PENN NATIONAL GAMING INC PENN
March 07, 2018 - 12:52pm EST by
Fletch
2018 2019
Price: 26.75 EPS 1.84 2.34
Shares Out. (in M): 92 P/E 14.6 11.5
Market Cap (in $M): 2,452 P/FCF 10.4 8.5
Net Debt (in $M): 1,002 EBIT 218 268
TEV ($): 3,455 TEV/EBIT 15.9 12.9

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Description

 

 

 

Company Description

 Penn National Gaming, Inc. (“PENN”) owns and operates Charles Town Races in West Virginia which features slot machines, casinos in Mississippi, and a riverboat gaming facility in Louisiana. The Company also owns racetracks and off-track wagering facilities in Pennsylvania, as well as manages a gaming facility in the Province of Ontario, Canada.

 

 

Pro Forma PENN-PNK Deal

 

Pro Forma PENN Valuation

PENN Price Per Share

   

$26.78

 

Shares Outstanding

 

117.606

PENN Shares Outstanding

 

91.676

 

Price Per Share

 

$26.78

Merger Ratio

   

0.420

 

Equity Value

 

$3,149.5

New Shares Issues to PNK

 

25.930

 

 

   

 

Total Shares Outstanding

 

117.606

 

Net Debt

   

$2,530.2

 

     

 

 

Enterprise Value

 

$5,679.7

Post Deal Equity Value

 

$3,149.5

 

 

   

 

Post Deal Enterprise Value

 

$5,679.7

 

Lease

   

$6,454.3

 

     

 

 

EV+Lease

   

$12,134.0

Current PENN Debt Oustanding

 

$1,280.2

 

 

   

 

New Acquisition Debt

   

$1,250.0

 

2018 E. EBITDA

 

$730.1

Pro Forma Total Debt

   

$2,530.2

 

Estimated 2018 pre-Lease EBITDA

$1,603.1

 

     

 

 

Estimated 2017 FCF

 

$389.4

PENN 2018 EBITDA

   

$457.0

 

 

   

 

PNK 2018 EBITDA

   

$311.0

 

EV / EBITDA

 

7.8x

Divesture EBITDA

   

($92.0)

 

EV+Lease / Pre-Lease  EBITDA

7.6x

Increase in Rent to GLPI

 

($45.9)

 

Price / FCF

 

8.1x

Synergies

     

$100.0

         

Pro Forma 2018 EBITDA

 

$730.1

         

 

     

 

         

PENN 2017 CAPEX (non-growth)

 

$100.0

         

PNK 2017 CAPEX

   

$80.0

         

Pro Forma CAPEX

   

$180.0

         

 

     

 

         

PENN Interest Expense

 

$54.3

         

Blended Interest rate on New Debt

5.50%

         

Interest Expense on New Debt

 

$68.8

         

Pro Forma Interest Expense

 

$123.0

         

 

     

 

         

PENN 2017 D&A

   

$278.2

         

PNK 2017 D&A

   

$222.0

         

Divesture D&A

   

($72.6)

         

Pro Forma Depreciation

 

$427.6

         

 

     

 

         

Pro Forma Pre Tax Income

 

$179.4

         

Pro Forma Tax Rate

   

21.0%

         

Pro Forma Taxes

   

$37.7

         

 

     

 

         

Pro Forma FCF

 

 

$389.4

         

 

 

 

Recent History & Current Situation

§  In 2012, PENN announced a transformative transaction, spinning off much of its real estate into an independent company called Gaming and Leisure Properties, Inc. (“GLPI”)

-    This transaction, executed in 2013 turned PENN into the first gaming “Opco”

§  Subsequent to this transaction, PENN has been looking to make acquisitions to grow.

§  In December 2017 PENN agreed to purchase Pinnacle Gaming (“PNK”), in a deal that will increase EBITDA close to 60%

§  Prior to the financials crisis of 2008, there was tremendous growth in the supply of casinos in the United States.

