The cheapest securities are usually the ones that don’t screen well and have a huge hidden asset. Investor fatigue, lack of analyst coverage, an upcoming catalyst, and downside protection are also good signs.
Today, Lakes Entertainment (LACO) is a no-brainier. LACO has about $1.70/share in cash, which is about equal to the current share price. Additionally, LACO has a hidden asset: it owns stakes in 2 Ohio casinos that are about to open. These assets alone are worth an additional $4/share.
The Quick Math
A quick calculation of the company’s valuation is below:
Ohio casinos (hidden asset): $105m
Cash: $ 45m
Real Estate: $ 11m
Various Other Assets: $ 10m
Liabilities: ($ 7m)
Capital Call Liability: ($ 9m) (optional)
Total: $155m
Value: $155m
S/O: 26.5m
Value Per Share: $ 5.85
Current Share Price: $ 1.90
In short, LACO has net assets of almost $6/share, but trades for $2.
LACO’s main operating business is the development and operation of Native American Casinos. Hidden in the footnotes and sparsely mentioned, LACO discloses that they own a 10% stake in Rock Ohio Ventures. Rock Ohio Ventures funded a referendum to legalize casinos in Ohio. The referendum ultimately passed and allowed the opening of four new casinos in Ohio (one in each of the 4 largest cities). Having a guaranteed monopoly in their geographies, these casinos are very valuable assets that will soon be open for business.
Rock Ventures obtained the right to own and operate two of the new casino sites: Cincinnati and Cleveland. The Cleveland casino is virtually complete and set to open in a few months.
What is Rock Ventures Worth?
The Cincinnati casino will contain approximately 100k sq ft of gaming space, 2,100 slots, 63 table games and 30 poker tables.
40 minutes east of the Cincinnati casino site is the Lawrenceburg Hollywood Casino–which has been open for many years. Lawrenceburg draws most of its business from Cincinnati, and therefore, is an excellent gauge of how much our Cincinnatti casino can produce.
Penn National Gaming owns the Lawrenceburg casino and breaks out Lawrenceburg’s income in their financial statements. Per Penn’s latest 10-K, Lawrenceburg is producing an annual EBITDA of approximately $135m.
We assume that, upon opening, Cincinnati’s EBITDA will be equal to that of Lawrenceburg. First, Cincinnati will be brand new and have better amenities. Second, Lawrenceburg is 40 minutes away Cincinnati, which is where most of its customers come from. Once a new casino opens in Cincinnati, most Cincinnatians will not travel to Lawrenceburg.
In addition to the Cincinnati casino, Rock Ohio Ventures also owns a casino in Cleveland. The Cleveland casino will be of equivalent size and have a similar target market as the Cincinnati casino. While we expect the Cleveland casino to produce a higher EBITDA than the one in Cincinnati, to be conservative, we assume that both casinos will produce the same EBITDA. As mentioned above, Cleveland is set to open its doors in a few months.
The question now becomes: what are these assets worth? Penn National currently trades at a 7x EV/EBITDA; Las Vegas Sands and Wynn trade at 12x-14x; and MGM trades at 17x.
If you analyze Penn’s casinos, most are older and located near state boarders, which exposes them to heavy competition. This risk is significantly lowered for our Cleveland casino because it has no border risk (it is more than 70 miles away from the closest border) and the State of Ohio committed to not allow any more casino openings for at least a decade. Secondly, Rock’s casinos are brand new, while Penn’s need remodeling to stay competitive.
Wynn and Sands have modern casinos. However, half of their casinos are located in Las Vegas, which means intense, non-stop competition and cyclical over supply. For reasons discussed above, our Ohio casinos will not have this problem.
Based on the above, a 7x multiple would be appropriate for the Cincinnati casino while a 10x should apply to Cleveland. Our conversations with casino industry experts confirm these multiples are the minimum at which these casinos could be sold for, today.
Given that, the Ohio Casinos are worth $2.3b. Subtract $675m in financing that they have and you get equity of $1.6b.
Construction on the Cleveland casino is virtually complete and it will open in March (though May is the likelier date due to red-tape issues). The Cincinnati casino will open in 2013.
The Structure: Rock Ohio Caesars, Rock Ventures, Lakes
Rock Ohio Caesars will own the Ohio Casinos. Rock Ohio Caesars is a JV between Rock Ventures (80%) and Caesars Entertainment Corp (20%).
LACO owns 10% of Rock Ventures – causing them to indirectly own of 8% of the equity interests of Rock Ohio Caesars (80% x 10%).
Beyond that, Quest Media Group is entitled 18.5% of LACO’s earnings from Rock Ventures, up to the first $30m. (Once Quest Media Group recovers $30m, they will be fully repaid and no longer own anything. To be conservative, we are diluting LACO’s ownership interest in Rock Ventures without accounting for this cap.)
Fully diluted, LACO will own 6.52% of Rock Ohio Ventures.
6.52% of the $1.6b equity value = $105m
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LACO currently spends $8m on corporate overhead and is in the process of searching for a new casino project that would cover the corporate overhead.
The Management
LACO’s CEO, Lyle Berman, owns approximately 25% of the company and has been with the company since day 1.
He is a three time World Series of Poker champion (16 money finishes) and author of “I’m All In: Lyle Berman and the Birth of the World Poker Tour”, an autobiography.
Berman is a self made millionaire. Earlier in his career, he bought and profitably resold a leather business to Wilson Leathers 3 times. He co-founded Grand Casinos, a public company which eventually spun-off Lakes Entertainment. From 1994-2000 he was the CEO of Rainforest Café, a themed restaurant chain.
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Wrapping it up
As calculated in The Quick Math section above, LACO has a $155m liquidation value.
LACO may burn another 8m per year as it seeks a new casino project. To be ultra-conservative, we will decrease our valuation by 3 years of cash burn ($24m).
That still leaves us with a $130m valuation vs. today’s $49m market cap, or a liquidation value of $4.90/share vs. the current $1.90/share price.
Free Option:
Ohio casinos should do much better than we calculated. Every year, these casinos are entitled to increase the amount of slot machines on the floor, up to 5,000 for each casino site. At full utilization, these casinos should produce a much higher EBITDA than we calculated above.
Furthermore, LACO has a $60m note receivable from a casino that LACO built and manages in Sacramento, CA. Lyle Berman is confident the note will be paid, which would add another $2.26/share in value. That would make LACO’s total liquidation value equal ~$7.16/share. Even if it is not recovered and eventually written-off, it would serve as a valuable NOL.
Downside Protection
Cash = market cap.
LACO’s Ohio casino stakes cannot be touched or impaired by LACO management, since they are passive minority interests.
Alternative Valuations
LACO was previously written up by pfq783 on January 8, 2011. In it, he calculates Rock Ohio Caesar’s EBITDA based on a “win per slot” formula. That is another way to arrive at what the Ohio casinos could produce and what they are worth.