arena events group - investors chronicle...market growth is providing a decent tailwind with...

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Arena Events Group: Structured for profitable growth

The newly-listed small-cap specialist in temporary structures and seating offers a solid platform for organic growth, and the firepower to make earnings-accretive acquisitions

Bull pointsn Market leader in a fragmented market.n High recurring revenues.n Quality and diversified customer base.n Lowly-geared balance sheet.n Bank facilities in place to fund bolt-on acquisitions.n International growth strategy.n Progressive dividend policy.n Relatively fixed overheads, above-average operational leverage.

Bear pointsn UK economic uncertainty.n Currency risk on international earnings. n Seasonality of income. n Execution risk on integrating acquisitions.

Arena Events (ARE) has been winning major multi-year and multi-million pound contracts, the revenue from which should deliver a hefty rise in profits in the coming

years, and decent cash flow to support a progressive dividend policy. Add to that scope for bolt-on acquisitions, and the shares are very conservatively valued on a forward PE ratio of 11.5 for 2019.

Simon Thompson’s view:

26 March 2018

Ticker ARE

Index Aim

Sector Travel & leisure

Current price 62.5p

Target price 88p

Market cap (£m) 73.2m

52-week high 65.5p

52-week low 56p

Net debt (£m) 12.5

Shares in issue (m) 117.1m

Financial year-end 31 Dec

Next event 2017 preliminary results in Apr 2018

Company website arenagroup.com

Arena Events

Analyst: Simon [email protected]

25/07/2017

25/08/2017

28/09/2017

31/10/2017

01/12/2017

08/01/2018

08/02/2018

13/03/201856

58

60

62

64

66Arena Events

FTSE Aim All-Share index

Source: Bloomberg


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Wimbledon-based Arena Events (ARE), a specialist provider of temporary physical structures, marquees, grandstands and ice rinks to major sporting, outdoor and leisure events, only listed its shares on the Alternative In-vestment Market (Aim) last summer, but the origins of the business can be traced back over 250 years to 1761. That’s when it was set up by Sir Richard Edgington to manufac-ture and sell tents, flags, banners, ship ropes and decora-tions for public events.

In more recent years, Arena has grown by a series of acquisitions in the UK with the backing of MML Equity Partners, a specialist capital provider that acquired a significant stake in the business in February 2012. This has added scale and enabled Arena to secure major contracts, including the most recent one with the US PGA golf tour.

In fact, such is the company’s presence within the sport-ing industry, a segment accounting for 60 per cent of its annual revenues, that it now has operational bases in seven countries and provides bespoke services to over 300 events each year across 15 countries. Arena’s core rental inventory of 300,000 sq metres of temporary structures and 125,000 demountable seats provides the grandstands and marquees to cater to the needs of visitors to the British Open and US Open golf tournaments, the ATP World Tennis Finals, Henley Royal Regatta, and major horse racing festivals at Cheltenham, Aintree (Grand National meeting), Newmarket (Guineas meeting) and Epsom (Derby meeting). The 10 largest sporting events in the UK attract almost 2.5m spectators each year, highlight-ing the potential for solid recurring revenue for Arena, a market leader in its field.

To put Arena’s income stream into perspective, around 92 per cent of budgeted revenue for last year had been identified within one month of the financial year start-ing, and by the time of the Aim listing in July 2017, the company’s contracted order book exceeded £125m or more than one year’s worth of sales. Over 70 per cent of revenue is contracted or recurring, highlighting the rock solid nature of its major contracts, which run for between three to five years.

Customers are clearly impressed with the service they are offered as Arena has never lost a multi-year client. In fact, the All England Club has been a customer for 69 years, The Open Golf Championship for 39 years, the Jockey Club for 34 years, and both the Ryder Cup and PGA European Tour for over 20 years.

Arena also provided temporary structures at the 2012 and 2016 Olympic Games, and the 2014 FIFA World Cup. For instance, the company was responsible for delivering

Arena Events has been manufacturing and selling tents, flags, banners, ship ropes and decorations for public events for over 250 years


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the tiered grandstands for the Beach Volleyball at Horse Guards Parade at the 2012 London Summer Olympic Games. And it’s not just sporting events that the company caters for, as Arena’s temporary structures can be seen at The Chelsea Flower Show in May and at numerous music events throughout the year.

It’s also a truly global business with 41 per cent of revenue generated from operations in the US, around 17 per cent from the Middle East and Asia (MEA) and 43 per cent from the UK and Europe.

Arena Events (Aim:ARE) Ord Price: 62.5p Market Value: £73.2m

Touch: 62-62.5p 12-Month High: 65p Low: 55p

Dividend yield: 3.5% PE Ratio: 11.6

Net Asset Value: 49p* Net Debt: 21%Year to Revenue Pre-tax Earnings Dividend 31 Dec (£m) profit (£m) per share (p) per share (p)2015 86 -1.8 na na

2016 93 -2.0 na na

2017** 100 4.5 3.3 1.4

2018** 107 5.9 4.3 1.8

2019** 114 7.2 5.4 2.2

% change +6 – – –Normal market size: 5,000 Matched bargain trading*Includes intangible assets of £34.9m, or 30p a share** Cenkos Securities forecasts. All prior years have been adjusted to reflect profits before exceptional charges. 2017 forecasts are pro forma and have been adjusted for the IPO.Source: Arena Events Admission Document, London Stock Exchange

Arena’s major contracts’ duration

Wimbledon (tennis)

The British Open (golf)

Jockey Club (horse racing)

PGA European Tour (golf)

Ryder Cup (golf)0

10

20

30

40

50

60

70

Source: Company accounts

num

ber o

f yea

rs


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Market characteristicsThe ability to deliver high-quality temporary structure facilities, which range from grandstands to upmarket corporate hospitality facilities, on time and on budget is a key strength of the business, and explains why Arena is so adept at winning high-profile contracts, and more impor-tantly maintaining client relationships for the long haul.

To meet the needs of existing and prospective clients, the company invests significant amounts in capital ex-penditure each year, so has the capacity on hand to deliver inventory to venues promptly. For instance, in ad-dition to the temporary structures and demountable seat-ing, Arena also has an inventory of 30,000 indoor seats and over 15,000 tables available in the UK alone. To give you some idea of its dominant market presence, the direc-tors believe their core addressable market for structures, seating and staging accounts for £135m of the £585m event equipment rental market in the UK, of which Arena has a 30 per cent market share. At the premium end, the business has a dominant 80 per cent share of this £25m segment. It’s a growing market too.

In the UK, attendances at sporting events have grown on average by 2 per cent a year since 2008, underpinned by golf and motor racing. The corporate hospitality market has been no slouch either, outpacing that growth rate. Nor has the music industry which has seen declining revenues from music sales – a trend that has prompted artists to target live music events. That’s music to the ears of Arena’s directors as this is creating additional demand for the company’s temporary structures. Indeed, between 2010 and 2015, the UK music and live events market grew at 7 per cent per year, a trend that is expected to be main-tained in the coming years too.

“Customers are clearly impressed with the service they are offered as Arena has never lost a multi-year client”

UK events equipment hire market by value in 2016

21% Sports events11% Corporate events26% Exhibition & trade shows

10% Other events11% Festivals & cultural events21% Music eventsSource: AMA Research

UK equipment hire market size and forecasts 2011-21 (£m)

Source: AMA Research/Trade estimate

Rank Sport Event Aggregate attendance Duration1 Tennis Wimbledon 473,000 13 days

2 Motorsport Formula 1 (Silverstone) 321,000 3 days [1]

3 Horseracing Royal Ascot 294,000 5 days

4 Horseracing Cheltenham Festival 260,000 4 days

5 Tennis ATP World Tour Finals 254,000 8 days

6 Golf The Open 235,000 8 days [2]

7 Equestrian Badminton Horse Trials 179,000 5 days

8 Equestrian Burghley Horse Trails 166,000 4 days

9 Horseracing Epsom Derby 150,000 3 days [3]

10 Horseracing Aintree Grand National 140,000 3 daysNotes: Excludes free sporting events. The London Marathon would be at the top of a list which included events for which admission was free.1. 24,000 spectators also attended “Fans’ Thursday” at Silverstone.2. The Open attendances include 48,000 spectators at the four practice days.3. The Epsom Derby attendance includes an estimated 100,000 attendees on the Hill who pay limited admission fees.Source: Event organisers; Deloitte analysis.