§  Since the crisis, Regional gaming companies have suffered due to an oversupply of casinos and a lackluster economic recovery

-    This has resulted in some rationalization of supply (a few casinos have closed), but more importantly, few new casinos have been built since the financial crisis, allowing the regional casinos to “grow into” their capital structures

§  Although, PENN (and all regional casinos companies) had significant share price appreciation in 2017, the shares have languished in 2018

-    Soft January regional gaming numbers and conservative guidance have been cited for the underperformance

-    In February 2018, as a result of underperformance of Jamul Indian casino, PENN lost the management contract and wrote down its investment (loan) in the property.

§  Although this property didn’t provide any material earnings (and projections for 2018 were for insignificant contributions) PENN had to write off almost $100 million of its loan to the tribe and will probably lose another $$28 million

Investment Thesis

§  PNK acquisition gives PENN tremendous scale and is a large opportunity for unannounced “revenue” synergies

-    PNK portfolio is complimentary to the PENN properties, with little overlap

-    PENN announced expected synergies of $100 million, which are all cost based synergies

-    Merging the player databases should result in a better and more robust rewards program, which should drive revenue synergies

-    Revamp of Tropicana Casino in Las Vegas should also drive top line growth

§  Secular growth opportunity from the Tropicana Las Vegas and through online & social gaming

-    Tropicana can provide revenue growth for PENN

§  Valuable spot on the strip with easy access from other casino’s

§  Huge potential for additional investment in the property

§  Large regional customer base and rewards program should drive traffic to the property

-    recent acquisition of Rocket Games provides PENN an entry into online and social gaming

§  currently only 2% of revenue, but certainly an avenue for growth

§  PENN is a disciplined operator, that has been able to grow margin without changing promotional spend

-    PENN’s promotional spend has consistently been the lowest in the industry

-    PENN’s promotional spend has been in a tight band for the last decade.  They have a loyal customer base that doesn’t need to be enticed by extra promotional spend

-    PENN has been able to increase margin by keeping its SG&A spend under control

§  Estimates are conservative

-    M&A Proxy and Sell side currently are estimating PENN to grow in line with inflation at 1-2% a year

-    Believe that revenue synergies and growth opportunities can have them grow revenues at over 2% a year

§  Tax cuts have just started to kick in and the extra discretionary income should be very good for regional casinos

-    Strong flow through to free cash flow should have PENN growing free cash flow at a 12% CAGR over the next 3 years

-    Additional upside possible from the legalization of sports betting

§  Supreme Court should be ruling on the issue within the next few months

§  Company using free cash flow to invest in the company and grow revenue

-    PENN has been using its FCF to increase its scale through casino acquisitions, without materially increasing leverage

-    Even the PNK acquisition wont materially increase leverage

Valuation

§  Regional Casinos are trading 10.5x 2018 Estimated EBITDA

-    PENN currently trades at EV (EV + Lease) / EBITDAR of 7.6x

§  1x turn = $13+ in the stock

-    PENN currently trades at EV / EBITDA of 7.8x

§  1x turn = $6+ in the stock

§  Regional Casinos are trading at a Median FCF multiple of 16x 2018 E. FCF

§  At $40 (a 50% increase from today’s price), PENN would be trading at:

-    8.5x EV (EV + Lease) / EBITDAR

-    9.9x EV/EBITDA

-    12x 2018 FCF

 

Why Does This Opportunity Exist?

§  Weak January

 

§  High Leverage

-    When including its lease, PENN will be leveraged at approximately 5x.  While this is not overleverage, it is on the high side for casino companies

§  PENN still needs to raise approximately $1.25 billion of new debt in the market

-    Excluding lease, leverage is more manageable at 3.5x;

-    Unsecured debt trades under 6%; if financing costs increase, it would pressure free cash flow

 

Risks

§  Gaming is the most discretionary item and a recession should hurt the gaming revenues

§  Weakening of the credit markets would hurt their financing of the PNK acquisition and pressure cash flow

§  Future capacity additions

-         The only anticipated new capacity is coming in the east coast in Pennsylvania

-         Unexpected additional capacity would pressure revenue and margins

§  Synergies are less than expected or take longer realize

-         Expected synergies of $100 million are expected to be realized in full by 2020

 

 

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

§  Legalization of Sports Betting

§  Attaining approvals and financing for PNK acquisition

§  Close of PNK acquisition

§  Progress of online gaming

 

    sort by    

    Description

     

     

     

    Company Description

     Penn National Gaming, Inc. (“PENN”) owns and operates Charles Town Races in West Virginia which features slot machines, casinos in Mississippi, and a riverboat gaming facility in Louisiana. The Company also owns racetracks and off-track wagering facilities in Pennsylvania, as well as manages a gaming facility in the Province of Ontario, Canada.

