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Questor: our Royal Mail replacement is a more resilient business and has better scope for dividend rises
Questor Income Portfolio: a firm that offers a perennially popular form of family entertainment is a better bet than a delivery business struggling to reinvent itself
Our replacement for Royal Mail, which we removed from our Income Portfolio in late November over fears that it would not make a success of its transition from a letters to a parcels business, is a very different kind of company.
Royal Mail is struggling to remain profitable while its main letters service becomes less and less relevant and its increasingly key parcels business is subject to fierce competition against a backdrop of troubled labour relations.
Ten Entertainment, the 10-pin bowling firm, by contrast, offers affordable entertainment in a market with only one direct competitor and has been awarded gold status by the Investors in People scheme.
The company is Britain’s second-largest bowling alley operator, after Hollywood Bowl, which was tipped by Questor in August 2018 and has gained 45pc since.
Ten Entertainment has 45 sites, all trading under the Tenpin brand, which offer a combined 1,000 lanes in addition to amusement machines, table tennis and pool tables, as well as restaurants and bars.
Most of its alleys are located on retail and leisure parks alongside other forms of family entertainment such as cinemas and casual dining restaurants. In all, customers visited its sites about 5.3 million times last year.
In Questor’s view this is a simple, sensible business model. Families are not going to stop visiting places that offer a variety of forms of entertainment along with plentiful parking and eating options, while 10-pin bowling itself has perennial appeal and is arguably the cheapest form of family entertainment.
The company is growing by adding new sites – Manchester Printworks, its first newly built alley, is scheduled to open in the first half of this year – as well as by testing new concepts, improving efficiency and investing in old sites. The latter achieves very high returns on the money spent.
As an example of its efficiency drive it has developed a proprietary lane booking system that helps maximise lane utilisation and minimise waiting at peak times, and has recently introduced “iServe”, which allows customers to order food and drink to be delivered directly to their lane.
In a trading update published on Wednesday the company said 70pc of its estate was now benefiting from the cost efficiencies delivered through its technology re-engineering programme, Pins & Strings.
It added that four sites had been refurbished in 2019, including one prime location that had received additional investment as a concept site format to test new entertainment experiences. All four sites were “performing strongly”, it said.
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Sales grew by 10.2pc over the year, most of which (8pc) came from increasing revenues from existing sites rather than from opening new ones. It was the eighth consecutive year of sales growth.
The company said it continued to “strengthen our pipeline of new site opportunities through a blend of new developments and selected acquisitions”.
Profits are growing at about 15pc annually, which makes the company look reasonably valued at about 14 times forecast earnings for this year. Annual free cash generation is very attractive at about 10pc of the stock’s market value and returns on capital are also strong.
We are, of course, most interested in the dividend. The company listed in 2017 and that year paid a dividend of 10p a share, which was increased by 10pc the following year to 11p. We’ll find out how much it intends to pay for last year when the annual results, due on March 25, are published.
This looks like a much more resilient, predictable business than Royal Mail and we have much greater confidence in its ability to increase its dividend in future years.
Questor says: buy
Ticker: TEG
Share price at close: 310p
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