| 2013 | 2014 | ||||||
| Price: | 104.50 | EPS | NA | NA | |||
| Shares Out. (in M): | 28 | P/E | NA | NA | |||
| Market Cap (in $M): | 98 | P/FCF | 9.3x | 9.3x | |||
| Net Debt (in $M): | 481 | EBIT | 66 | 66 | |||
| TEV (in $M): | 579 | TEV/EBIT | 8.8x | 8.8x | |||
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MTR Gaming is a regional operator of middle-market casinos and horseracing tracks. The stock has been written up twice on VIC, both times as a long. The stock was first written up as a long in June 2001 when the stock was at $11.88, and subsequently as a long in December 2004 when the stock was at $10.00. Currently the stock is at $3.54. While I understand the allure of the levered equity at this price, I am recommending a less exciting but still attractive investment in the bonds. The MNTG 11.5% bond due August 2019 is 6-year paper yielding 10.5% to maturity and 10.2% yield to worst call (961 bps spread) if called in August 2017. The bonds are essentially the entire capital structure.
If the bonds trade to an 8.5% yield in a year, we achieve a 17% total return, attractive for a credit given the equity-like return. For individual investors, I would recommend making the investment out of an IRA.
Negative covenant protection. Call protection - bonds cannot be called until 8/1/2015 (106 call price). Drops to 103 on 8/1/2016 and then par on 8/1/2017.
Note: The P/FCF multiples given above do not back out excess cash. Ex-cash, the FCF multiples are much lower.
Business Description
The company currently has 3 properties: Mountaineer Casino, Racetrack & Resort in WV; Presque Isle Downs & Casino in Erie, PA; and Scioto Downs in Columbus, OH. A meaningful driver of value is that Scioto Downs recently opened a VLT gaming facility.
Mountaineer has 2,062 slot mahines, 47 tables games, 12 poker tables, 106,000 gaming square ft, a thoroughbred racetrack, 354 hotel rooms, 376 acres.
Presque Isle Downs has 1,931 slot machines, 44 tables games, 9 poker tables, 59,000 gaming square feet, a thoroughbred racetrack, 272 acres.
Scioto Downs has a harness racetrack and gaming facility, 2,107 VLTs, 65,000 gaming square feet, 208 acres. The market does not fully appreciate the full potential of Scioto Downs. Once fully ramped, I expect Scioto Downs to generate around $50 million of EBITDA.
MTR has a customer base with 1.7 million players in loyalty programs.
Jeffrey Jacobs owns 18% of the shares and is the CEO of Jacobs Entertainment http://jacobsentertainmentinc.com/about-us/.
Jeffrey's father Richard was a major real estate developed and owned the Cleveland Indians.
Current Capital Structure
$ in millions except per share amounts
52-week high (6/11/2012) $5.72
52-week low (11/23/2012) $2.74
Share price $3.54
Outstanding shares 27.7
Market capitalization $98
Cash $90 (Had $115 million of cash as of 12/31/2012, and I am deducting $25 million for a license fee to be paid in June)
Revolver 8/1/2016 0 ($20 million of availability)
Sr. secured 2nd lien note 8/1/2019 571
Net debt $481
TEV (total enterprise value) $579
2012 EBITDA $94
TEV / 2012 EBITDA 6.1x
Maintenance capex $15 (but will spend closer to $20 million in 2013)
EBITDA less maintenance capex $79
TEV / EBITDA - maint capex 7.3x
Competition
Mountaineer and Presque Isle Down have both been impacted by the new Horseshoe Cleveland casino. I believe that Mountaineer and Presque Isle Downs have felt the full impact of this competition in Q4 2012. Analysts are worried that Mountaineer will be impacted by Penn National's planned casino in Youngstown, OH which will probably come online at the end of 2014. My work indicates that this property will not have a large impact on MTR. In the markets near Mountaineer and Presque Isle Downs, new competition will come online in the form of Nemacolin Woodlands (summer 2013), Thistledown (commencing VLT operations in spring 2013), Northfield Hard Rock (December 2013), and Penn's future property in Youngstown (end of 2014). While these new facilities will impact Mountaineer and Presque Isle Downs, it will not be nearly as impactful as the impact which Horseshoe Cleveland had. Additionally, I expect the difference to be made up in the form of Sciotto Downs which has been ramping operations and is constructed. The best way to get comfortable with the competitive landscape is to talk to the company, competitors, and the gaming commissions as well.