Top 10 attended annual sporting events in the UK in 2017


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CompetitionThe event equipment rental market is highly fragmented both domestically and internationally. In the UK, there are around 6,000 to 7,000 equipment and services suppliers, of which a high proportion are small operators who cater for local events and are constrained from expanding due to the capital-intensive nature of the business – Arena’s inventory has an original equipment cost of £53m, a net book value of £31m and the company invests around £3m in maintenance capital expenditure each year just to maintain the existing stock. In addition, it also invested over £2m last year to grow inventory.

As a result of this high capital requirement, and the expertise, reputation and financial strength required to bid for major events, only a small number of larger opera-tors tender for these substantial contracts. The trend for events to be more sophisticated and larger is also favour-ing the largest operators, as is the introduction of the Construction (Design and Management) Regulations in 2015 governing the activities of operators. Market growth is providing a decent tailwind with research consultancy AMA Research predicting a compound annual growth rate of 2.6 per cent between 2016 and 2021 to lift the UK event equipment hire market size from £585m to £665m.

The company’s closest rival in the UK is GL Events (GLO:PAR), a €595m (£526m) market cap France-based company, followed by Losberger De Boer (an unlisted European operator) and Danco International, both of which are about a quarter of Arena’s size in terms of their revenue. In other words, Arena is a leading domestic player and one that employs around 750 staff in what is a highly fragmented event equipment rental market. The same is true in the US, a country where the directors have identified a growth opportunity to exploit.

Indeed, by leveraging off its high-profile UK contracts, Arena has been able to grow its international footprint, and no more so than in the US (accounting for 40 per cent of its revenues) where event rental revenue is fore-cast to grow at an annual rate of 5.8 per cent between 2017 and 2021, significantly outpacing GDP growth forecasts even for a buoyant US economy. Arena’s core addressable market is worth around £900m in the US, and one which is highly fragmented with an estimated 10,400 event rental businesses servicing the entire North American marketplace.

“Arena Group has worked closely with Jockey Club racecourse over several years, advising on and delivering tem-porary environments, and continu-ously raising the bar with new ideas to get the best value from our budg-ets, with flexibility to change their infrastructure to best suit our needs.”– The Jockey Club

“Arena Group has amassed a wealth of experience over the years under-standing the requirements of the European Tour, which underpinned their selection through a competitive tender process to supply temporary infrastructure across the UK, Spain, Portugal and to the 2018 Ryder Cup in Paris. We are confident they will help us deliver a series of outstanding, memorable tournaments.”– The European Tour

“Every year Arena have come back and found some brilliant solutions to challenging rooms… every single seat has a great relationship with the stage. It’s been a great relation-ship with Arena and each year brings venue challenges that together we overcome.”– Edinburgh Fringe

Client Testimonials


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Strategic geographic expansionArena is now a top five operator in this market, and it has serious ambitions. That’s because a shortage of national or regional players provides the company with the op-portunity to build a fully integrated product offering that can be delivered by geographic and strategic acquisitions. And with the benefit of a UK listing, and a lowly geared balance sheet, it now has the firepower to do so.

The company is led by 58-year-old chief executive and 5.67 per cent shareholder Greg Lawless who has held the role since 2011, having overseen operations since MML Partners bought into the business in 2012.

Arena subsequently made seven debt-funded bolt-on acquisitions over the next five years, adding complimen-tary businesses in the UK and establishing significant operations in Asia and the US with the acquisitions of Asia Tents and Karl’s Events. Both have benefited from being part of a larger enterprise, thus enabling them to secure major golf customers such as the US PGA Tour, the Presidents Cup and the EurAsia Cup. In fact, the US opera-tion landed a lucrative five-year contract with the US PGA Tour last year. Worth around $40m in revenue, it was the largest in the company’s history.

Importantly, these and other acquisitions have al-lowed Arena to grow revenue through geographic expan-sion, increase awareness of the Arena brand around the world, and reduce the seasonality of its revenues. For instance, the company is now the largest provider of temporary ice rinks in the UK, a segment accounting for 3 per cent of Arena’s annual revenues, thus diversifying its revenue stream and reducing seasonality. Contracts here include a three-year award with ITV for Dancing on Ice to provide a temporary studio, bespoke oval ice rink, and tiered seating for 500 spectators. That said, June to September remain the key income-generating months of the year, a reflection of the summer timetable of UK and US sporting events.

