Description

We recommend purchase of SeaWorld Entertainment (SEAS - $24.15)

• Results are improving rapidly: 2018 Attendance/Revenue/EBITDA up 9%, 9% and 35%
• On a market cap of $2.0bn and an EV of $3.5bn
  • SEAS should generate 2019 revenue/EBITDA/FCF of $1.40bn/$435m/$170m
  • On 2019 numbers, SEAS is valued at 8.1x EV/EBITDA and 11.8x Market cap/FCF
  • Current debt/EBITDA is 3.8x
• Management targeting 2020 EBITDA $475m to $500m, up from $401m in 2018
• Hill Path Capital LP (Scott Ross - former Apollo executive) owns 16% of the company and has a board seat
• Blackfish issue has subsided.  The real problem was very poor execution by the previous mgmt. team

Description.  Orlando, Florida based SeaWorld Entertainment operates 12 theme parks throughout the United States under the SeaWorld, Busch Gardens, Aquatica, Sesame Place and other brand names:

• SeaWorld operates parks in Orlando, San Diego and San Antonio.  Each of the SeaWorld parks have Aquatica water parks nearby.  Additionally, Discovery Cove is next to SeaWorld Orlando
• Busch Gardens operates parks in Tampa, FL and Williamsburg, VA.  Adventure Island waterpark is adjacent to Busch Gardens Tampa & Water County USA is near Busch Gardens Virginia.  Sesame Place is in Pennsylvania.

The SeaWorld parks are “marine-life themed” with orcas (killer whales) as a significant attraction.  The Orlando park is in a destination market (positioned as a value offering compared to Disney/Universal).  SeaWorld San Diego and the Busch Gardens parks are more traditional regional amusement parks, comparable to a Six Flags or Cedar Fair park.  Sesame Place is a smaller niche park (i.e. “locals”).

AECOM’s 2017 global attractions report (2018 not available) attendance numbers are below – numbers are not confirmed by the company.  SeaWorld San Diego was the most heavily impacted by the Blackfish movie, SeaWorld Orlando has been impacted by Blackfish and local competition.  Busch Gardens parks have been roughly flattish. SeaWorld attendance numbers in 2018 showed significant improvement across the board at 22.6m visitors versus 20.9m in 2017.  The five big SeaWorld/Busch Gardens parks account for about 80% of total attendance.

*San Antonio attendance not listed by AECOM post 2012.  2012 Attendance was 2.678. Remaining years are our estimates

**Busch Gardens VA attendance listed by AECOM 2013-2015.  Remaining years are our estimates

Background.  Blackstone took the company public in April of 2013 at $27 per share (after acquiring the company from AB Inbev in December 2009).  Blackstone did two secondaries and ultimately exited by selling its remaining 21% stake to China-based Zhonghong Group for $23 per share.  Hill Path Capital owns 16% of the company and its founder (former Apollo Partner Scott Ross) has a seat on the board.  Hill Path is experienced in the amusement park business, Ross is on the board of Greywolf and Operating Partner Richard Golding is on the board of Parques Reunidos Servicios (PQR-ES), a Madrid-based company with a ~$1 billion market cap that owns parks globally.  Zhonghong appears to be in financial difficulties and is a likely seller of its stake in the company.

Financial Highlights.  SEAS does not offer attendance/revenue/EBITDA by park.  While the orca controversy (Blackfish movie released 2013) has certainly been a negative, the company’s execution overall has been lousy with poor marketing/communication, a lack of compelling new rides, no orca show in San Diego for three months during 2017, excessive costs, etc – basically a lack of blocking and tackling.  In February 2018, John Reilly (a “Parks Guy” who has been with SEAS for 33 years) was appointed interim CEO, replacing Joel Manby. After Manby’s departure, every metric in 2018 showed significant improvement. The company also put out a 2020 EBITDA target of $475m-$500m. SEAS recently appointed a new CEO (Gustavo Antorcha, formerly COO of Carnival Cruise Line – division of Carnival Corporation). Reilly has since departed the company – we do not see any meaningful changes operationally and management (including new CEO) reiterated its $475m-$500m target on the 4th quarter earnings call (02/28).

We assume $435m of 2019 EBITDA and $455m of 2020 EBITDA….well below the company’s targets.

On its August 6th 2018 Q2 earnings call, management laid out a plan to achieve $475m-$500m EBITDA by 2020.

• On 2017 base attendance of 20.8m (down from 24.4m peak attendance in 2012)
  • Grow base attendance 1% annually (+630k) plus recapture 20%-25% of lost attendance (+700k to 1m)   
• Increase revenue per capita from $60.74 in 2017 to $64+ in 2020 – about 1.75% to 2.0% pricing growth annually
• SG&A declines by $50m from 2017 to 2020 (seems aggressive), we assume cash SG&A goes down $10m annually

2018 attendance, at 22.6 million has already increased by 1.8 million so the entirety of the attendance goal has been achieved, though on its Q4 conference call management stated that it expects to continue growing attendance.  For each of 2019 and 2020 we assume a 1%-2% increase in attendance, a 1% increase in the per cap (admission and merchandise) and a slight decrease in cash expenses which brings $435m/$455m in 2019/2020 EBITDA.

