CENTURY CASINOS INC CNTY
May 18, 2009 - 10:44am EST by
bafana901
2009 2010
Price: 2.14 EPS -$0.76 -$0.03
Shares Out. (in M): 24 P/E na na
Market Cap (in M): 51 P/FCF 17.3x 13.0x
Net Debt (in M): 26 EBIT 2 4
TEV: 77 TEV/EBIT 48.0x 19.0x

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Description

I am recommend buying Century Casinos (CNTY). My sum-of-the-parts valuation of $3.00 represents a 40% upside. This valuation is conservative as it is limited to the catalysts described below and does not assume a recovery in CNTY's earnings power resulting from an improved economy. In other words, an improved economy is a bonus which will send the target price much higher.

Overview

CNTY has an EV of $77mil. Towards the end of q2 2009 CNTY will receive $42mil from the sale of it's South African casino's. This implies that investors are buying the stub for $35mil.

The stub consists of  

  • Womacks, a casino in Cripple Creek, Colorado (437 slots + 4 tables)
  • a casino in Central City, Colorado (525 slots+9 tables)
  • a casino in Edmonton, Alberta, Canada (658 slots+35 tables)
  • Casinos on five cruise ships (143 slots + 22 tables)
  • a 33% interest in 8 casino's in Poland (255 slots + 100 tables)

Before looking at the earnings power of these assets it is worth noting that the Edmonton and Central City casino's both opened in 2006. The development costs were $30mil and $50mil respectively. Comparing the $80mil replacement cost of only two assets to the $35mil value of the stub clearly indicates that CNTY is trading at a substantial discount to it's replacement cost.

 

Strong Catalysts

The catalyst for the trade includes

  • 1) The implementation of Colorado's Amendment 50 on July 1, 2009.
  • 2) Receipt of $42mil from the sale of South African casinos

 

Amendment 50:

In November 2008 Colorado approved Amendment 50. Amendment 50 increases the maximum bet size from $5 to $100. The legislation also allows casinos to add roulette and craps for the first time and to operate 24 hours a day 7 days a week. (Casino's currently close at 2 am.)

CNTY management believe that the relaxation of gambling laws will grow gaming revenues by 20% to 30% as a more competitive Colorado grabs market share from Las Vegas.

Proceeds from Sale of South African Casino's

The $42mil proceeds are expected late q22009 following the approved of the sale by the South African gaming boards. This approval is a formality and there is almost no risk that the sale will not be approved.

Management have guided that they want to use the proceeds to pay down some of the debt. The remainder of the proceeds will be used for buybacks (depending on the stock price) or for acquisitions.

 

Sum-of-Parts Valuation

 

Edmonton

There are 7 casinos in Edmonton, a city of 1mil inhabitants.

CNTY developed their casino for CAD36mil (USD31mil). The casino opened in Nov 2006.

                                                              2008              2007

Revenue (CAD)                       23 318             20 536

EBITDA(CAD)                          8 492               6 037

The casino has been successful generating a 24% EBITDA return on invested capital. The casino also appears to have escaped the effects of the credit crunch growing revenues in q12009 by 7% to CAD5.970mil. EBITDA grew by 15% to CAD2.208mil.

Using a 6 times EBITDA multiple gives a value of CAD48mil or USD41mil. I have used a 6times multiple as the 24% growth in year-on-year revenues indicates that this casino is still in the process of maturing.

 

Womacks, Cripple Creek

CNTY has operated Womacks, 45miles from Colorado Springs, since 1996. Cripple Creek is a competitive market with 16 casinos competing for the gambling dollar. The market has suffered from the weak economy and a smoking ban which came into effect in January 2008.

                                                  2008              2007               2006                2005   

Revenue                       11 243             16 722             16 255             17 108

EBITDA                        1 667               5 432               6 150               6 214

In 2001 revenue was R21mil and EBITDA 10.8mil. Revenues and profits have been under pressure as a result of increased competition. This decline was accelerated by the opening of a 700 slot casino in q32008. As a result Womack's market share has declined from 18% in 2000 to 8% today.