P&L - consolidated
| Revenues | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | ||
| Gaming | $371.0 | $418.1 | $400.6 | $382.5 | $385.3 | $445.8 | ||
| growth | 12.7% | -4.2% | -4.5% | 0.7% | 15.7% | |||
| Pari-mutuel commissions | 13.3 | 14.5 | 12.8 | 11.2 | 10.2 | 10.4 | ||
| growth | 8.5% | -11.4% | -12.7% | -8.7% | 1.6% | |||
| Food, beverage, lodging | 29.4 | 36.0 | 32.0 | 32.3 | 32.6 | 36.5 | ||
| growth | 22.2% | -11.1% | 0.9% | 1.1% | 11.9% | |||
| Other | 8.1 | 10.3 | 8.8 | 8.7 | 11.1 | 11.4 | ||
| growth | 27.3% | -14.9% | -0.3% | 26.7% | 2.9% | |||
| Gross revenues | $421.8 | $478.8 | $454.1 | $434.7 | $439.2 | $504.1 | ||
| growth | 13.5% | -5.1% | -4.3% | 1.0% | 14.8% | |||
| Less: promotional allowances | (6.0) | (7.9) | (10.0) | (9.8) | (11.1) | (14.1) | ||
| % gross revenues | 1.4% | 1.7% | 2.2% | 2.3% | 2.5% | 2.8% | ||
| Net revenues | $415.8 | $470.9 | $444.2 | $424.9 | $428.1 | $490.0 | ||
| growth | 13.2% | -5.7% | -4.3% | 0.8% | 14.5% | |||
| Operating expenses | ||||||||
| Gaming | 232.5 | 265.1 | 251.1 | 239.4 | 244.3 | 267.2 | ||
| % gaming revenues | 62.7% | 63.4% | 62.7% | 62.6% | 63.4% | 59.9% | ||
| Pari-mutuel commissions | 11.7 | 14.2 | 12.5 | 11.3 | 11.4 | 11.1 | ||
| % pari-mutuel revenues | 87.6% | 97.9% | 97.8% | 100.8% | 111.8% | 106.9% | ||
| Food, beverage, lodging | 25.2 | 28.8 | 23.6 | 23.2 | 23.7 | 28.6 | ||
| % food, bev, lodging revs | 85.6% | 80.0% | 73.9% | 72.1% | 72.7% | 78.3% | ||
| Other | 7.1 | 8.8 | 6.2 | 6.1 | 6.3 | 7.4 | ||
| % other revenues | 87.8% | 85.4% | 71.2% | 70.3% | 56.7% | 64.7% | ||
| Marketing & promotions | 17.6 | 15.9 | 19.6 | 12.8 | 12.6 | 16.9 | ||
| % net revenues | 4.2% | 3.4% | 4.4% | 3.0% | 2.9% | 3.5% | ||
| G&A | 61.3 | 67.1 | 66.7 | 54.1 | 53.0 | 62.7 | ||
| % net revenues | 14.7% | 14.3% | 15.0% | 12.7% | 12.4% | 12.8% | ||
| Project opening costs | 5.6 | 0.0 | 0.0 | 1.4 | 0.2 | 2.7 | ||
| % net revenues | 1.3% | 0.0% | 0.0% | 0.3% | 0.0% | 0.6% | ||
| Depreciaton | 27.8 | 29.8 | 29.3 | 28.7 | 27.9 | 27.5 | ||
| Impairment loss | 0.0 | 0.0 | 11.9 | 0.0 | 0.7 | 0.0 | ||
| (Gain)/loss on the sale/disp prop | 0.1 | 3.0 | 0.2 | 0.1 | 0.5 | (0.1) | ||
| Total operating expenses | 388.9 | 432.6 | 421.3 | 377.1 | 380.5 | 424.0 | ||
| Operating income | $26.9 | $38.2 | $22.8 | $47.8 | $47.6 | $66.0 | ||
| % margin | 6.5% | 8.1% | 5.1% | 11.2% | 11.1% | 13.5% | ||
2012 Quarterly P&L - segment
| Q1 2012 | Q2 2012 | Q3 2012 | Q4 2012 | FY 2012 | |||
| Mountaineer | |||||||
| Revenues | $59.0 | $58.7 | $57.4 | $47.0 | $222.0 | ||
| growth | 14.7% | 2.0% | -3.4% | -15.7% | -0.9% | ||
| Adj EBITDA | 12.8 | 12.3 | 11.2 | 7.2 | 43.5 | ||
| margin | 21.6% | 21.0% | 19.6% | 15.3% | 19.6% | ||
| Income from continuing ops | 10.0 | 9.5 | 8.5 | 4.8 | 32.8 | ||
| Interest (income) expense, net | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| Income taxes | 0.0 | 0.0 | (0.0) | 0.0 | (0.0) | ||
| Depreciation | 2.8 | 2.8 | 2.8 | 2.4 | 10.8 | ||
| (Gain) loss on sale/disposal prop | (0.0) | 0.0 | 0.0 | 0.0 | (0.0) | ||
| Loss on debt mod/extinguishment | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| Impairment loss | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| Adj EBITDA | $12.8 | $12.3 | $11.2 | $7.2 | $43.5 | ||