For what it’s worth, the fourth quarter press release included a table of newly defined credit adjusted EBITDA which allowed for add backs of already taken cost reductions – off the 2018 actual EBITDA of $401m, management added back $23m of known already taken cost reductions (to be achieved within 18 months) to get to a 12/31/18 LTM adjusted EBITDA of $425m.  SEAS EBITDA margins at 29% are well lower than SIX at 38% and FUN at 35% - while animal care costs account for some of the difference, there are likely substantial cost reduction opportunities.

Blackfish Controversy.  The 2013 film Blackfish highlighted the captivity of orcas at SeaWorld and among other things the death of a SeaWorld trainer caused by one of the orcas.  PETA has been an ongoing critic of the company. In response to the controversy, SeaWorld announced in March 2016 that it would discontinue breeding orcas and that its shows would be more educational going forward and less about the use of animals to entertain guests.  Practically speaking, orcas live for a long time so halting the breeding is not an issue for many years. A new orca show debuted in San Diego during 2017 (three months after the closing of the previous show….a delay that cost the park significantly in attendance). New shows in Orlando and San Antonio are planned for 2019, we expect a smooth transition given lessons learned from SD in 2017.  At this point the company is on the same page as the The Humane Society of the United States – PETA on the other hand will not be happy until the orcas are placed in “Seaside Sanctuaries” and not used by SeaWorld for commercial purposes at all.  That said, the issue seems to have subsided and managements’ communications now focus on emphasizing SeaWorld’s ongoing animal rescue and rehabilitation activities.  

Valuation.  Current market cap and EV is $2.0 billion and $3.5 billion.  Per share numbers include some ongoing buyback.

• 2019e EBITDA of $435m less $170m cap-ex less $85m cash interest, less $10m w/c & other would drive 2019 FCF of $170m ($2.10 per share).
• 2020e EBITDA of $455m, less $175m cap-ex, less $85m cash interest, less $10m w/c & other, would drive 2020 FCF of $185m ($2.40 per share).
• On an EV/EBITDA basis SEAS trades at 8.1x 2019 and 7.8x 2020 EBITDA.  The FCF multiple is 11.8x 2019e and 10.9x our 2020 estimates.
• The midpoint of the company’s 2020 EBITDA guidance ($487.5m EBITDA) would drive about $2.83 p/s in FCF
• SEAS bought back $92m of its stock in Q4 2018 and increased its buyback authorization to $250m

SIX trades at 11x 2019 EBITDA and FUN trades at 9x 2019 EBITDA.  FUN is a publicly traded limited partnership, which limits its attractiveness to institutional investors – additionally, EBITDA growth has been limited despite healthy cap-ex spend.  In terms of SEAS, the SeaWorld parks probably always get a discount to SIX/FUN because of the orca issues, however, the Busch parks (likely 25%-30% of EBITDA) appear to be very highly thought of in the industry with multiple other companies stating that they would be interested in acquiring those parks.

At a bit over 10x 2020 FCF using a $455m EBITDA estimate vs the company’s $475m - $500m guide, the stock seems cheap.

Our bet is that management continues blocking and tackling (effective marketing/communications, consistency of new rides, successful adjustment of orca shows, free beer at the parks, etc.) while reducing costs, which should drive strong EBITDA growth.  When combined with a plan to keep base cap-ex to $150m and nearly $1bn in NOL’s, FCF should grow considerably.

Strategic Alternatives Speculation.  With Zhonghong a likely seller of its stake and Hill Path an experienced private equity investor in the amusement park space, there have always rumors about the future of SEAS.  The Busch parks would clearly be of interest to many industry buyers. The SeaWorld parks are not that simple given the animal rights activist issues, though that was predominantly an issue in Southern California.  SeaWorld’s significant footprint in Orlando (i.e. the physical land/real estate on which its park sits) could potentially be of interest to an industry buyer. All that said, a transaction seems unlikely to us.

Summary.  The momentum of improving financial metrics combined with a modest valuation makes for a very interesting upside opportunity at SEAS.  The Hill Path presence ensures an intense focus on enhancing shareholder value. Theme park companies are big on capital returns (SIX and FUN basically return all FCF to shareholders).  SEAS bought back 4% of the company in Q4 and increased its buyback authorization to a total of $250m, more than 10% of the company. By the end of 2020, a dividend seems like a real possibility - $1 a share would consume 45% of SEAS 2020 FCF.

Risks.  Competition, particularly in Orlando where Disney/Universal are coming out with newer/better rides and attractions (i.e. Star Wars).  SEAS is accustomed to the competition, as they have always had to deal with it….and the company is actively building out its own new rides and attractions (i.e. new Sesame Place in Orlando).  The other risk that will not go away are the ongoing protests from animal activist groups who object to animals being held in captivity. As mentioned above, the company is doing a better job of publicizing its rescue activities, no longer breeding orcas and making its shows more educational, all of which should help counteract this issue.   

Catalyst

Return of capital to shareholders. Management continues to execute well and drive attendance growth, while taking out some costs.