If that was not tough enough the January 2008 smoking ban and weak economy have hurt revenues and profitability. Revenues fell 29%, 36%, 38% and 25% in q1, q2, q3 and q4 2008. EBITDA declined by 78%, 74%, 66% and 47%.

In q1 2009 revenues only declined 10.8% to R2 572mil. Even more impressive q12009 EBITDA increased by 77% to R494mil. 

Q12009 results encapsulates the now famous positive 2nd derivative as well as evidence of the green shoots fertilized by Helicopter Ben and Toxic Tim. These hopeful signs should be bolstered by the implementation of Amendment 50 on July, 1 2009.

Assuming a EBITDA of $1 667mil marks the bottom and adding 30% for Amendment 50 indicates that future maintainable EBITDA should be at least R2.2mil. A conservative 4 times multiple implies a value of R9mil. (The replacement costs of the 437 slots alone is approximately $4.5mil.)

 

Central City

The casino was opened in July 2006 at a cost of $50mil. Central City has 6 casino's with a further 18 casino's in the neighbouring Black Hawk.

                                                  2008              2007

Revenue                       17 435             20 374

EBITDA                        3 906               4 922

Like Womacks, revenues and profits at Central City have been hurt by the smoking ban and slower economy.

Again, considering the cruel environment Q12009 revenues and profits held up well. Revenues only declined by 5% to $1 063mil. EBITDA rose by 27% to R1mil. Using R1mil per quarter EBITDA as a base and adding 30% for the favourable impact of Amendment 50 indicates that the casino could generate an EBITDA of R5mil per annum. Using a 5 times multiple implies a value of R26mil well below the $50mil development cost.

 

Ships

CNTY operate 123 slots and 18 tables on 4 ships. The income stream is fairly volatile depending on the number and quality of customers on the ships. Dry docking for maintenance can make the income stream fairly lumpy.

CNTY have recently signed an agreement with a German cruise ship operator to operate casinos on up to 4 additional ships. This deal could double the amount of passengers exposed to CNTY's casinos.

On average the ships generate $100k EBITDA per annum per ship. Using an average of 6 ships and an EBITDA multiple of 6 implies a value of $3.6mil. (I have used a multiple of 6 as shipping profits are only taxed at 3%.) 

 

Poland

CNTY bought 33% of Casinos Poland in March 2007 for $12mil. Casino Poland is the largest casino operator in Poland with 50% market share. CNTY have board representation and actively participate in the operation of the casinos. After tax margins are barely 4% and there is hopefully a lot of room for improvement.

The investment is accounted for using the equity method generating equity profit of $0.9mil in 2008.  Using a PE multiple of 6 to reflect the risk of being a minority shareholder and potential currency risk implies a value of $5.4mil

 

Head Office

Head office costs are far too high a $6mil per annum. Using a multiple of 5 implies a drag of $30mil on the valuation. Management will have to address these costs especially since head office no longer has to support the South African operations.

 

Valuation

South African(Proceeds)            $42.0mil

Edmonton                                 $40.7mil

Cripple Creek                          $  9.0mil

Central City                              $26.0mil

Ships                                        $  3.6mil

Poland                                      $  5.4mil

Head Office                              ($30.0mil)

                                               ------------

EV                                           $ 96.7mil

Net Debt                                  ($26.0mil)

                                                -------------

Market Cap                             $70.7mil (or $3 per share)

                                                ========

 

Conclusion

The $3.00 calculated above is conservative. Womacks is valued at a lousy $9mil even though it was able to generate $5.4mil per annum as recently as 2007. Also, Central City is valued at $26mil well below the $50mil development cost. There is obviously a lot of upside to these values if the economy recovers. For the moment I am not betting on an economic recovery. My only catalysts are the receipt of the South African proceeds and the introduction of Amendment 50.

                                   

Catalyst

 

1) The implementation of Colorado's Amendment 50 on July 1, 2009.

2) Receipt of $42mil from the sale of South African casinos

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    Description

    I am recommend buying Century Casinos (CNTY). My sum-of-the-parts valuation of $3.00 represents a 40% upside. This valuation is conservative as it is limited to the catalysts described below and does not assume a recovery in CNTY's earnings power resulting from an improved economy. In other words, an improved economy is a bonus which will send the target price much higher.