So, having developed the business – the company invested over £26m in acquisitions and capital expendi-ture between 2014 and 2016 – the former owners decided to sell out last summer as part of an equity raise to de-leverage the company’s heavily indebted balance sheet. The IPO attracted some high-profile fund managers who backed a placing at 55p a share to raise net proceeds of £54.7m for the company, and which has slashed net debt to £11.5m at the end of 2017.

Arena Events sets up temporary ice rinks at major sporting, outdoor and leisure events


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Funded to make bolt-on acquisitionsAs a result of the IPO, Arena’s net borrowings of £11.5m have been reduced to one times annual cash profits and gearing is a modest 21 per cent of net assets, so the balance sheet is no longer overleveraged. There is also substantial hard asset backing as the net book value of property, plant and equipment is around £34m.

Furthermore, there is ample headroom on current facilities to fund the board’s expansion plans as Arena has two banking facilities:n An asset-backed lending facility of $20m (£14.3m) priced 3.25 per cent above US Libor and maturing in December 2019.n A £20m facility with HSBC charged at 4.2 per cent above Libor and expiring in February 2020.

The plan is to use its credit facilities to make selective bolt-on acquisitions to grow the business further. It makes sense to do so as I understand that recent acquisitions have been made on a multiple of between 6.3 times and 8.2 times trailing cash profits, and management expects to pay around 4.5 times cash profits for small bolt-on deals, and six to seven times cash profit for larger, more strategically important acquisitions. Given the low-cost finance facility at the board’s disposal, and the fact that the company has a relatively flat fixed overhead base, this means that a chunk of the cash profits from acquisitions will drop straight to the bottom line.

Moreover, leisure analyst Simon French at house broker Cenkos Securities is forecasting an 11 per cent corporation tax rate over the 2017 to 2019 financial years to reflect the fact that Arena has UK tax losses to use up, reflecting its previ-ous ownership structure as its former owners geared up the balance sheet; it will pay no tax on US profits until 2019; and has operations in the low tax jurisdictions of the Middle East. This favourable tax structure means that future acquisitions could have quite an accentuated impact on EPS. But even without them the shares offer a decent entry point.

“By leveraging off its high-profile UK contracts, Arena has been able to grow its international footprint, and no more so than in the US where event rental revenue is forecast to grow at an annual rate of 5.8 per cent between 2017 and 2021”

Shareholder Percentage of share capitalLombard Odier 14.07%

Miton Asset Management 12.42%

BlackRock Investment Management 7.51%

Ennismore Fund Management 7.45%

Hargreave Hale Limited 7.22%

Greg Lawless (CEO) 5.67%

Tellworth Investments 5.30%

Islandbridge Capital 3.72%

BMO Global Asset Management 3.39%

Livingbridge EP LLP 3.32%

Ruffer UK Mid and Smaller Companies Fund 3.10%

Total 73.17%Source: Arena Events Shareholder Information (arenagroup.com), London Stock Exchange

Arena Events’ substantial shareholdings


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Crunching the numbersThe previous owners were intentionally running the com-pany at a pre-tax loss due to the high interest charges being paid on an overleveraged balance sheet. This means that Arena doesn’t have a rising pre-tax profit line prior to its IPO last summer. More informative is the fact that the company posted cash profits of £8.5m and operating profit of £2.8m on revenues of £93m in the 2016 financial year. The £5.7m difference between the cash profit and operating profit reflects a non-cash depreciation charge on equipment.

For the 2017 financial year, the company revealed in a pre-close trading update ahead of the full-year results in April that it has been trading in line with analyst expecta-tions, which point towards revenues hitting £100m and the company delivering a 25 per cent hike in cash profit to £10.6m. Deduct a £5m depreciation charge and this implies operating profits of around £5.6m and pro-forma pre-tax profits of £4.5m after a £1.1m estimated interest charge. Please note that the IFRS reported figures will be impacted by the £3.2m expected cost of the IPO, around £500,000 of reorganisation costs and a much higher inter-est charge resulting from the company having over £60m of debt on its balance sheet prior to the IPO last July. The pro-forma figures are far more informative given the sub-sequent change in ownership structure.

