Description

Hollywood Bowl, plc (BOWL.L)

Summary

We focus on smaller companies with “Ft. Knox” balance sheets and large and sustainable free cash flow yields and we are typically seeking a double-digit FCF yield or higher on an unleveraged basis. The objective is for the sustainable FCF to eventually drive up the share price to a more reasonable valuation through share buybacks, debt reductions, dividends, or accretive acquisitions. We have increasingly focused on companies that can sustainably grow over long periods of time.  We must have a management team that cares about shareholder value. We focus on small-cap stocks because there is a much better chance of finding an attractive investment opportunity that is under-followed or undiscovered.

Hollywood Bowl Group plc (ticker BOWL.L) operates ten-pin bowling and mini-golf centers in the United Kingdom and Canada.  The Company also supplies and installs bowling equipment.  As of December 2023, it operated 75 centers under the Hollywood Bowl (65 centers), Putt-stars (5 centers), and Splitsville (Canada) (11 centers) brands.  The Company was incorporated in 2016 and is based in Hemet Hempstead, the United Kingdom. 

BOWL.L is benefiting from macro trends of (1) increased demand for social experiences by customers and (2) expanded interest in leisure offerings by landlords to drive traffic to their locations.  BOWL.L’s strategies are to drive like-for-like revenue growth, actively refurbish its assets, develop new centers and niche acquisitions, and leverage its indoor leisure experiences.  The market has priced BOWL.L for a post-COVID letdown (which has so far failed to materialize) but we believe BOWL.L’s post-COVID results will prove more sustainable than the current valuation implies.

BOWL.L has several characteristics that we like including (1) a highly resilient business model with deep customer relationships, (2) a highly cash-generative business with modest capital expenditure needs, (3) a strong focus on higher value-added services with longer-term and “stickier” customer relationships, (4) an attractive valuation trading at 6.7x adjusted EBITDA, (5) a record of strong sales growth - both organic and inorganic, (6) a disciplined management team focused on accretive acquisitions, (7) a “Ft. Knox” balance sheet with net cash of 52m GBP at 9/30/23, (8) a long-term strategy to grow sales and EBITDA, and (9) a high-ROIC business model with limited capital requirements.

BOWL.L has an attractive valuation, especially given its recent growth profile, driven by a post-COVID increase in demand for affordable entertainment from consumers.  A family of four in the U.K. can enjoy a bowling outing for a modest amount, approximately GBP 25.  This affordable entertainment experience compares very favorably to other alternatives like movies and amusement parks.  Further, BOWL.L and other players have upgraded their facilities and food to attract a younger demographic.  BOWL.L has lapped the post-COVID rebound in demand in FY23 and grew results nicely compared to FY22.  Bowlero (BOWL) is the largest bowling player in the U.S. and trades at a much higher valuation (10x adjusted EBITDA) with close to $1.3b in net debt and less attractive growth prospects than BOWL.L.  Furthermore, BOWL has approximately 33% EBITDA margins, about the same as BOWL.L  

Bowling sales post-COVID have increased significantly due to shifts in consumer behavior (more hybrid working enables off-peak participation); good value (while other entertainment options have increased prices with inflation, bowling prices have been kept fairly constant, making them relatively more attractive to customers); and upgraded centers, with new and upgraded activities, better digital communications with customers, and “pins-on-strings” when enables less downtime on bowling equipment.

BOWL.L has an attractive valuation, especially given its recent growth profile.  We believe these post-COVID trends are sustainable and that BOWL.L can grow from this base.  BOWLL has 172m shares outstanding trading at about 2.85 GBP per share for a market cap of about GBP 490m.  BOWL.L has net cash at 9/30/23 of about GBP 52m.  BOWL.L has an enterprise value of about GBP 440m which compares to FY23 (ended 9/30) pre-IFRS adjusted EBITDA of about GBP 65m, or about 6.7x LTM adjusted EBITDA. 

We believe BOWL.L’s current profit multiples are depressed and attractive given BOWL.L's strong growth in revenue, adjusted EBITDA, and adjusted EPS post-COVID.  We believe the market has not recognized BOWL.L's dominant market share in the U.K. (approximately 30%) and the more resilient and predictable business model that it developed in the last couple of years.  As BOWL.L continues to execute and grow both organically and inorganically, we believe the market will eventually recognize BOWL.L with more appropriate earnings multiples.

We believe BOWL.L can continue its growth trend over the last few years in terms of revenues and adjusted EBITDA.  On an EBITDA basis, we believe BOWL could grow pre-IFRS adjusted EBITDA from GBP 65m in FY23 to GBP 80m or more by FY26 and trade for 9x adjusted EBITDA with net cash of GBP 80m or more.  Based on 172m shares outstanding, this would result in a share price of about GBP 4.65 per share versus GBP 2.85 today.  Further, we believe BOWL’s dominant market position in the U.K. entertainment market (roughly 30% market share) and growing position in the Canadian market could be attractive to either a strategic or financial purchaser.