    Overview

    CNTY has an EV of $77mil. Towards the end of q2 2009 CNTY will receive $42mil from the sale of it's South African casino's. This implies that investors are buying the stub for $35mil.

    The stub consists of  

    Before looking at the earnings power of these assets it is worth noting that the Edmonton and Central City casino's both opened in 2006. The development costs were $30mil and $50mil respectively. Comparing the $80mil replacement cost of only two assets to the $35mil value of the stub clearly indicates that CNTY is trading at a substantial discount to it's replacement cost.

     

    Strong Catalysts

    The catalyst for the trade includes

     

    Amendment 50:

    In November 2008 Colorado approved Amendment 50. Amendment 50 increases the maximum bet size from $5 to $100. The legislation also allows casinos to add roulette and craps for the first time and to operate 24 hours a day 7 days a week. (Casino's currently close at 2 am.)

    CNTY management believe that the relaxation of gambling laws will grow gaming revenues by 20% to 30% as a more competitive Colorado grabs market share from Las Vegas.

    Proceeds from Sale of South African Casino's

    The $42mil proceeds are expected late q22009 following the approved of the sale by the South African gaming boards. This approval is a formality and there is almost no risk that the sale will not be approved.

    Management have guided that they want to use the proceeds to pay down some of the debt. The remainder of the proceeds will be used for buybacks (depending on the stock price) or for acquisitions.

     

    Sum-of-Parts Valuation

     

    Edmonton

    There are 7 casinos in Edmonton, a city of 1mil inhabitants.

    CNTY developed their casino for CAD36mil (USD31mil). The casino opened in Nov 2006.

                                                                  2008              2007

    Revenue (CAD)                       23 318             20 536

    EBITDA(CAD)                          8 492               6 037

    The casino has been successful generating a 24% EBITDA return on invested capital. The casino also appears to have escaped the effects of the credit crunch growing revenues in q12009 by 7% to CAD5.970mil. EBITDA grew by 15% to CAD2.208mil.

    Using a 6 times EBITDA multiple gives a value of CAD48mil or USD41mil. I have used a 6times multiple as the 24% growth in year-on-year revenues indicates that this casino is still in the process of maturing.

     

    Womacks, Cripple Creek

    CNTY has operated Womacks, 45miles from Colorado Springs, since 1996. Cripple Creek is a competitive market with 16 casinos competing for the gambling dollar. The market has suffered from the weak economy and a smoking ban which came into effect in January 2008.

                                                      2008              2007               2006                2005   

    Revenue                       11 243             16 722             16 255             17 108

    EBITDA                        1 667               5 432               6 150               6 214

    In 2001 revenue was R21mil and EBITDA 10.8mil. Revenues and profits have been under pressure as a result of increased competition. This decline was accelerated by the opening of a 700 slot casino in q32008. As a result Womack's market share has declined from 18% in 2000 to 8% today.

    If that was not tough enough the January 2008 smoking ban and weak economy have hurt revenues and profitability. Revenues fell 29%, 36%, 38% and 25% in q1, q2, q3 and q4 2008. EBITDA declined by 78%, 74%, 66% and 47%.

    In q1 2009 revenues only declined 10.8% to R2 572mil. Even more impressive q12009 EBITDA increased by 77% to R494mil. 

    Q12009 results encapsulates the now famous positive 2nd derivative as well as evidence of the green shoots fertilized by Helicopter Ben and Toxic Tim. These hopeful signs should be bolstered by the implementation of Amendment 50 on July, 1 2009.

    Assuming a EBITDA of $1 667mil marks the bottom and adding 30% for Amendment 50 indicates that future maintainable EBITDA should be at least R2.2mil. A conservative 4 times multiple implies a value of R9mil. (The replacement costs of the 437 slots alone is approximately $4.5mil.)

     

    Central City

    The casino was opened in July 2006 at a cost of $50mil. Central City has 6 casino's with a further 18 casino's in the neighbouring Black Hawk.

                                                      2008              2007

    Revenue                       17 435             20 374

    EBITDA                        3 906               4 922

    Like Womacks, revenues and profits at Central City have been hurt by the smoking ban and slower economy.