Moreover, it’s the 2018 and 2019 financial years that really interest me. That’s because with the benefit of past acquisi-tions, the successful move to replace lower-margin legacy contracts with higher-quality and higher-margin business, and after taking into account the natural operational gearing of the business and the full benefits of contract wins including the five-year US PGA Award, cash profits are forecast to rise from £10.6m to £12.2m this year on revenues up from £100m to £107m. On this basis, expect Arena to deliver a pre-tax profit of £5.9m and EPS of 4.3p based on 117m shares in issue.

Forecasts for 2019, which are conservative in my view, point towards revenues of £113.9m, cash profits of £13m, pre-tax profits of £7.2m and EPS of 5.4p. The hefty rise in pre-tax profits also reflects the paying down of debt, and the saving on interest charges.

Year Revenues Cash profits Depreciation Operating profits (£m) (£m) (£m) (£m)2015A 86 8.2 6.2 2.0

2016A 93 8.5 5.7 2.8

2017 (pro forma) 100 10.6 5.0 5.6

2018E 107 12.2 5.2 7.0

2019E 114 13.0 5.5 7.5Source: Company accounts, Cenkos Securities, Investors Chronicle

Profits building up

Arena’s 2016 revenue by geography (%)

41.4% UK40.7% North America

8.8% Asia8.2% Middle East0.7% Europe0.1% ROWSource: Company accounts

Revenue by geography (£m)

UK North America

Asia Midde East Europe ROW0

5

10

15

20

25

30

35

40

45


Turn

over

(£m

)

2014 2015 2016

Cash profit margin by geography (%)

UK & Europe Middle East & Asia US TOTAL0

2

4

6

8

10

12

14

16


%

2014 2015 2016


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Cash profitability supports higher share priceArena’s solid cash profitability means that, acquisitions aside, the existing businesses should be able to deleverage Arena’s balance sheet completely by the end of next year.

This means that a greater proportion of cash profits will fall to the bottom line with the benefit of a much reduced interest charge. In other words, just taking into account the organic growth of existing businesses, and without factoring in earnings-accretive debt-funded acquisitions, Arena has the potential to lift pro-forma adjusted EPS of 3.3p for the 2017 financial year by almost two-thirds to 5.4p in 2019, valuing the shares on a for-ward PE ratio of around 11.5.

Furthermore, with cash profits being used to repay debt, this means that a higher proportion of the ownership of Arena is being transferred from debtholders to equityhold-ers. That’s not reflected in an enterprise value of 6.5 times this year’s cash profit forecast of £12.2m after taking into account a halving of net debt to £6m by end December 2018, nor in a miserly enterprise valuation of 5.7 times next year’s cash profit estimate of £13m, by which time Arena’s balance sheet should be almost ungeared. For a

Share price (p) 62.5

Market value (£m) 73.1

Net debt (£m) at December 2017 11.5

Enterprise value (£m) 84.6

Cash profits (2017 financial year) 10.6

EV: cash profits multiple 8

But with debt falling and cash profits rising, then if the cash profit multiple is unchanged .... Share price (p) 78


Net debt (£m) forecast at December 2018 6

Enterprise value (£m) 97.6

Cash profits (2018 financial year forecast) 12.2


And with cash flow slashing debt by the end of 2019 then.... Share price (p) 88


Net debt (£m) forecast at December 2019 0.8

Enterprise value (£m) 104

Cash profits (2019 financial year forecast) 13


This means the combination of rising cash profits and debt reduction have potential to drive Arena’s share price 40 per cent higher, and that’s without considering any earnings-accretive acquisitions

Arena Events enterprise value calculations

“Given the low-cost finance facility at the board’s disposal, and the fact that the company has a relatively flat fixed overhead base, this means a chunk of the cash profits from acquisitions will drop straight to the bottom line”


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market leader in its field, that’s a very harsh valuation.In fact, assuming the cash profit multiple to enterprise

value remains stable at 8 times, the debt repayment alone supports a 25 per cent rise in Arena’s share price to 78p by the end of this year as my following calculations illustrate, and a 40 per cent rise in the share price by the end of 2019.

