Description
DESCRIPTION
Six Flags (SIX) is an attractive, under followed, post-reorganization story with >100% potential upside. SIX operates 19 regional theme parks in North America. Due to the high barriers to entry, theme parks have historically commanded multiples in the range of 10-12x EV/EBITDA in both the public and private markets. At its closing price on 8/25/10, SIX is trading at only 4.6x our projected 2011 EBITDA. As new management continues to execute and as sell-side coverage positively initiates on the Company (leading to liquidity flows into the name) and the story gains more visibility, there should be no reason why it doesn't garner at least an 8.0x EV/EBITDA multiple, which would equate to a $77 stock price.
| |
|
|
2009A |
2010E |
2011E |
| Adjusted EBITDA |
|
$194 |
$275 |
$330 |
| Target Multiple |
|
|
8.0x |
8.0x |
| Enterprise Value |
|
|
$2,200 |
$2,640 |
| Net Debt |
|
|
|
834 |
674 |
| NOL Value |
|
|
|
137 |
137 |
| Equity Value |
|
|
$1,503 |
$2,104 |
| S/O |
|
|
|
27.4 |
27.4 |
| Target Stock Price |
|
|
$55 |
$77 |
| Return (%) |
|
|
|
53% |
114% |
INVESTMENT THESIS
Highly Experienced New Management Team Instated
Post SIX's emergence from bankruptcy, former CEO Mark Shapiro and three other members of management were fired. On 8/13/10, Jim Reid Anderson, who was responsible for Dade Behring's turnaround (see DADE stock chart from '02-'07), was made Chairman, President & CEO. Upon Reid Anderson's appointment, Al Weber, formerly the interim CEO and a 40-year veteran of the theme park business, was made COO. With the turnaround expert (Reid Anderson) and the industry expert (Weber) at the helm, we believe this new management team is highly competent (and incentivized) to realign the cost structure that was made bloated under the previous management team.
As detailed in an 8K filed on 8/18/10, management is highly incentivized to grow EBITDA to $350mm in 2011. As part of the Board's Project 350 program, CEO Reid Anderson will be granted 1.25% of the outstanding common stock (or 342k shares) if he achieves $350mm or more of Adjusted EBITDA in 2011 (off of a 2010 Adjusted EBITDA base of $275mm). He will receive 50% of the grant if he achieves $330mm, and 0% if he achieves anything less than $330mm. With an improved economic backdrop, favorable weather, lack of swine flu, and a focus on managing costs, management is on tract to achieve ~$275mm of EBITDA in 2010. Incremental cost saves, sponsorship/licensing opportunities, increase in ticket prices (SIX currently underprices competitors by 20% despite being in better markets), and a more disciplined approach to ticket promotions should make the $350mm Adjusted EBITDA target achievable in 2011. However, in my valuation, I am only assuming that they earn $330mm of EBITDA next year.
Operational Turnaround Opportunities Abound
SIX's closest public comp, Cedar Fair (FUN), has consistently operated at 35% adjusted EBITDA margins. This compares to SIX's 2009 modified EBITDA margin of 24% [Note: "Modified" EBITDA adds the interests of the partnership parks that are less than wholly owned to "adjusted" EBITDA as to make comparisons with FUN accurate on an apples-to-apples basis]. We do not believe that there are any structural reasons why SIX can't operate at margins at least equal to those of FUN (if not higher since SIX also has high margin sponsorship/license fees which FUN does not). In fact, much of the EBITDA margin discrepancy between the two has been a result of the previous management team's lack of focus on cost containment. Case in point: under previous leadership, SIX's headquarters were moved from Oklahoma City to NYC. Thankfully, the new management team is keen on keeping the organization lean and has moved its headquarters from NYC to Dallas, which in of itself will achieve $16mm of annualized savings. Additionally, management has identified and continues to identify more opportunities to cut costs.
Recently reported Q2 results confirm that this turnaround is in order. Revenue increased 7% YoY driven by a 7% increase in attendance, while cash operating costs were down 5%. This drove a 68% YoY increase in adjusted EBITDA to $95mm, representing a 29.5% margin (modified EBITDA was $111mm, a 34.4% margin).
Solid Free Cash Flow Generation
On $330mm of adjusted EBITDA, SIX should generate $160mm of FCF in 2011 (representing a 16% levered FCF yield). Cash interest expense is $75mm; Capex on an annualized basis will run at $80-$90mm; and cash taxes are $10mm. Management's priority for use of cash is to delever, as evidenced by their unscheduled $25mm prepayment of SIX's 1st Lien Term Loan on 8/5/10.
"Hidden" Assets
- SIX emerged from bankruptcy with $1bn of federal NOLs, which I have valued at roughly $137mm ($5/sh). As a result of these federal NOLs, SIX will only be paying $10mm/year in annual cash taxes for the foreseeable future.
- SIX owns ~1200 acres of excess real estate around its New Jersey park and another ~200 acres of excess real estate around its Washington D.C. park. These plots of land could be sold or used to develop hotels in the future. As the current environment for valuing such assets is nonexistent, I have currently assigned no value to these assets. It is worth noting, however, that Jones Lang LaSalle valued these assets at $76mm ($3/sh) in 2009.
- Dick Clark Productions (DCP) recently did a high yield bond deal with $100mm of excess cash that could be used to distribute as a dividend to its parents. SIX owns 39% of the equity and would be entitled to a $39mm payment.
Risks
- Inclement weather
- Economic slowdown
- New management team fails to execute
Catalyst
- Management continues to execute and put up great quarterly results
- Positive sell-side coverage rollout
- Continued debt paydown