    Again, considering the cruel environment Q12009 revenues and profits held up well. Revenues only declined by 5% to $1 063mil. EBITDA rose by 27% to R1mil. Using R1mil per quarter EBITDA as a base and adding 30% for the favourable impact of Amendment 50 indicates that the casino could generate an EBITDA of R5mil per annum. Using a 5 times multiple implies a value of R26mil well below the $50mil development cost.

     

    Ships

    CNTY operate 123 slots and 18 tables on 4 ships. The income stream is fairly volatile depending on the number and quality of customers on the ships. Dry docking for maintenance can make the income stream fairly lumpy.

    CNTY have recently signed an agreement with a German cruise ship operator to operate casinos on up to 4 additional ships. This deal could double the amount of passengers exposed to CNTY's casinos.

    On average the ships generate $100k EBITDA per annum per ship. Using an average of 6 ships and an EBITDA multiple of 6 implies a value of $3.6mil. (I have used a multiple of 6 as shipping profits are only taxed at 3%.) 

     

    Poland

    CNTY bought 33% of Casinos Poland in March 2007 for $12mil. Casino Poland is the largest casino operator in Poland with 50% market share. CNTY have board representation and actively participate in the operation of the casinos. After tax margins are barely 4% and there is hopefully a lot of room for improvement.

    The investment is accounted for using the equity method generating equity profit of $0.9mil in 2008.  Using a PE multiple of 6 to reflect the risk of being a minority shareholder and potential currency risk implies a value of $5.4mil

     

    Head Office

    Head office costs are far too high a $6mil per annum. Using a multiple of 5 implies a drag of $30mil on the valuation. Management will have to address these costs especially since head office no longer has to support the South African operations.

     

    Valuation

    South African(Proceeds)            $42.0mil

    Edmonton                                 $40.7mil

    Cripple Creek                          $  9.0mil

    Central City                              $26.0mil

    Ships                                        $  3.6mil

    Poland                                      $  5.4mil

    Head Office                              ($30.0mil)

                                                   ------------

    EV                                           $ 96.7mil

    Net Debt                                  ($26.0mil)

                                                    -------------

    Market Cap                             $70.7mil (or $3 per share)

                                                    ========

     

    Conclusion

    The $3.00 calculated above is conservative. Womacks is valued at a lousy $9mil even though it was able to generate $5.4mil per annum as recently as 2007. Also, Central City is valued at $26mil well below the $50mil development cost. There is obviously a lot of upside to these values if the economy recovers. For the moment I am not betting on an economic recovery. My only catalysts are the receipt of the South African proceeds and the introduction of Amendment 50.

                                       

    Catalyst

     

    1) The implementation of Colorado's Amendment 50 on July 1, 2009.

    2) Receipt of $42mil from the sale of South African casinos

    Messages


    SubjectRE: RE: RE: Cheap
    Entry01/07/2013 12:14 PM
    Memberaa123

    what's your take on management? i agree that this is cheap but spent time talking to them during the last few months about returning cash to shareholders and it didn't go anywhere. it was clear that they are more interested making acquisitions than starting a dividend or considering a sale of the company. Their last acquisition was not a success so I question the capital allocation and whether they really care about the stock price. They could be buying back their stock instead of making new investments or could start a dividend and highlight the undervaluation but they either don’t get it or don’t care.  I am afraid that their time horizon is a lot longer than ours and in the meantime they get paid and travel the world looking at possible deals. So I agree with you that there is asset value here but not sure that these guys get it and even tough they own a lot of stock, I am not sure their incentives are aligned with us in the short to medium term. Also look at the board – it is a joke. I wrote a letter to the board which I am happy to share if you are interested and you give me a way to contact you. Btw I think they are ok operators.


    SubjectRE: RE: Management?
    Entry01/07/2013 04:59 PM
    Memberbafana901
     
    cuyler
     
    I agree with aa123's view on managment. Great salaries, private jets, AGM's in exotic locations etc etc a PE guy could really kick some arse and slash these "lifestyle" costs. The managment team are focused on "living the dream" which is a great pity because you are right there is value, just nobody to unlock it.
     
