Escape Hunt “well positioned to take market share in the emerging experiential entertainment sector” says Zeus Capital

Escape Hunt plc (LON:ESC) announced the acquisition of its Middle East master franchise partner, Escape Hunt Entertainment LLC (“EHE”). The operation offers high potential returns at modest cost and risk to the company. The transaction also pushes the company’s rollout ahead of our forecasts. Such acquisition opportunities, combined with attractive new lease terms and rebounding early demand, position the company for strong return potential.

Opportunistic transaction: Escape Hunt acquired EHE for a modest consideration. EHE owns and operates an escape room site in the Galleria Mall in Dubai and has sub-franchise relationships for four regional sites. The Dubai site is re-opening today and the transaction is expected to close on 22 October 2020.

Strong earnings potential, de-risked costs: The potential returns from the site Dubai site are strong. The site had turnover of approximately £490k in 2019 and Escape Hunt expects to run the site on similar operating metrics to a UK site. (UK sites have targeted site EBITDA margins of approximately 30%.) Furthermore, the risk of the operating is limited by attractive lease terms, which have been renegotiated to only include revenue-linked payments. The regional sub-franchisee network is being reviewed in light of the pandemic, with the continuing operations representing only upside. Escape Hunt’s revenue share from the Middle East sub-franchisee network rises from 5% to 10% due to the acquisition. 

Rollout tracking ahead: The acquisition accelerates Escape Hunt’s rollout plans. Dubai is the company’s 11th site in operation and Basingstoke is expected to open before the end of the month, resulting 12 sites by October. Cheltenham has completed contracts and should reopen at end of November, resulting in 13 sites. One further site may possibly be opened by the end of December, which would result in 14 sites. These milestones are ahead of our base case forecast, where we assume 11 sites by the end of October and 13 sites by the end of the year.

Overall view: We believe Escape Hunt is well positioned to take market share in the emerging experiential entertainment sector. We see smaller, less well-resourced operators struggling against Escape Hunt’s diverse product suite, aggressive marketing plans, and premium branding. At the same time, we see costs and risks limited by opportunities in the weak commercial property market and increasingly flexible labour costs. Furthermore, we see prospects potentially boosted by digital and remote products. Our scenario analysis envisions Q4 2022 annualised EBITDA could range between £0.6m and £2.3m in 2022. Such prospects make the company’s market value (£6.8m market capitalisation and £4.3m current cash) highly attractive.

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