Description

Company Description

 Boyd Gaming Corporation (“BYD”) owns and operates 6 casinos in the Las Vegas Local market, 3 casinos in Downtown Las Vegas, 12 casinos throughout the Midwest & South, and is a 50% owner of the Borgata Casino in Atlantic City. BYD recently announced three transactions, acquisitions of the Aliante on 4/21/16 and two Cannery casinos on 4/25/16, adding 3 Las Vegas Local casinos, and the sale of their 50% stake in the Borgata Casino on 5/31/16. These transactions are expected to close in Q3 2016

Capital Structure & Relevant Financial Metrics

Recent History & Current Situation

§  BYD recently announced three transactions all of which are expected to close Q3 2016. BYD acquired Aliante on 4/21/16 and two Cannery casinos on 4/25/16, adding 3 Casinos to the Las Vegas Local segment. On 5/31/16 BYD announced sale of their 50% stake in Borgata Casino

-    Aliante and Cannery Casino expand BYD’s LV Local exposure to North Las Vegas, an area in which BYD currently has no exposure, but is part of the LV Local market, which is BYD’s core market

-    The Cannery properties are tuck-in acquisitions similar to BYD’s current LV Local properties, BYD’s strongest region

-    While the Borgata has recently performed very well, because of the deconsolidated statements and separate balance sheet the sale will simplify BYD’s financials and provide liquidity for the Las Vegas acquisitions

§  Sale of the Borgata removes the risk of added capacity in the Northeast negatively affecting performance, including a vote later this year to expand gaming to Northern New Jersey

-    Below is a snapshot of the transactions:

§  For the last few years, BYD has been focused on deleveraging its balance sheet. In 2014 and 2015 BYD used approximately $375 million in cash from operations to pay down debt.  In 2013, BYD paid down approximately $600 million of debt using proceeds from an equity offering and the sale of Echelon

§  Additionally, as its balance sheet has been improving, BYD has been refinancing expensive high yield debt with lower cost capital

-     In May 2015 BYD refinanced $500 million 9.125% notes with new $750 million 6.875% improving its cost of capital

§  In 2014 BYD began a $100 million capex program to improve non-gaming revenues by upgrading hotel rooms at Suncoast, Orleans, Blue Chip, and IP, improving F&B offerings at many locations, and adding event space and an equestrian center at the Kansas Star. In 2016, BYD expects to add 20 new restaurant concepts and 167 hotel rooms to Delta Downs. The non-gaming amenities capex program is expected to be completed by the end of 1Q 2017, at which point wholly owned capex will normalize (from E. 2016. $173 million to E. 2017 $116 million). BYD has continually referenced non-gaming as a key contributor to their success in 2015

§  Partnership with GVC (formerly Bwin.Party Digital Entertainment, aka PartyPoker) online gaming is uncertain.

-    BYD’s online platform was only operating in NJ by the Borgata and BYD online gaming revenue from NJ will end after the Borgata sale

-    BYD, is well positioned capitalize on growth in online gaming with casinos in multiple states and 3 years’ experience operating an online platform

-    There is no near term legislation for federal online gaming, all online gaming will be done on a state-by-state basis. Due to the uncertainty we have not ascribed any value to BYD’s online platform

Investment Thesis

§  After years of revenue declines at BYD’s wholly owned casinos, BYD grew revenue 2.5%  in 2015

-    BYD had excellent execution in 2015, both increasing revenues and lowering expenses, leading to margin expansion. As a result, wholly owned casino revenue grew 2.5% while EBITDA grew 12.8%

-    Management has fundamentally shifted their approach to promotional allowances by focusing on total return (gaming and non-gaming revenue) in contrast to focusing simply on gaming return

§  Renewed focus on the Las Vegas Locals market

-    The sale of the Borgata and the purchases of the Aliante and Cannery casinos has sharpened BYD’s focus on the Las Vegas Locals market

-    This market is BYD’s original gaming market and one that it knows best

-    More importantly, over the last few years this market has been exhibiting strong growth characteristics:

§  Top 10 in US metro population growth

§  Total employment has recovered to pre-recession highs in 2016

§  Unemployment has dropped below 6% in 2016

§  Aliante Acquisition

-    While, on the surface it appears that BYD paid a high price (12.7x post synergy EBITDA) for the Aliante, this is an asset that has strong long term growth characteristics

§  Aliante was a single site casino, and while Aliante management may have been excellent, they certainly didn’t benefit from cross promotion. Projected EBITDA of $30 million assumes the Aliante receives no benefit from BYD’s marketing and B-connected loyalty program

§  Aliante Casino services “Aliante” new master planned community located in North Las Vegas built on 1,905 acres.  More than 7,000 homes and 20,000 residents are projected at build-out, Amenities include an amphitheater, 20 acre nature discovery park, 18 hole municipal golf course, two traditional parks, linear parks, soccer and ball fields, picnic areas, and arroyo and trail system.