    Remember when looking at ho costs a large portion of these have already been allocated down to the operating assets and what is left still eats manages to eat up most of the ebitda from there largest casino. Why do you feel comfortable standing in line after managment?
     
     

    Subjectmy letter to the board
    Entry01/07/2013 08:52 PM
    Memberaa123

    Here is a letter i sent to the Board in April of 2012. Some interesting statistics in my humble opinion! (and yes I think ADNC was/is a terrific idea - thanks cuyler).

    Thank you for taking the time to talk to me on two occasions. I enjoyed learning more about the business and its prospects. As discussed on the call, I believe that CTNY stock is significantly undervalued trading at only 3.9 times expected 2012 EBITDA and 0.57 book value (not to mention the fact that book value is understated as it doesn’t reflect the true value of the Polish assets). I think that there are a number of reasons why the stock is undervalued and likely to remain significantly undervalued unless the company aggressively takes action to increase shareholder value. In particular, I believe that the company should form a special committee of the independent directors to explore the sale of the business. I strongly believe that a sale would result in the highest risk-adjusted returns for the shareholders and is likely to result in a significantly higher price than the stand alone option. I believe that now would be an opportune time to explore the sale as the business performance has significantly improved in 2011 and the credit markets are wide open.

    I believe the stock is and will remain undervalued due to the following reasons:

    1. Lack of cash flow generation:

    Since fiscal year 1995 (the company became public in 1994), the company has lost a cumulative $16 million in cash flow. In other words, for the last 17 years, the company not only did not generate a dollar in free cash flow, it actually lost $16 million. The table below summarizes the findings which I think you will find enlightening:

     


    2. Poor return on capital

    Notwithstanding the significant capital invested in the business in the past, the company today generates very little income. In 2011, the company generated $3 million in net income, generating a return on equity (ROE) of 2.7%. Given the poor ROE, it is not surprising that the company stock trades at a large discount to its book value of $112 million. From a cash flow perspective, the returns are barely better. In 2011, the company generated cash flow from operations of $10.7 million and invested $2.8 million in capital expenditures, generating $7.9 million of free cash flow. Dividing that number by the equity value of $112 million generates a return of 7.1%, which is well below the company’s cost of equity. The poor returns explain why every dollar reinvested in the business destroys value and obviously explains the low valuation.

    3. Poor capital allocation illustrated by the acquisition of the Calgary asset

    The acquisition of the Calgary asset is a good illustration of the poor capital allocation at the company. The Century Casino Calgary was acquired in January 2010 for $9.3 million. Since then another $3.7 million and $0.6 million were invested for renovations and upgrades in 2010 and 2011 respectively for a total investment of $13.6 million. In 2011, losses from operations at the Calgary casino were approximately $159,000. In order for this asset to generate a satisfactory internal rate of return (IRR), the company would have to execute a very significant turnaround. Clearly the market is very skeptical. This is of particular importance as the company is considering ways to redeploy its cash through acquisitions. The market is very competitive and in light of the long term cash flow generation track record of the company, its return on equity and the return of its latest acquisition, I am very concerned that the cash currently on the company balance sheet could be destroyed through a bad acquisition.

    The initiation of a large quarterly dividend would be a much better way to allocate capital and return cash to shareholders. If the company were to distribute 80% of its 2012 free cash flow through a dividend, it could initiate a 7 cent quarterly dividend representing an annual yield of almost 10% (28 cents dividend divided by the $2.90 stock price). This would highlight the undervaluation of the stock and attract new shareholders interested in a yield play. The stock price would increase to a new level corresponding to a more appropriate yield. I believe that the stock would trade at a yield of 5% to 6%, resulting in a stock price of $4.67 to $5.40 per share, a level close to book value.

    While the sale of the company represents the best option to create shareholder value, the initiation of a very large quarterly dividend could be an intermediate step to highlight the value and get the stock higher in advance of a potential sale (since buyers care about premium, it is helpful to start from a higher stock price level).