Potential for sharp dividend hikesThe modest rating also fails to acknowledge that even after splashing out a forecast £5m or so on capital expend-iture in 2018, and factoring in interest charges on current net debt of £11.5m, the directors have ample cash left over to fund an attractive and progressive dividend payment and pay down borrowings too.

Having declared an interim payout of 0.45p a share last year, analysts expect the board to declare a full-year divi-dend of 1.4p a share for 2017, rising to 1.8p a share in 2018 and 2.2p a share in 2019. The 1.8p-a-share forecast payout this year has a cash cost of £2m, representing just one-sixth of Arena’s predicted cash profits of £12.2m.

The obvious take is that if Arena’s board makes some well-timed and earnings-accretive debt-funded acquisi-tions, then the boost to profits will enable them to ramp up the payout to shareholders even further. Either way, a prospective dividend yield of 2.9 per cent for 2018, rising to 3.5 per cent in 2019 is attractive.

“Cash profits are forecast to rise from £10.6m to £12.2m this year on revenues up from £100m to £107m”


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Peer group comparisonThere are no direct comparable companies listed on the London Stock Exchange, although the UK-listed trade ex-hibition and conference companies Tarsus (TRS) and ITE (ITE) are the closest to Arena in terms of their business. Rival GL Events is listed on the Paris Stock Exchange and has a market capitalisation of €595m, although only around half of its activities are from comparable events.

Nonetheless, there is a valuation discount between Arena and all three companies when you value them on an enterprise value to cash profit basis. For the 2018 esti-mates, Arena is rated on less than half the rating of Tarsus and ITE, and a 12 per cent discount to GL Events, even though Arena offers prospects for much faster earnings growth as highlighted by the rapid decline in its forward PE ratio. Indeed, if Arena delivers on 2019 EPS estimates of 5.4p, then its forward PE ratio drops from 14.5 in 2018 to 11.5 in 2019.

Arena is also being valued on a modest price-to-book value ratio of 1.2 times, a deep discount to all three com-panies. This seems anomalous given the potential for Arena to make selective bolt-on debt-funded earnings accretive acquisitions on modest cash profit multiples to enterprise value, which will easily cover its 8.2 per cent estimated weighted average cost of capital employed. Acquisitions will also boost the company’s post-tax return on capital employed above my 12 per cent conservative-looking estimate for the 2019 financial year.

In addition, the company should enjoy significant operational leverage as revenue builds on recent contract wins, a factor that underpins expectations of faster EPS growth as operating margins expand, and supports a higher earnings multiple, too.

“Arena’s solid cash profitability means that, acquisitions aside, the existing businesses should be able to deleverage Arena’s balance sheet completely by the end of next year”

Share Market PE ratio PE ratio EV/Ebitda EV/Ebitda Price-to- Company price cap 2017e 2018e 2017E 2018E book valueITE 165p £447m 20.6 19.0 16.2 16.6 6.6

Tarsus 297p £335m 11.4 17.5 9.9 13.5 5.5

GL Events (Paris) € 25 €595m 15.9 13.8 7.4 7.4 1.5

Arena Events 62.5p £73m 18.9 14.5 8.0 6.5 1.2Source: Peel Hunt, Cenkos Securities, FT.com Market Data. Ebitda = earnings before interest, tax, depreciation and amortisation.

Peer group valuation


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Risk assessmentOf course, no business is without risk and there are several to consider with Arena.n Loss of a major contract: In mitigation, the company’s top 10 contracts only account for 20 per cent of revenues, the largest customer accounts for 4 per cent of annual revenue, and Arena has never lost a major, multi-year recurring contract.n Economic risk: Demand for events is driven by both corporate profits and consumer spending, so an economic slowdown could reduce the level of attendance at events, and lead to event organ-isers scaling back their size. That said, the UK event equipment hire market was not materially impacted by the 2008-09 recession, and impor-tantly no major events were cancelled.

