Description
Business Overview:
SIX is the largest regional theme park operator globally, with 27 parks in the US, Mexico, and Canada. Following a necessary recapitalization in 2009, SIX shares grew nearly ten-fold, rising from ~$10 in 2010 to their peak of ~$70 in mid-2018. However, factors such as stagnant growth, aggressive promotions, and failure to expand overseas led to a prolonged sell-off. In early 2020, the COVID-19 pandemic made a bad situation worse and shares came crashing down to a low of ~$12.
Last May, CaddieCapital provided an excellent overview of the company's history, which we won't repeat here. Essentially, compounding frustration and shareholder activism resulted in a complete mgmt/BoD overhaul, and the implementation of a new "strategic plan." Selim Bassoul (former CEO of MIDD from 2001 to 2019) was brought onboard in late 2021 (Dir. Since Feb ’20) to align the company's priorities with those of shareholders. The core strategy under CEO Selim is simple:
- Invest in park infrastructure to enhance the guest experience and operational efficiency;
- Reduce promotions and raise pricing to optimize park attendance.
A Rocky Start:
Bears might criticize CEO Selim's "premiumization" strategy as elitist, and exclusionary, and we originally viewed the strategic shift as overly ambitious. We believed that the sudden price hikes were too aggressive, and that SIX’s strategic plan was a case of mgmt. trying to do too much too fast. As it turns out, this view was not entirely incorrect. SIX’s new pricing strategy appeared to work exiting the pandemic. Entering Summer 2021, lockdowns started to ease, attendance began to recover, and pricing adjustments took effect. 3Q21 revenue grew to nearly $640M, 2.8% higher than 3Q19; everything was going perfectly.
But, as CEO Selim aptly stated on the 2Q22 CC, “raising price is no easy task for a company that has trained customers to expect discounts.” As expected, the shift toward premium pricing for a historically value experience was unpopular among customers, and attendance quickly began to tumble.
Thesis:
As with many turnarounds in which incoming mgmt. attempt to shake-up the business, we expected SIX to double-down on the new initiatives. We were encouraged by CEO Selim’s commentary on the 4QCC that pricing was pushed too hard in 2022, and that they should walk back some of the changes. While this could be seen as a capitulation, we believe this is the right approach.
On March 2nd, SIX reported 4Q and full FY22 results. 4Q attendance fell -30% y/y (-26% LTM), while guest spending per capita rose +23% y/y to $65.15 ($63.93 LTM). FY22 attendance of 20.4M declined by 12.4 million (-38%) compared to FY19, while total guest spending per capita grew by +51%, resulting in FY22 revenue only 8.7% lower than FY19, and flat vs 2017. Further, despite inflationary cost headwinds SIX has maintained an aEBITDA margin in the mid-30s, only 120 bps below FY19’s margin and 400 bps lower than FY17. In 2017, SIX shares were trading for ~ $60 (~14x fwd aEBITDA) vs ~$26 as of this writing (<9x fwd aEBITDA).
Thesis Points:
- Mgmt. commentary on the 4QCC indicates that SIX is tracking toward its optimal attendance level of 25M to 27M guests. Per CEO Selim on the 3Q22 conference call, SIX should reach this level around 2H25 (“3 years from today”), implying a 4% to 7% attendance CAGR.
- The Street is modeling HSD revenue growth in FY23, which agrees with mgmt.’s outlook of double-digit attendance growth offset by slightly lower per-cap spend. Backing into consensus revenue estimates of $1.57B and $1.62B in FY24/FY25, we can see that attendance is modeled to grow at a 6% CAGR, with guest per-cap spend flat ~$60 to $62.
- CFO Gary Mick noted on the 4QCC that the company is on track to deliver “record” adjusted EBITDA for NA core park operations in 2023 (the previous record was $518M in 2018). Assuming ~12% y/y attendance growth (~23M total FY23), average spend/guest of ~$62.5 (FY22 $63.93), and an aEBITDA margin of ~35% to 37% (SIX average hist. range), the >$518M target appears reasonable (add ~$4M from intnl. licensing).
- Mgmt. sees a path toward low-40% aEBITDA margins within the next 3Y (2025 target). Pricing benefits should lead to operating leverage as total guest spending outgrows variable cost per guest.
- Due primarily to inflation, COGS/guest rose to ~$5.3 in FY22 from pre-pandemic <$4. Similarly, OpEx/guest rose from ~high teens pre-pandemic to $28.95 in FY22.
- As inflation normalizes and SIX sees seasonal labor optimization and leaner overhead flow through the P&L, it is likely that per guest costs return to a more normal range of ~$5.5 COGS/ $25 OpEx.
- SIX valuation of ~8.6x FY23 aEBITDA (already excl. NCI income) at first seems expensive relative to peers SEAS (7.8x) and FUN (7.9x), but if mgmt. is able to achieve FY25 optimal attendance/pricing and aEBTIDA margin expansion (~42% as noted on the 4QCC), aEBITDA could grow at >10% CAGR, vs. SEAS/FUN LSD.
- Assuming mgmt.’s FY25 outlook materializes, we believe SIX will be worth >$45 p/s based on 10x FY25 aEBITDA of ~$640M (40% margin on 6% revenue CAGR), resulting in a very attractive >30% IRR.
- Mgmt.’s path to delever provides additional upside to shares.
Risks:
- Highly levered capital structure (>50% current TEV in debt) could crush equity if SIX is unable to meet mgmt. 2025 targets.
- $2.3B net debt, excl. ~$520M in NCI. Note that aEBITDA is reported after distributions related to NCI (Mgmt refers to pre-NCI income as modified EBITDA)
- Premiumization strategy is risky given historical focus on discounts/promotions; mgmt. could underestimate elasticity.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
- Operating leverage from premiumization strategy: growth in guest spend outweighs cost/guest.
- Potential OpCo/PropCo spin-off (see Land & Building activist campaign): unlikely given commentary on the 4QCC, but H Partners (13.7% CSO) and L&B (3% CSO) carry significant influence.