    I also believe that a stock buyback would not be advisable in this situation. The stock doesn’t trade a lot and a buyback would make this situation worse. Also given the light trading, it is very unlikely that the company could buy back a meaningful amount of shares. Finally because of the inherent flexibility of a buyback, it would not alleviate the market concerns that the company could engage in a value-destroying acquisition. The discipline that the dividend requires is what the market will want to see to rerate the stock. Finally given the significant amount of cash on the company balance sheet and the ability of the company to further lever, a 7 cents quarterly dividend should not be an issue for the company.

    4. Lack of scale

    Corporate General and Administrative expenses were $5.7 million is 2011. This is a very high number to support a business with EBITDA of $9.8 million. The business is simply too small to support the large infrastructure of a stand alone public company and therefore should not be a public company.

    5. Polish assets not reflected in the current valuation

    Given the current ownership structure of the Polish asset, I don’t believe the market values this asset appropriately. Based on our discussion, this asset had EBITDA of approximately $6 million in 2011. Using a conservative 6 times multiple, the asset is worth $12 million or around 50 cents per share to Century Casinos (close to 20% of the company market capitalization). Unless the company is able to purchase the two thirds of CPL it doesn’t currently own, the company will only be able to account for this asset through “earnings from equity investment” - $0.6 million in 2011. This materially undervalues the investment. I suggest that you take advantage of the current transaction between your co-shareholders (LOT Polish Airlines and PPL Polish Airports) and Totalizator Sportowy Group to monetize this investment so that it can be properly valued by the market. Keeping a one third ownership even with a potential management contract is not going to resolve the undervaluation issue as you still won’t be able to consolidate the earnings from these assets (except for the management contract).

    6. Poor long-term stock performance

    I believe that all of these reasons explain why Century Casinos’ stock is currently well below where the stock was when the company became public in 1994 through a reverse merger with Alpine Gaming Inc. On March 31, 1994, Century Casinos Management Inc. and Alpine Gaming Inc. completed their merger. The stock closed at $5.10 on that date. Since then, the stock has lost more that 44% in approximately 18 years! In October 2005, the company raised around $50 million through an offering on the Vienna Stock Exchange at close to $7 per share. Since then the stock has lost about 60% of its value. Management has now had plenty of time to create shareholder value and asking for more time to improve the business instead of selling the company is not realistic.

    I believe that the company has valuable assets that could be worth significantly more in the hands of another owner. A sale of the company would resolve the scale issue as another buyer could reduce costs through synergies and just add the property EBITDA to its corporate structure. A sale would also solve the complex corporate structure of the Polish asset and allow a private buyer to give full value to these assets, perhaps through a sale to Totalizator Sportowy Group. When I suggested a sale of the company, your response was that a few years ago the stock was above $10 and you saw no reason why it couldn’t get there again. In my opinion, just because the stock was above $10 a few years ago (5 years ago actually) during a real estate bubble in the US, is no reason why the stock should go back there. I believe I have highlighted a number of valid reasons why the stock is likely to remain undervalued and a sale of the company is likely to result in the highest risk adjusted return for the shareholders. The performance of the business has significantly increased in 2011 and is forecast to continue to improve in 2012. Credit markets have significantly improved over the last few months. This could lead to a robust sale process. I believe that now is the time to explore such a transaction. A bird in the hand is better than two in the bush … A sale today at some premium to book value, say $6, is worth a lot more than a hypothetical $10 value in a few years especially considering the time value of money, the risks inherent in executing the stand alone business plan and the long term track record of the company.


    SubjectRE: RE: bafana
    Entry01/08/2013 09:52 AM
    Memberaa123

    activist angle - i looked at it from that angle and it is not obvious to do something which is one of the reasons it is languishing there. 

    1. the 2 co-ceos own more than 10% and if I remember correctly, there is a large Austrian investor who has been shareholder since the offering inAustria. I assume that this investor would side with management (maybe wrong assumption). Together they own more than 20%. That makes it hard in a proxy fight.

    2. From a M&A perspective, CNTY is not an obvious target because of the different types and geographies of the assets so there is no obvious strategic buyer. Also private equity may get gaming licenses and regulatory approvals so again I think it restricts the list of buyers.

    From all these reasons, I think management feels somewhat insulated. 

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