Business Description

Hollywood Bowl Group plc operates ten-pin bowling and mini-golf centers in the United Kingdom and Canada.  The Company also supplies and installs bowling equipment. It operates centers under the Hollywood Bowl, Puttstars, and Splitsville brands. The Company was incorporated in 2016 and is based in Hemel Hempstead, the United Kingdom.

Dominant Market Share in the U.K. and Canada => Competitive Advantage

BOWL.L is the largest player in the U.K. and Canada, its two major markets.  The Company estimates a 30% market share in the U.K.  This gives it a powerful advantage versus smaller mom-and-pop competitors which cannot match BOWL.L’s cost structure and brand recognition and well-defined and focused strategy to enhance traffic into its bowling centers.  BOWL.L has significant brand recognition as an enjoyable and affordable activity in its key markets.  We believe this gives BOWL.L a strong competitive advantage and “moat” that competitors find difficult to match and which is likely sustainable over the long term.

Highly Resilient Business Model

BOWL.L has a highly resilient business model with strong customer relationships.  Over the past few years, BOWL.L has managed inflationary pressures quite well and has not experienced major price increases.  This reflects a strong and resilient model.  The low cost of bowling relative to other forms of entertainment also provides some insulation against a weaker economy.  BOWL.L has generated solid revenue growth despite a difficult economic environment in the U.K. in FY22 and FY23.  BOWL.L has also improved its digital communications strategy with customers and can strategically use this to drive traffic in off-peak periods and adjust pricing to drive demand.  Top Golf (MODG) has attracted a huge following in the U.S., and we think BOWL.L offers a similar product and food and entertainment, but at a much lower cost.   We think BOWL.L’s business could become increasingly predictable as it builds its relationship with customers and families.

Attractive Valuation

BOWL.L has an attractive valuation, especially given its recent growth profile, driven by post-COVID demand for entertainment activities, especially given its reasonable cost.  We believe these post-COVID trends are sustainable and that BOWL.L can grow from this base.  BOWLL has 172m shares outstanding trading at about 2.85 GBP per share for a market cap of about GBP 490m.  BOWL.L has net cash at 9/30/23 of about GBP 52m.  BOWL.L has an enterprise value of about GBP 440m which compares to FY23 (ended 9/30) pre-IFRS adjusted EBITDA of about GBP 65m, or about 6.7x LTM adjusted EBITDA. 

We believe these multiples are too low and are attractive given BOWL’s solid growth in revenue and adjusted EBITDA over the past few years.  We believe the market has not yet recognized BOWL.L’s more resilient and predictable business model, which it has developed over the past few years.  As BOWL.L continues to execute and grow both organically and inorganically, we believe the market could eventually recognize BOWL.L as more appropriate earnings multiples.

Highly Cash Generative Business with Modest Capital Needs Creates “Flywheel” Effect

BOWL.L is a highly cash-generative business with modest capital expenditure needs. The Company has an attractive unleveraged FCF yield in the high single-digit range. They have generated almost GBP 250m of cumulative cash from operations over the past several years, or half of the current market cap.  BOWL.L’s strong cash flows have enabled it to make high-return organic capital expenditures on refurbishments (30% ROI) and new centers (20% ROI) as well as successful strategic acquisitions, such as strategic expansion into Canada with the Splitsville brand, where it is now the largest player in the Canadian market.

Strong Private Equity Interest in Bowling Industry Due to Cash-Generative Business Model

There has been consistent private equity interest in the bowling industry due to its strong cash-generative business model.  Most recently, Trive Capital agreed to acquire Ten Entertainment (TEN.L), the number two player in the U.K. bowling industry behind BOWL.L, in December 2023.  In the U.S., the largest bowling industry player by far is Bowlero (BOWL), Atairos Management, a private equity group, is the major shareholder, with close to 70% of fully diluted shares outstanding owned.  We believe BOWL.L could represent an attractive investment to a private equity group over the next few years.

Strong Growth in Revenues, Adjusted EBITDA, and Adjusted EPS Post-COVID

Over the past few years, post-COVID, BOWL.L has shown strong growth in revenues, adjusted EBITDA, and adjusted EPS.  We believe BOWL.L has significantly exited COVID period results and continues to post stair-step improvement over pre-COVID results of FY19.  We believe the post-COVID trend of hybrid working and interest in affordable entertainment activities for individuals and families has driven these stronger results at a higher level than pre-COVID.  BOWL.L has also materially improved its operations and has better food, lighting, games, and ambiance.  We believe these current levels will prove to be sustainable but BOWL.L’s valuation remains muted as the market is concerned about a reversion back to pre-COVID levels.   We believe BOWL.L can continue to grow off this higher base, as it executes its improved operating strategies and enhanced marketing activities to drive customer traffic during peak and off-peak periods.