| Presque Isle Downs | |||||||
| Revenues | $48.9 | $47.8 | $47.6 | $36.9 | 181.2 | ||
| growth | 4.4% | -8.2% | -13.0% | -22.3% | -9.9% | ||
| Adj EBITDA | 10.8 | 9.9 | 8.6 | 5.8 | 35.1 | ||
| margin | 22.2% | 20.7% | 18.0% | 15.7% | 19.4% | ||
| Income from continuing ops | 7.1 | 7.4 | 5.8 | 1.9 | 22.3 | ||
| Interest (income) expense, net | (0.0) | (0.0) | (0.0) | (0.0) | (0.1) | ||
| Income taxes | 0.6 | 0.6 | 0.6 | 1.7 | 3.6 | ||
| Depreciation | 3.2 | 2.0 | 1.9 | 1.9 | 9.0 | ||
| Other reg. gaming assessements | (0.1) | (0.1) | 0.2 | 0.4 | 0.4 | ||
| (Gain) loss on sale/disposal prop | 0.0 | 0.0 | 0.0 | (0.0) | (0.0) | ||
| Impairment loss | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| Adj EBITDA | $10.8 | $9.9 | $8.6 | $5.8 | $35.1 | ||
| Scioto Downs | |||||||
| Revenues | $0.1 | $12.6 | $41.7 | $32.4 | 86.8 | ||
| growth | NM | NM | NM | NM | NM | ||
| Adj EBITDA | (0.7) | 1.7 | 15.1 | 10.8 | 26.9 | ||
| margin | NM | 13.5% | 36.2% | 33.4% | 31.0% | ||
| Income from continuing ops | (0.7) | 1.4 | 11.9 | 7.7 | 20.3 | ||
| Interest expense, net | (0.2) | (0.9) | (0.1) | 0.0 | (1.2) | ||
| Income taxes | 0.0 | 0.1 | 0.1 | (0.2) | (0.0) | ||
| Depreciation | 0.2 | 1.1 | 3.2 | 3.3 | 7.8 | ||
| Gain on debt extinguishment | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| Adj EBITDA | ($0.7) | $1.7 | $15.1 | $10.8 | $26.9 | ||
| Corporate | |||||||
| Loss from continuing operations | ($19.6) | ($20.4) | ($20.9) | ($20.0) | (80.8) | ||
| Interest expense, net of int income | 17.2 | 17.2 | 17.3 | 17.4 | 69.1 | ||
| Income taxes | 0.0 | (0.0) | 0.0 | 0.0 | 0.0 | ||
| Depreciation | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| (Gain) loss on sale/disposal prop | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| Loss on debt extinguishment | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| Impairment loss | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| Adj EBITDA | ($2.4) | ($3.1) | ($3.5) | ($2.6) | ($11.6) | ||
| Consolidated | |||||||
| Mountaineer | $59.0 | $58.7 | $57.4 | $47.0 | 222.0 | ||
| growth | 14.7% | 2.0% | -3.4% | -15.7% | -0.9% | ||
| Presque Isle Downs | 48.9 | 47.8 | 47.6 | 36.9 | 181.2 | ||
| growth | 4.4% | -8.2% | -13.0% | -22.3% | -9.9% | ||
| Scioto Downs | 0.1 | 12.6 | 41.7 | 32.4 | 86.8 | ||
| growth | NM | NM | NM | NM | NM | ||
| Corporate | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| Total revenues | 108.0 | 119.1 | 146.7 | 116.3 | 490.0 | ||
| growth | 9.8% | 7.8% | 26.8% | 12.2% | 14.5% | ||
| Mountaineer | 12.8 | 12.3 | 11.2 | 7.2 | 43.5 | ||
| margin | 21.6% | 21.0% | 19.6% | 15.3% | 19.6% | ||
| Presque Isle Downs | 10.8 | 9.9 | 8.6 | 5.8 | 35.1 | ||
| margin | 22.2% | 20.7% | 18.0% | 15.7% | 19.4% | ||
| Scioto Downs | (0.7) | 1.7 | 15.1 | 10.8 | 26.9 | ||
| margin | NM | 13.5% | 36.2% | 33.4% | 31.0% | ||
| Corporate | (2.4) | (3.1) | (3.5) | (2.6) | (11.6) | ||
| Total EBITDA | $20.5 | $20.8 | $31.4 | $21.2 | $93.8 | ||
| margin | 19.0% | 17.4% | 21.4% | 18.2% | 19.1% | ||
Q4 2012
Questions/Concerns
