Description

Gamehost Inc. (TSX:GH)

Company Overview:

Brief Description: Gamehost operates hospitality and gaming properties in Alberta. The Company owns and operates: (1) the Great Northern Casino, located in Grande Prairie; (2) the Boomtown Casino, located in Fort McMurray; (3) the Deerfoot Inn & Casino (91% interest) located in south-east Calgary; (4) the Service Plus Inns & Suites, a hotel in Grande Prairie; (5) and a commercial multi-tenant lease facility in Grande Prairie.   

Industry: Casinos and Gaming

Location: Red Deer, Alberta

Website: www.Gamehost.ca

Founded: 2003

Stock Price (Sept. 14/17): $9.86

Dividend Yield: 7% (103% payout ratio)

5YR Avg Dividend Payout Ratio: 102%

Balance Sheet:

-          Cash: $14mm

-          WC: $1.7mm

-          Debt: $29mm

Key Highlights

Favourable Macro Conditions: Most industry experts believe the recession in Alberta is officially over, over 3% GDP growth is expected for 2017. Demand Outlook for oil has improved over last couple of weeks. On Sept 14/17, WTI hit a 5-week high of $50.16.

Favourable to peers: Higher dividend yield, leveraged play on Alberta economy.

Experienced Senior Management: David Will has been CEO since inception, and has 40+ years of industry experience. Also has 23% ownership in the Company. Together, senior management owns 35%

Analyst Coverage:

-          Acumen Capital Partners: BUY rating and $10.50 target.

Institutional Ownership:

-          Sentry Investments (9.9%)

-          Sionna (1.0%)

-          AGF (0.8%).

Good buying opportunity as the current weakness in the stock price could be attributed to the recent downtown in the Alberta economy due to the decreased in the oil price and recent wildfires in 2016 and 2017. High dividend yield helps while the investor waits for the stock growth.

Risk: The dividend payout ratio remains high at ~100%. There is a risk the Company could reduce the dividend as it did in 2016.

Business Summary:

Gamehost operates hospitality and gaming properties in Alberta. The company operates 3 casinos, 1 hotel, and leases out a strip mall.

·         Boomtown Casino ("Boomtown") in Fort McMurray, Alberta

·         Great Northern Casino ("Great Northern") in Grande Prairie, Alberta

·         Deerfoot Inn & Casino Inc. (“Deerfoot”) in Calgary, Alberta (91% interest)

·         Service Plus Inns & Suites (“Service Plus”), a limited service hotel, in Grande Prairie, Alberta

·         Retail complex (“Strip Mall”) that leases space to a pub/eatery, in Grande Prairie, Alberta

Key Investment Highlights:

Gamehost is a well-established Casino operator with decades of total experience at its 3 casino facilities. The Company operates in a regulated environment as gaming operations are controlled by the Alberta Gaming and Liquor Commission but also results in high barriers of entry. Casino operations include Company owned table games and government owned slot machines, video lottery terminals and lottery ticket outlets. Casino locations also offer food, beverages and entertainment. Hotel operations include full and limited service hotels, banquet and convention services.

Strong Correlation Between Oil Prices & Gamehost Stock Price:

WTI Crude Oil – Red     Gamehost – Blue                                                                Source: QuoteStream

In order to drive investor returns, the Company utilizes a combined entertainment and hospitality model, and operates in 3 segments Gaming (Casino), Hotel, and Food & Beverage. The Company’s target audience is the social gamer and the entertainment seeker. Gamehost pays a monthly dividend and investors are eligible for a tax credit for a lower marginal rate. On June 30, 2017, Gamehost announced the Alberta Gaming & Liquor Commission renewed its gaming licenses for all the casinos, for a period of 6 years, until June 30, 2023.

The outlook for Gamehost remains tied to the Oil & Gas outlook for the province of Alberta. On August 28th, 2017, ATB Financial released the Alberta Economic Outlook which stated the recession is officially over. The report also noted that 35,000 jobs had been added in 2017, and that the province would experience a 3% GDP increase over the year. Furthermore, the International Energy agency raised its outlook for oil prices in 2017, and OPEC has shared the same sentiments. Significant increases in the price of oil could potentially breathe new life into the Albertan economy, and by extension, into Gamehost’s financials.

As the chart on the previous page shows, there is a strong positive correlation between the price of oil and Gamehost’s stock price.  With improvements in the oil economy in Alberta, Gamehost’s gaming revenue should rebound and drive better net income.

Financial Performance:

Revenues: Revenue in Q2/17 was flat Q/Q to $16.5mm from $16.7mm in Q1/17, but positive Y/Y by 11% from $14.8mm in Q2/16, following signs of a slow recovery in Alberta’s economy. In 2016, due to wildfires and post-fire clean-up, the Boomtown Casino in Fort McMurray was closed for most of May and all of June, re-opening with full operations on July 15, 2016 but benefited from business interruption insurance settlements.

Net Income: Net Income is up 16% Y/Y from Q2/16 as Gamehost recorded Net Income of $4mm for Q2/17. Quarterly revenue is relatively flat Q/Q and potentially signals a cyclical bottom.

Operating Income: Quarterly Operating Income remained relatively flat Q/Q at $5.9mm in Q2/17 but improved Y/Y from $4.2mm in Q2/16.

Ratios:

·         Net margins of 25% for the last year (2016), versus industry median of 6.7%.

·         Debt to Equity Ratio of 0.25 versus industry median of 0.65

Comparables:

Source: Thomson Reuters

Although Gamehost trades at a slight premium on an EV/EBTIDA basis at 9.2x compared to peers at 7.2x, it stands at discount at 3.8x EV/Sales compared to its gaming peers at 4.6x. Importantly, Gamehost’s current yield of 7.1% differentiates the company from its peers, as only one other peer, Canterbury, pays a dividend at a significantly lower rate. Nonetheless, due to the Company’s exposure to Western Canada and the downturn in the Oil & Gas industry, Gamehost has underperformed, down 13%, compared to its peers, which have been up on average by 26%.

Consequently, Gamehost remains an attractive entry point to leverage an oversold stock, while not only grasping the possibility of a recovering Western Canadian market, but also to take advantage of a high yield return in the process. It appears to be a well-run dividend stock that is in pole position to leverage a turnaround in Alberta’s economy. However, the dividend payout ratio remains high at ~100%, which could spark a negative catalyst for the stock if operations do not improve in the near-term.

Catalyst

Improving Alberta Economy and the Canadian Economy in general

Oil has potenatially bottomed out at around $40/barrel and the outlook for oil seems to be improving