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We believe BOWL.L has significant growth opportunities over the next several years.  These include new centers in the U.K., refurbishments of existing centers in the U.K., new centers in Canada, and strategic “tuck-in” acquisitions of smaller competitors or adjacent businesses in both the U.K. and Canada.

“Ft. Knox” Balance Sheet

BOWL.L has an “Ft. Knox” balance sheet with GBP 52m million in net cash as of 9/30/23.  We believe BOWL.L is well-positioned to make further accretive acquisitions like Strikers Limited in Canada and drive additional shareholder value.  Its “Ft. Knox” balance sheet reduces risk and enables BOWL.L to take advantage of strategic opportunities.

Attractive and Affordable Entertainment Activity

BOWL offers an attractive entertainment activity for customers, especially in a post-COVID world with increased flex-working schedules.  Pricing is very attractive relative to movie theatres or amusement parks.  BOWL has also significantly improved the ambiance and the quality of food and games in its bowling centers.  A family of four in the U.K. can enjoy an outing for as little as GBP 25, which is very attractive relative to other entertainment options.  BOWL fits well with the trend toward experiences among younger consumers post-COVID.

Experiential Secular Trend Beneficiary

Revenue for the bowling entertainment sector has demonstrated steady growth of about 2% over the past 20+ years. Bowling has a broad appeal to customers across income, age, and other demographic characteristics. Additionally, as mentioned, BOWL provides attractive entertainment activities for customers in a post-COVID world as consumer spending trends towards experiences versus goods. The slide below is from Bowlero’s (BOWL) investor presentation and demonstrates the sustained growth and recession resilience in bowling.

Disciplined Management Team Focused on High-Return Organic Investments and Accretive Acquisitions

We believe the management team of BOWL.L is approaching its long-term growth strategy in a disciplined manner in both organic investments and acquisitions.  BOWL.L is earning very attractive returns on its U.K. refurbishments as seen in the chart below.  In addition, new centers opened have exceeded a 20% return hurdle.  Furthermore, management has completed several smaller tuck-in acquisitions of independent bowling centers (Lincoln in October 2023, 3 bowling centers in Calgary, Canada in February 2023, and acquisition of Canadian bowling business of Teaquinn Holdings, with 5 Splitsville bowling centers in May 2022).  We believe they are highly disciplined with a strong focus on resiliency, profitability, and return on invested capital.  They have executed multiple accretive acquisitions.  We believe they have executed well during the COVID pandemic issues.  We believe management can use the Company’s strong balance sheet and large cash flows to continue to make strategic organic and inorganic investments to create a larger and stronger business model.

Focus on Higher Value-Added and Building Stickier Relationships with Customers

BOWL.L continues to make improvements to its product offering to customers and improve the value offered to customers.  It is making investments in its core bowling products, in its amusements, and its food offerings.

We think it can continue to build stronger and more consistent relationships with customers and increase repeat usage of its best customers over time.  BOWL.L has also improved its digital marketing to tighten relationships with customers and drive traffic by adjusting pricing in non-core time periods during the week.

Conclusion

We believe BOWL.L can continue its growth trend over the last few years in terms of revenues and adjusted EBITDA.  On an EBITDA basis, we believe BOWL could grow pre-IFRS adjusted EBITDA from GBP 65m in FY23 to GBP 80m or more by FY26 and trade for 9x adjusted EBITDA with net cash of GBP 80m or more.  Based on 172m shares outstanding, this would result in a share price of about GBP 4.65 per share versus GBP 2.85 today.  Further, we believe BOWL’s dominant market position in the U.K. entertainment market (30% market share) and growing position in the Canadian market could be attractive to either a strategic or financial purchaser.

1. Pre-IFRS results

Comparable Companies

 *** On 12/6/23, Ten Entertainment agreed to be acquired by U.S. private equity firm Trive Capital.

Catalysts

• Highly cash-generative business model.
• Low valuation at 6.7x adjusted EBITDA.
• Attractive free cash flow yield in high single digits.
• Continued steady growth of revenues, adjusted EBITDA, and adjusted EPS.
• The business model is resilient, and not recognized in market valuation.
• Low-cost activity – a family of 4 can bowl for about GBP 25 – attractive relative to movie theatres, amusement parks, and other activities.
• Excellent management team focused on shareholder value.
• Strong track record of accretive acquisitions.
• “Ft. Knox” balance sheet with GBP 52m net cash.
• High return organic investments in refurbishments (over 50%) and new locations (over 20%).

Risks

• Severe downturn in U.K. and global economies
• Business segments are less resilient than expected.
• Post-COVID improvements in profitability decline.
• Poor acquisition which hurts shareholder value.

Catalyst

See above.