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Great Canadian Gaming Corp GC S
September 27, 2018 - 12:58pm EST by
TheSpiceTrade
2018 2019
Price: 46.55 EPS 2.53 2.91
Shares Out. (in M): 61 P/E 18.4 16.0
Market Cap (in $M): 2,850 P/FCF N/A N/A
Net Debt (in $M): 200 EBIT 264 322
TEV (in $M): 3,050 TEV/EBIT 11.6 9.5
Borrow Cost: General Collateral

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Description

Summary

In my first VIC write-up on Great Canadian Gaming (GC), I went over the background as to why I think the company may be facing a potential existential risk with regards to allegations of illegal money laundering taking place at its BC casinos. I am providing this update to VIC members on a number of highly relevant recent developments on this issue. Surprisingly, my conversations with market participants indicated that not all investors are aware of what has transpired over the last few months as it relates to these allegations.

 

I am again a contrarian and may in fact be alone in holding this position, but I do not believe that the money laundering issue has gone away, and that the release of the Peter German report does not exonerate GC from potential wrong-doing. There has been so much controversy over the alleged money laundering, as well as the process to-date run by the local NDP government, that I believe the likely outcome is that there will either be an additional provincial government investigation, or a full blown independent public inquiry into the events that transpired here. Neither will be positive for GC’s stock price, and it could end up weighing on the shares for years.

 

Overview of Recent Events

I have included a brief timeline of major developments relating to alleged money laundering taking place in B.C. casinos. Much of the coverage has been provided by local and regional news outlets, thus making it more difficult for investors, particularly international investors, to stay on top of.

 

  1. September 22, 2017 – MNP report is released, highlighting that $13.5 million worth of $20 dollar bills was accepted by the River Rock Casino in July 2015. Law enforcement intelligence have indicated that these funds may be direct proceeds of crime. See Appendix for further details.

  2. September 27, 2017 – FINTRAC states that it is reviewing the MNP report, to determine whether any action on its part is appropriate.  FINTRAC states that its examination team found 80 percent of staff at the River Rock “demonstrated limited knowledge of money laundering” in 2016.

  3. October 16, 2017 – Vancouver Sun article alleges that the River Rock Casino knowingly accepted millions in suspicious cash that was provided to VIP gamblers by lenders who were banned from B.C. casinos. See Appendix for further details.

  4. June 5, 2018 – Great Canadian Gaming signs new operational services agreements with the British Columbia Lottery Corporation for terms of 22 years covering all of its B.C. facilities. Operating commissions for regular limit table games are increased to 42.5% from 40%, and 77.5% from 75% for poker.

  5. June 27, 2018 – Attorney General’s office releases “Dirty Money” report. The document contains numerous references to the River Rock Casino as the epicentre of money laundering in British Columbia. While the entire 247-page report is worth a read, I have highlighted a number of items that may affect Great Canadian Gaming in the Appendix.

  6. July 10, 2018 – Global News interviews  Fred Pinnock, former commander of BC’s Integrated Illegal Gambling Enforcement Team who stated on the record that “organized criminal activity was running amok” in casinos, and that the B.C. Liberals and RCMP were aware of the issues and deliberately turned a blind eye.  Although he did not name names, he stated in the video interview that he was “very much look forward to receiving a subpoena to give evidence.”

  7. July 15, 2018 – David Eby is reported to be reaching out to Fred Pinnock, after the July 10th Global News interview. The article states that “B.C’s Attorney General is not ruling out the idea of prosecutors approving criminal charges as more shocking accusations are made about dirty money being laundered in casinos.”

  8. July 24, 2018 - Global News article alleging ties between Great Canadian Gaming and Cheng Yu Tung, a Hong Kong tycoon suspected of links to organized crime, prompting the Attorney General to suggest that this new information could lead to an investigation by B.C.’s gaming enforcement branch.

    The Global News article also references oral depositions given by two former surveillance employees of Great Canadian, who both resigned due to issues relating to disagreements about how Great Canadian Gaming treated alleged loan sharking activity.  I have included the source documents to these depositions in the Appendix below. They are a worthwhile read.

  9. August 14, 2018 – It is reported that David Eby has provided a lawyer to Fred Pinnock, former commander of BC’s Integrated Illegal Gambling Enforcement Team, and a chance to tell his story. Eby stated: “This is a whistleblower opportunity for Mr. Pinnock to disclose everything that he has in order to assist government in deciding whether a public inquiry is warranted”.  Eby said that Pinnock’s information will decide whether the government moves ahead with a full-blown public inquiry into money laundering.

    It is reported that Pinnock will be meeting with outside counsel hired by the BC government in September 2018. A quote from this article: “It was the Wild West in those large casinos where organized criminal activity was running amok,” Pinnock said at the time. “They all knew what was going on.”

  10. August 29, 2018 – It is reported that documents and source interviews reveal that the BCLC had warned Great Canadian Gaming executives about River Rock Casino staff shredding paper records of large cash transactions, potentially avoiding scrutiny from FINTRAC.


  11. September 24, 2018 – GC issues a press release announcing that executive officers of the company are intending to adopt an automatic securities disposition and/or purchase plan. These automatic plans allow insiders to sell, purchase or transfer shares (including upon exercise of stock options) regardless of any subsequent material non-public information they receive. Once a plan is established, the executive is not permitted to exercise any further discretion over the trading activity.  

    Notably, the CEO, Rod Baker has set-up an automatic plan to exercise 500,000 options and subsequently sell up to 500,000 common shares. These shares have a market value of over $23 million. Terrance Doyle, the COO, is setting up an automatic plan to exercise 50,000 options and subsequently sell up to 50,000 common shares.

    It is concerning to me that at a time when his company is in the media spotlight for controversial issues, the CEO is opting to potentially sell shares, rather than buying stock in the open market. Bloomberg shows that Rod Baker holds just 74,914 shares of GC.

 

Valuation and Conclusion

My belief after reviewing all the information below is that there is a lot of anger among the populace in British Columbia over this issue, as it has received widespread local attention. This coverage is much less impactful at the national level.  A recent survey indicated that there was increasing support for a public inquiry, similar to the 2011 Charbonneau commission on the awarding and management of public contracts which resulted in criminal charges for many individuals including the mayors of Montreal and Laval. It is possible that a similar inquiry will be launched by the B.C. provincial NDP government, which would likely be a negative for Great Canadian’s B.C. operations and its stock price.

 

As a gauge of local sentiment, take a look at Attorney General David Eby’s Twitter account. He posted this two weeks ago regarding the casino money laundering file. Pretty impressive engagement for a politician:

 

Citizens have even created faux movie posters with the cast of characters: