FULL HOUSE RESORTS INC FLL
November 04, 2019 - 7:30am EST by
TheEnterprisingInvestor
2019 2020
Price: 2.80 EPS 0 0
Shares Out. (in M): 3 P/E 0 0
Market Cap (in $M): 78 P/FCF 0 0
Net Debt (in $M): 102 EBIT 0 0
TEV ($): 180 TEV/EBIT 0 0

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Description

 

FLL is a company that has been profiled here in the past.  We suggest that you read mrsox’s writeup from a few years ago for background and information on management.  There have been some recent changes that merit a new pitch.

“This is a big ____ing deal” ~ Dan Lee Q3 2019 Quarterly Call (edited out of transcript)

It isn’t often you see companies with a little over 5 turns of gross debt ($102m or so) set to see their EBITDA increase by 50%+, but that (pending a successful vote on sports betting in Colorado on Tuesday) is exactly what happened to FLL recently.

So what happened?  A few things, in order of importance.

First the big deal, online sports betting.  After the Supreme Court legalized online sports betting nationwide, states began legalizing.  Different states took different approaches.  Colorado, where FLL has Bronco Billy’s, and Indiana, where they have Rising Star, took the stance that one needed a physical presence and gaming license to offer online betting and receive skins.  FLL has 3 skins in IN and should, subject to a successful referendum, have 3 in CO.  

Dan Lee took that as an opportunity.  What did he do?  He sold the rights to use the skins to 3 different parties in the two states.  He got a market access fee ($3m/state) and minimum payments totalling $3.5m per state from the parties for 10 years, or $7m/yr for a decade, with renewal options.  Since the skins go to three different parties, they have three chances of doing better than the minimum fee in each state.  It seems likely FLL does better than $7m/yr as online wagers ramps.  This revenue has minimal cost associated with it, it drops right to EBITDA.  

The second thing was a gaming tax reduction in Indiana, which starting in July 2021, which will reduce FLL’s gaming tax liability by $2.5m.  This too, drops right to EBITDA.

So, a company with $17.4m of LTM EBITDA should pick up at least $9.5m of EBITDA as this plays out the next 12-24 months.  

It gets a bit better than that though, because FLL is a highly levered company with high cost debt.  So these events could allow it to reduce interest expenses by maybe $4m.  It is currently adding a parking garage to its Cripple Creek casino, Bronco Billy’s, which is phase 1 of a project with phase 2 being a nice hotel so customers can stay overnight and gamble more.  The cash cost of interest may not actually decline because they would expand their facility to complete phase 2.  Dan Lee describes this better than I can, from the recent call:

“The other thing it does for us. Because when you have this big an increase in the cash flow backed by contractual agreements with substantial companies, it dramatically improves our balance sheet and our financing ability, so at this point we can probably refinance our debt at significantly below the 10% interest rate we're paying. And if we do that, we'd probably pick up another $4 million or $5 million of free cash flow. Or alternatively, it allows us to finance the construction of Phase 2 in Cripple Creek without having to issue equity. Because we certainly don't want to issue equity at these prices. It's way undervalued from what we think the company is worth. And so I think that has been an overhang on the stock. People worried about how are you going to finance the hotel in Cripple Creek, and now we have an answer. We can go to the debt markets and finance it. We may be able to do a combination of the two. We may be able to finance the hotel and reduce our interest rates a little bit on the backs of these sports wagering agreements.”

What’s interesting about all this is that FLL’s EV has not changed all that much since the first announcement of indicating they has two partners for online sports betting (a third was revealed with the Q3 report).  Even though the stock is up 40% or so from about $2 that’s only $22m or so from $56m market cap to $78m or so.  

In my mind this company traded about 8x EBITDA prior to these announcements.  EV of this company was the market cap of $56m plus $102m or so of debt.  The cash($27m @ quarter end) is spoken for, due to working capital and capex related to phase 1 of bronco billy.  $158m EV on $17.4m is just over 8x.  The EV has increased less than 15% on a 50%+ increase in EBITDA.  I’d call that an underreaction.  

Let’s say 8x is about right.  Looking out, they take $6m in, should generate some cash.  Previously that was about $4m/yr with $17.4m of EBITDA minus 3.5m of MCX and $10m of interest expense.  Taking EBITDA to $27m increases cash flow to north of $13m.  At some point they’ll be a taxpayer again, but I do not think it is between here and $27m of EBITDA.  

So they get $6m in access fees, let's say they only half of the $7m in fees hit for 2020 (due to different start dates, etc.) and only FCF $7.5m, they should do another $5.5m by the time the gaming tax goes down mid 2021.  That’s about $20m of cash.  If we think $27m of EBITDA is worth about 8x at that point, that’s an EV of $216m, minus $102m of debt is $114, plus $19m of cash build means the equity is worth about $133m vs about $78m today, or 70% higher.  Pending Tuesday’s vote, these are based on things we know are going to happen.  I think it is likely the parties entering into the agreements think they’ll do better than the minimums.  

I think it could work out a bit better than that.  Dan Lee is a creative and experienced gaming exec that can’t sit still.  He has a number of irons in the fire that could drive further upside.

  • Property improvements at Bronco Billy’s bear some additional EBITDA

  • American Place, an Illinois project where they are one of three final bidders.  FLL’s proposal was deemed the best, but who knows who ultimately gets it.  

  • A racetrack casino proposal in Clovis, NM.  Again, they have a good proposal but again these decisions are political as much as anything, so who knows

  • Moving excess gaming capacity in IN to somewhere else in the state.  Rising Star only uses about half of the seats it is allotted.  FLL has attempted to relocate the other half but has been rebuffed, they are still trying.  Again, political decisions, who knows?

 The other thing I think this does, is potentially make FLL a more attractive asset to a purchaser.  Acquirer’s EBITDA is probably $3-4m higher than the run rate, which adjusting for the online sports betting and gaming tax reduction, but it north of $30m.  I think FLL is always for sale for the right price, to paraphrase Lee on a call a few years ago  "We are a public company, all public companies are for sale, every day, if someone comes along with a compelling offer, we’re going to take it"

Taken all together, the current quotation just seems too cheap.  

Risks:

CO votes down sports betting

Property performance deteriorates

The Bronco Billy projects are a flop

Gaming has cyclicality to it

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

Online sports betting fees come in

Refinancing of balance sheet

Potential sale

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