Why purchase a security with capped upside when the company could go bankrupt? I think the downside is relatively well-protected long term. Let's assume EBITDA collapses to $70 million and let's place a 5x EBITDA valuation on the business. So here we have a large drop in EBITDA coupled with meaningful multiple compression. At a $350 million firm value in bankruptcy, today's 2nd lien holders would probably get a package of first lien debt plus all the equity in the company. If the 1st lien is 2.5x levered, they would get a $175 million first lien which would be the only debt. Of course there can be many permutations of post-restructuring capital structures, but the company would emerge with much less leverage. At $70 million of EBITDA, this business would produce roughly $28 million in free cash flow to equity (i.e. real FCF, not unlevered FCF or pre-tax FCF). Pricing the equity at a 10% yield, which is fair to conservative with the new capital structure, today's 2nd lien holders would get $175 million of first lien + $280 million of equity value, equating to $455 million in value, or a 77% recovery excluding interest. Given the high coupon, if this scenario happened a few years from now and we got 2+ years of coupon, we would basically have recovered all of our capital. This will not be a fun experience, but I do think we would emerge whole taking into accont interest. The bonds are heavily owned by distressed firms which would work on our behalf in a restructuring. There is no meaningful amount of first lien. This bankruptcy scenario is given here:
Valuation mutliple in bankruptcy 5x
EBITDA $70
Implied valuation $350
New capital structure...
1st lien $175 (2.5x leverage)
Implied equity $175
Total value $350
EBITDA $70
Maintenance capex (15)
Interest (12)
Cash taxes (15)
FCF $28
Pro forma value @ 10% FCF yield
1st lien $175
Equity $280
Total value $455
What do you think about the equity? The equity is definitely intriguing, especially since the business currently produces cash flow and the cash balance is very high. If the market felt today's free cash flow was stable, the equity would be substantially higher. For example, the company right now has $90 million of adjusted cash, and about $63 million of excess cash since roughly $27 million of cash is required for keep for casino operations. On $95 million of EBITDA, one gets about $9 million of free cash flow taking into account full taxes and maintenance capex. Applying a 10% yield to that FCF and then adding the excess cash would yield a stock price 60% higher. If the numbers were to improve, they could eventually do a highly accretive refinancing additionally (11.5% on $570 million in a lot of expensive interest) which would add substantially more value. They could in that scenario do some combination of bank and bond refinancing to bring down the blended debt cost to 8%. All this being said, there is no margin of safety in the trade in a prolonged downturn, which is why I am avoiding the equity.
CEO recently left the company. My sources indicate that he was not forced out, but decided to leave for personal reasons. There are strong managers at the individual properties and the CFO has a long tenure with the company and is competent.
Continued growth at Scioto Downs.
Robust free cash flow.
Market realizing bonds are covered and pricing accordingly.
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