When investing in shares, it’s helpful to understand the fundamental business model behind the numbers that is hopefully generating returns for shareholders. Experiencing or interacting with a business first-hand as a customer can give investors a far better understanding of how well a business is executing its strategy.
Let’s take a closer look at Ten Entertainment Group (LSE:TEG), a leading UK operator of bowling and family entertainment centres, trading under the Tenpin brand. This is a simple, easy-to-understand business I believe is of high quality and, at present, undervalued.
The group operates within the broader UK leisure market, and at present bowling has a share of 0.29% of this £126bn market. TEG’s strategy is to increase participation in bowling through providing reasonably priced, good-quality food and broaden its family entertainment offering. Sounds reasonable to me.
Capitalising on the experiential leisure trend
As mentioned, increasing bowling participation is the key driver. To support this and encourage families to visit sites, TEG is targeting areas of high footfall such as retail outlets. Attracting customers through its doors will over time become easier, with online streaming making a trip to the cinema simply less appealing and once on site, families will be more likely to play on the machines and enjoy a meal before, during or after they’ve enjoyed a game or two of tenpin bowling. Food and beverage and amusement machines contribute towards half of the groups sales, so this is a big part of the business.
Research shows that consumers are looking to spend their money on “doing things” rather than “buying things”, and this desire for experiential leisure time leaves TEG well placed to take advantage of this opportunity. TEG is also committed to reinvesting in its estate to keep sites modern and relevant. They typically operate a six to seven-year cycle and impressively manage to generate £1.50 for shareholders for every £1 spent over the course of this investment cycle.
Strong acquisition pipeline in a highly fragmented market
Ten Entertainment currently has a market share of around 20% of the tenpin bowling market, which is worth approximately £350m in total sales a year. The market leader Hollywood Bowl Group has a share of just over 40%, with the balance held by a high number of independent operators with between one and five sites. This fragmentation naturally presents an opportunity for the business to grow through acquisition and has identified a pipeline of 60 sites, which meet the group’s criteria.
Sales and profits set to soar
Ten Entertainment is trading at a discount to its larger competitor Hollywood Bowl, with a price-to-earnings (P/E) ratio of 16.7 versus 17.9. The investment case is strengthened with the knowledge TEG is expecting sales to reach £100m by 2021 and pre-tax profit is set to rise to £21m, representing over 100% growth from 2017 through to 2021. With a modest market share, a strong acquisition pipeline and an accomplished management team focused on delivering shareholder value, this is a quality business that is set to see its share price rise further.