§  There are other housing developments being built near the Aliante providing meaningful long-term growth potential for the casino.

§  Developers expect to build 2,000 new houses per year in North Las Vegas over the next 10 years

§  Aliante’s current utilization is 30-40% of gaming positions on peak nights compared to 90%+ for BYD’s other LV Local casinos. For illustration, below is a table of Aliante’s PF 2016 Revenue per Position per Day (“RPPPD”) at current utilization and PF RPPPD at full utilization:

§  Aliante growth to potential Revenue and EBITDA would have 8.2% revenue CAGR over 10 years

§  Performance of wholly owned properties has been strong

-    Growth at LV Local and Downtown properties has been very strong and management raised FY16 EBITDA growth to 6.5%

-    Midwest and South EBITDA grew 15% in 2015 but declined in Q1 2016 due to flooding and a new competitor to the IP Casino in Mississippi. Despite this weakness, management reiterated FY EBITDA growth of 2.5%

-    In 2015, Peninsula grew revenue 2.7% and EBITDA 5.2%

§  BYD has a very large refinancing opportunity, which can materially increase free cash flow.  Due to its merger with Peninsula, BYD has a convoluted debt structure with two credit facilities and some high coupon legacy bonds.  A refinancing of the credit facilities into one facility and a refinancing/pay down of its two callable bond issues should increase BYD’s cash flow by over $49 million

-    Pro Forma for the acquisitions, refinancing, recent acquisitions, and normalized capex, FCF would grow from approximately $162 million LTM to $360 million in 2017

-    Additionally, leverage will drop from 7.0x EBITDA to a manageable 5.1x EBITDA

§  While BYD pays very little tax due to its low net income, even when net income grows in 2016 and beyond, cash taxes will not materially increase due to the $600 million+ (post Borgata) NOL which will shield earnings from taxes over the next few years

§  M&A - With MGP & GLPI (the Casino REITs) looking for assets, there is a possibility that BYD can sell assets (sale-leaseback transactions) at an attractive price and use proceeds to pay down debt, pay a dividend or buy back stock

Valuation

§  As a result of the high leverage, lack of meaningful free cash flow and its 50% ownership of the Borgata, BYD has historically been valued on a “sum-of-the-parts” basis versus looking at valuation metrics based on earnings or FCF

§  After the refinancing, BYD will be able to easily support its debt & generate a lot of free cash flow, which will allow investors to focus more on equity metrics versus enterprise value metrics

§  BYD’s wholly owned casinos are expected to generate $311 million of free cash flow in 2017 and pro-forma after a refinancing, the FCF would be $360 million

-    Comparable casino operators RRR and ISLE trade at 10x E. 2017 FCF, resulting in a $32 price target for BYD

§  BYD has over $600 million of NOL’s that it should start using in the next few years

-    Even when fully taxing BYD, the cash flow is substantial and would result in a $25+ price target before giving them any credit for the NOL

§  Additional upside is available through:

-    A tax refund from Borgata of $90 million ($0.80 per share) if a tax settlement with Atlantic City occurs

-    Online Gaming: It is difficult to value the online gaming business at this point because of the small revenues and lack of clarity regarding margins.  However, Morgan Stanley estimates the value ex-Borgata to be $1 a share to BYD, FREE at current levels

Why Does This Opportunity Exist?

§  Confusion caused by the full consolidation and then deconsolidation of Borgata

-    This has caused investors to focus on “Sum of the Parts” valuations, versus looking at valuation metrics based on FCF of the entire entity

§  Investors focus on EBITDA metrics and not the more important Free Cash Flow metrics

-    BYD is currently trading at 9.8x wholly owned EBITDA. These metrics make BYD look “fully valued”. However, this doesn’t fully value the E. 2017 14.1% FCF yield.

-    Since there won’t be any maturities for years, BYD may be able to announce a dividend or stock repurchase

§  High leverage and a lack of GAAP Net Income causes many investors to focus on other opportunities

Risks

§  BYD is betting bigger on the LV Locals market. Any employment slowdown in Las Vegas would materially affect BYD

§  Weakening of the credit markets would hurt their refinancing opportunity

§  Future development in North Las Vegas occurs much slower than anticipated or never materializes

§  A material slowdown in the Midwest and South

Catalysts

§  Refinancing of Peninsula credit facility and senior bonds – expected in Q3 2016

§  Simplified capital structure and financials

§  Continued increase in revenues from non-gaming amenities

§  Continued growth in Las Vegas Locals segment

§  Maintained GGR in the Midwest and South

§  Further progress of online gaming

§  Announcement for Dividend / Share repurchase

Catalyst

§  Refinancing of Peninsula credit facility and senior bonds – expected in Q3 2016

§  Simplified capital structure and financials

§  Continued increase in revenues from non-gaming amenities

§  Continued growth in Las Vegas Locals segment

§  Maintained GGR in the Midwest and South

§  Further progress of online gaming

§  Announcement for Dividend / Share repurchase