Compass Rollout And New Centers Will Strengthen Future Prospects

Key Takeaways

• Expansion in the U.K. and Canada, along with strategic acquisitions, is expected to drive future revenue growth through new centers and diversified revenue streams.
  
• Operational improvements, including a bespoke booking system, aim to lower costs and enhance customer engagement, potentially increasing earnings and net margins.
  
• Expansion into Canada and competitive pressures in the UK, combined with rising costs, threaten margins and future revenue growth for Hollywood Bowl.

Catalysts

Operates ten-pin bowling and mini-golf centers in the United Kingdom and internationally.

• The company is expanding its new center program in both the U.K. and Canada, which is expected to drive future revenue growth. The company believes it can open at least 2 new centers in the U.K. each year over the next 5 years, and it has a healthy pipeline of new centers in Canada. This is likely to positively impact revenue.
  
• Improvement in revenue-generating capital investments through refurbishments and new center openings is generating returns well above the target hurdle rate. This suggests potential growth in net margins as more of the capital expenditures yield higher returns.
  
• Introduction and rollout of the bespoke booking system, Compass, aims to lower costs, increase speed across multiple channels, and improve customer engagement. This operational efficiency is expected to increase earnings by reducing costs and enhancing the customer experience.
  
• Strategic acquisitions, especially in Canada, present an opportunity for growth; for instance, the acquisition of Stoked allows for testing new revenue streams with ancillary services. This could lead to an increase in earnings through diversified revenue channels.
  
• Despite inflationary pressures, the company maintains a unique operating model with a high proportion of revenue not subject to cost of goods inflation. This, alongside prudent pricing strategies, positions the company to potentially improve net margins even amid rising costs.

Hollywood Bowl Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hollywood Bowl Group's revenue will grow by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.0% today to 15.0% in 3 years time.
• Analysts expect earnings to reach £42.4 million (and earnings per share of £0.25) by about March 2028, up from £29.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.3x on those 2028 earnings, up from 15.1x today. This future PE is greater than the current PE for the GB Hospitality industry at 14.9x.
• Analysts expect the number of shares outstanding to grow by 0.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.61%, as per the Simply Wall St company report.

Hollywood Bowl Group Future Earnings Per Share Growth

Risks

• The refurbishment and rebranding of Puttstars to Putt & Play by Hollywood Bowl indicates potential struggles with the Puttstars brand, resulting in a significant impairment charge of £5.3 million. This impacts net margins as it reflects underperformance and necessitates financial write-downs.
  
• Increased utility costs, a higher national minimum wage, and rising employee costs, particularly with planned rises in national insurance, could squeeze operating margins and negatively impact earnings growth.
  
• The planned expansion into Quebec and other Canadian territories presents operational risks due to dual language requirements, different taxation, and other regulatory complexities, potentially affecting net margins through additional costs and compliance measures.
  
• The growing number of new competitors entering the UK market—20 expected in the coming year—may pressure Hollywood Bowl's pricing power and customer acquisition, threatening future revenue growth and market share.
  
• Inflationary pressures, along with only modest price increases promised to date, might compress net margins if costs continue to rise faster than revenue, especially if there's reluctance to raise prices further to sustain competitive positioning.

Valuation

• The analysts have a consensus price target of £3.991 for Hollywood Bowl Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £4.4, and the most bearish reporting a price target of just £3.4.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £282.0 million, earnings will come to £42.4 million, and it would be trading on a PE ratio of 21.3x, assuming you use a discount rate of 9.6%.
• Given the current share price of £2.64, the analyst price target of £3.99 is 33.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.