Moreover, with global economic growth fore-casts robust, especially in the US and Asian economies, this should be highly supportive of demand for Arena’s revenues and profits earned in the coming years.n Seasonality risk: The majority of the company’s revenues are earned in the second half of the year due to the summer sporting season for major out-door events. This weighting means that it would be nigh on impossible for the directors to make good any shortfall if an event was cancelled at late notice.n Currency risk: Although Arena has natural foreign exchange hedging in place – its overseas costs and revenues are incurred in the same regions – it is exposed to translational risk when these earnings are converted back into sterling, its reporting currency.

Taking all these factors into account and the risk assessment, I feel that Arena’s shares should command a valuation around 16 times 2019 EPS estimates of 5.4p and an enterprise value of £103m based on a multiple of 8 times forecast cash profits of £13m in 2019. This suggests a target price of 88p, or 40 per cent above the current share price.

The potential for earnings-accretive acquisitions – in January’s pre-close trading update the board said they were evaluating a number of opportunities – further contract wins, and a progressive dividend policy not only add to the attraction, but should be the catalyst to drive a break-out from the narrow range (56p to 65.5p) the share price has been trading in since last summer’s IPO. The forthcoming full-year results could be the likely spark. Buy.

Target price


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n Acquisition risk: The expansion plan adds an element of execution risk when integrating acquisi-tions and maintaining the client relationships that are critical to the profits these businesses make. Acquisitions will be funded partly by recycling cash flow from Arena’s existing businesses, but also by tapping debt facilities, so there is an element of financial risk for debt service costs too, albeit this is relatively low given the modest cash profit multiples Arena is likely to pay for bolt-on deals.n Labour risk: Around two-thirds of Arena’s 750-plus staff are employed in warehousing, transport and distribution, with the rest working in sales and marketing, and administration and finance. Labour costs account for 28 per cent of revenues, so this is a major overhead. Although representing a low risk at present, the possibility of immigra-tion controls after the UK leaves the EU has poten-tial to raise labour costs in what is a tight labour market, or could even lead to labour shortages.n Bad debts: Arena has no significant concentra-tion of credit risk, with exposure spread over a large number of counterparties and customers. No single customer accounts for more than 10 per cent of the trade receivables balance, and the only bad debt to be written off in the past three years was £355,000 in the US, during which time the com-pany generated accumulative revenue of £260m. n Equipment failure: Due to the nature of the business, a catastrophic failure of equipment could lead to serious injury or loss of life and a substantial adverse reputational impact on the Arena brand. The repercussions of any such inci-dent would almost certainly affect the company’s ability to win or retain business in its local geogra-phy, internationally and across all sectors in which Arena operates. The associated litigation costs could have a material impact on profitability and the company’s ability to trade going forward.n Competition: Arena typically differentiates itself from its competitors on quality of service and product, which can result in a higher priced offering and expose the company to the potential loss of business to a competitor that has a differ-ent offering, usually priced at a discount to the Arena service. Competitive pricing pressure can lead to a loss of revenue and/or margin, resulting in an adverse impact on financial performance. That said, Arena has an impressive retention rate on its major multi-year client contract awards.


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n Management: The company is reliant on a small number of important personnel, so it’s reassuring that finance director Piers Wilson has almost six years’ service and chairman Ken Hanna brings a wealth of experience from his role at Aggreko (AGK), a £2bn market-cap provider of mobile power supply.

Grahame Muir, chief executive of the com-pany’s UK and European business, has been with the business for 28 years. Mr Muir has overseen the consolidation of the UK operations into a new purpose-built depot facility in St Ives, Cam-bridgeshire, to improve efficiency and provide the platform for future growth. He was also the force behind the strategic move into temporary ice rinks. Arena’s chief executive, Greg Lawless, has been with the company for 11 years, and his 5.67 per cent shareholding aligns his interests with those of outside shareholders.n Liquidity: The company’s top 11 sharehold-ers hold 73.1 per cent of the issued share capital which restricts the free float and means that share price moves can be accentuated. This is not an issue as long as Arena’s directors deliver the predicted earnings growth analysts forecast. A forward PE ratio of 11.5 for 2019 is hardly exact-ing. However, if the share price achieves my 12-month target price of 88p, the forward PE ratio rises to 16, so the high expectations embedded in the higher valuation leave far less ‘margin for error’ if the company falls short.


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