Leading analysts Douglas Jack, of Peel Hunt, has said the country’s two leading bowling operators – Hollywood Bowl and Ten Entertainment have “substantial scope” to increase their dominance of the sector. He stressed that potentially significant rewards await if the two companies can further raise the perception of the bowling sector.

On Hollywood Bowl, Jack said: “For Monday’s prelims, we forecast EBIT to rise by 11% to £21.8m, resulting in PBT of £20.7m (consensus: £20.7m). LFL sales rose by 3.5%, having increased by an estimated 5.8% in H2. Warmer conditions in October-November should have been less helpful, but the next LFL data point is H1 2018E, for which the comp is soft. Overall, we expect forecasts to at least be held, supported by innovation. We expect the results to be well-received, with a positive read-through to Ten Entertainment.

“The 3.5% LFL sales increase was all volume/spend per head rather than pricing. The pick-up to 5.8% in H2, vs 1.2% in H1, largely stemmed from softer comps (3.2% vs H1’s 10.4%) and higher rainfall (which benefits bowling businesses) in Q4. For 2018E we are forecasting just 2.5% LFL sales growth; each extra 1% of LFL sales equates to a 4% upgrade.

“Over the long-term, we believe there is good potential for the company grow its average number of customers visit from 1.3x pa. This could be achieved through refurbishments, new products, CRM, marketing and promotional activity rewarding more regular attendance. Potentially significant rewards await if Hollywood Bowl and Ten Entertainment can further raise the perception of the bowling sector.

We forecast just a 40bps increase in EBIT margins in 2017E, even though 50bps growth was achieved in H1, when LFL sales grew by just 1.2%. Given the LFL sales pick-up in H2 (80-85% of incremental sales typically flows through to profits) and minimal exposure to labour cost inflation, we believe there is little downside risk to margin forecasts.

“We believe our forecasts are cautious by anticipating just 100bps EBIT margin growth between 2017E and 2020E, despite a new wave of innovation that includes improving labour scheduling, Pins on Strings benefits (only a 10% return is in our forecasts) and 2.5-3.0% LFL sales.

“Hollywood Bowl’s balance sheet is strong in our view, with net debt/EBITDAR forecast to fall below 3x in 2019E. On Monday, the company should announce a return of cash to shareholders, possibly through a special dividend.”

He concluded: “We believe the two leading bowling operators have substantial scope to grow through self-help, increasing their dominance of the sector. They have both met expectations despite trading through a relatively unfavourable, hot/dry year, and both can look forward to easy weather comps in the year ahead. We expect the trading news flow for both companies to be strong over the next six months.”