     

     

    Pro Forma PENN-PNK Deal

     

    Pro Forma PENN Valuation

    PENN Price Per Share

       

    $26.78

     

    Shares Outstanding

     

    117.606

    PENN Shares Outstanding

     

    91.676

     

    Price Per Share

     

    $26.78

    Merger Ratio

       

    0.420

     

    Equity Value

     

    $3,149.5

    New Shares Issues to PNK

     

    25.930

     

     

       

     

    Total Shares Outstanding

     

    117.606

     

    Net Debt

       

    $2,530.2

     

         

     

     

    Enterprise Value

     

    $5,679.7

    Post Deal Equity Value

     

    $3,149.5

     

     

       

     

    Post Deal Enterprise Value

     

    $5,679.7

     

    Lease

       

    $6,454.3

     

         

     

     

    EV+Lease

       

    $12,134.0

    Current PENN Debt Oustanding

     

    $1,280.2

     

     

       

     

    New Acquisition Debt

       

    $1,250.0

     

    2018 E. EBITDA

     

    $730.1

    Pro Forma Total Debt

       

    $2,530.2

     

    Estimated 2018 pre-Lease EBITDA

    $1,603.1

     

         

     

     

    Estimated 2017 FCF

     

    $389.4

    PENN 2018 EBITDA

       

    $457.0

     

     

       

     

    PNK 2018 EBITDA

       

    $311.0

     

    EV / EBITDA

     

    7.8x

    Divesture EBITDA

       

    ($92.0)

     

    EV+Lease / Pre-Lease  EBITDA

    7.6x

    Increase in Rent to GLPI

     

    ($45.9)

     

    Price / FCF

     

    8.1x

    Synergies

         

    $100.0

             

    Pro Forma 2018 EBITDA

     

    $730.1

             

     

         

     

             

    PENN 2017 CAPEX (non-growth)

     

    $100.0

             

    PNK 2017 CAPEX

       

    $80.0

             

    Pro Forma CAPEX

       

    $180.0

             

     

         

     

             

    PENN Interest Expense

     

    $54.3

             

    Blended Interest rate on New Debt

    5.50%

             

    Interest Expense on New Debt

     

    $68.8

             

    Pro Forma Interest Expense

     

    $123.0

             

     

         

     

             

    PENN 2017 D&A

       

    $278.2

             

    PNK 2017 D&A

       

    $222.0

             

    Divesture D&A

       

    ($72.6)

             

    Pro Forma Depreciation

     

    $427.6

             

     

         

     

             

    Pro Forma Pre Tax Income

     

    $179.4

             

    Pro Forma Tax Rate

       

    21.0%

             

    Pro Forma Taxes

       

    $37.7

             

     

         

     

             

    Pro Forma FCF

     

     

    $389.4

             

     

     

     

    Recent History & Current Situation

    §  In 2012, PENN announced a transformative transaction, spinning off much of its real estate into an independent company called Gaming and Leisure Properties, Inc. (“GLPI”)

    -    This transaction, executed in 2013 turned PENN into the first gaming “Opco”

    §  Subsequent to this transaction, PENN has been looking to make acquisitions to grow.

    §  In December 2017 PENN agreed to purchase Pinnacle Gaming (“PNK”), in a deal that will increase EBITDA close to 60%

    §  Prior to the financials crisis of 2008, there was tremendous growth in the supply of casinos in the United States.

    §  Since the crisis, Regional gaming companies have suffered due to an oversupply of casinos and a lackluster economic recovery

    -    This has resulted in some rationalization of supply (a few casinos have closed), but more importantly, few new casinos have been built since the financial crisis, allowing the regional casinos to “grow into” their capital structures

    §  Although, PENN (and all regional casinos companies) had significant share price appreciation in 2017, the shares have languished in 2018

    -    Soft January regional gaming numbers and conservative guidance have been cited for the underperformance

    -    In February 2018, as a result of underperformance of Jamul Indian casino, PENN lost the management contract and wrote down its investment (loan) in the property.

    §  Although this property didn’t provide any material earnings (and projections for 2018 were for insignificant contributions) PENN had to write off almost $100 million of its loan to the tribe and will probably lose another $$28 million

    Investment Thesis

    §  PNK acquisition gives PENN tremendous scale and is a large opportunity for unannounced “revenue” synergies

    -    PNK portfolio is complimentary to the PENN properties, with little overlap

    -    PENN announced expected synergies of $100 million, which are all cost based synergies

    -    Merging the player databases should result in a better and more robust rewards program, which should drive revenue synergies

    -    Revamp of Tropicana Casino in Las Vegas should also drive top line growth

    §  Secular growth opportunity from the Tropicana Las Vegas and through online & social gaming

    -    Tropicana can provide revenue growth for PENN

    §  Valuable spot on the strip with easy access from other casino’s

    §  Huge potential for additional investment in the property

    §  Large regional customer base and rewards program should drive traffic to the property

    -    recent acquisition of Rocket Games provides PENN an entry into online and social gaming

    §  currently only 2% of revenue, but certainly an avenue for growth

    §  PENN is a disciplined operator, that has been able to grow margin without changing promotional spend

    -    PENN’s promotional spend has consistently been the lowest in the industry

    -    PENN’s promotional spend has been in a tight band for the last decade.  They have a loyal customer base that doesn’t need to be enticed by extra promotional spend

    -    PENN has been able to increase margin by keeping its SG&A spend under control

    §  Estimates are conservative

    -    M&A Proxy and Sell side currently are estimating PENN to grow in line with inflation at 1-2% a year

    -    Believe that revenue synergies and growth opportunities can have them grow revenues at over 2% a year

    §  Tax cuts have just started to kick in and the extra discretionary income should be very good for regional casinos

    -    Strong flow through to free cash flow should have PENN growing free cash flow at a 12% CAGR over the next 3 years

    -    Additional upside possible from the legalization of sports betting

    §  Supreme Court should be ruling on the issue within the next few months

    §  Company using free cash flow to invest in the company and grow revenue

    -    PENN has been using its FCF to increase its scale through casino acquisitions, without materially increasing leverage

    -    Even the PNK acquisition wont materially increase leverage

    Valuation

    §  Regional Casinos are trading 10.5x 2018 Estimated EBITDA

    -    PENN currently trades at EV (EV + Lease) / EBITDAR of 7.6x

    §  1x turn = $13+ in the stock

    -    PENN currently trades at EV / EBITDA of 7.8x

    §  1x turn = $6+ in the stock

    §  Regional Casinos are trading at a Median FCF multiple of 16x 2018 E. FCF

    §  At $40 (a 50% increase from today’s price), PENN would be trading at:

    -    8.5x EV (EV + Lease) / EBITDAR

    -    9.9x EV/EBITDA

    -    12x 2018 FCF

     

    Why Does This Opportunity Exist?

    §  Weak January

     

    §  High Leverage

    -    When including its lease, PENN will be leveraged at approximately 5x.  While this is not overleverage, it is on the high side for casino companies

    §  PENN still needs to raise approximately $1.25 billion of new debt in the market

    -    Excluding lease, leverage is more manageable at 3.5x;

    -    Unsecured debt trades under 6%; if financing costs increase, it would pressure free cash flow

     

    Risks

    §  Gaming is the most discretionary item and a recession should hurt the gaming revenues

    §  Weakening of the credit markets would hurt their financing of the PNK acquisition and pressure cash flow

    §  Future capacity additions

    -         The only anticipated new capacity is coming in the east coast in Pennsylvania

    -         Unexpected additional capacity would pressure revenue and margins

    §  Synergies are less than expected or take longer realize

    -         Expected synergies of $100 million are expected to be realized in full by 2020

     

     

    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

    §  Legalization of Sports Betting

    §  Attaining approvals and financing for PNK acquisition

    §  Close of PNK acquisition

    §  Progress of online gaming

     

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