Description
Trump Casino and Resorts (NYSE:DJT) is a gaming company with casino operations located in Atlantic City, Indiana and a large new casino in California. The company has a total of approximately 38.1 million shares outstanding on a fully diluted basis.
Over the last three years, investors and analysts have focused upon DJT’s high total debt load and operating losses and concluded that the company required a reorganization which would leave equity holders with nothing. Taking into account recent business improvements coupled with the probability for significant reductions in annual interest expenses, this report concludes that a reorganization of debt for equity is no longer necessary to ensure the long term viability of the business.
A detailed comparative analysis of DJT to 7 different casino firms using 8 different metrics has been completed. 4 of the more relevant metrics are included in this summary. The results of this analysis conclude that fair market value of DJT may range from $5.12 to $6.80 by the end of 2003. Total gains from current prices in the range of 112% to 182% within the next 16 months would result for equity holders should the fair market value ranges be reached. Mid term upside after 2004 is significant.
Introduction and Overview
Trump Casino and Resorts represents a pure investment in the casino gaming industry. The company has primarily concentrated its operations in Atlantic City New Jersey, where the three Trump Casinos hold a dominant market position. The New Jersey Casino Gaming Control Commission has deliberately controlled the pace of casino development Atlantic City. This results in new casino development only being permitted when the commission is confident of a net improvement in total taxation. The implication that analysts should conclude from this policy is that any new development will not result in long term redistribution of existing revenues. Rather, new casino developments should generate net accretion of taxation to New Jersey.
The conservative policies being employed by the New Jersey Casino Control Commission has resulted in monopolistic type profits historically being earned by the Atlantic City casinos. However, in the last several years, it has become evident that a lack of infrastructure and lack of hotel facilities has resulted in revenues flattening out. This should be alleviated by a major new hotel/casino development being completed in latter 2003. As well, two hotel expansions to existing casinos are scheduled to be completed in 2004. This bodes well for the longer term growth potential of the Atlantic City casino businesses.
The three casinos have traditionally captured approximately 25% to 27% of the total Atlantic City Gambling business per annum. Until 1999, Trump had four facilities, but made a decision to close the oldest facility, which had been quite unprofitable. Since the closure of the “Trump World’s Fair”, the remaining operations have shown steady improvements, leading to healthy annual increases in EBITDA.
In recent years, as the Atlantic City market has matured, Trump has ventured into new jurisdictions. Since 1996, DJT has owned a riverboat casino in Gary Indiana (approximately 25 miles from Chicago). Profit margins have been steady.
A new casino development managed (but not owned) by Trump Casino and Resorts has commenced operations in the quarter ended June 30th, 2002. DJT receives 30% of the revenue from the "Trump 29 Casino", owned by the 29 Palms Indian Band in the Palm Springs area of California. In return for a modest loan, Trump has gained management control over a modern casino which will have 125,000 square feet of gaming space when totally completed. The first phase of this casino expansion has been completed, and now has roughly 75,000 square feet of gaming space. When fully operational, Trump’s management contract will enable it to generate revenues (net to Trump) equivalent to owning an additional 37,500 square feet of gaming space. This represents 10.3% more square footage to Trump’s total casino floor space. The Trump 29 Casino will have the ability to increase DJT’s total revenues by approximately 2% to 3% per annum, beginning in the 4th quarter of 2002.
Recent Developments
The Atlantic City operations have just completed their best operating quarter in the company’s history. Total revenues for the quarter ending June 30th, 2002 increased by approximately 2% to $213 million, up from roughly $208.7 million for the same quarter of 2001.
Indiana operations had a modest revenue decline in excess of 1.3% for the quarter. Total revenues for the quarter ending June 30th, 2002 were $30.2 million, down slightly from the prior year’s revenues of $30.9 million.
The Trump 29 Casino operations commenced officially on April 2nd, 2002. As construction of phase 2 is still underway, the revenue stream generated in the quarter just ended is only a fraction of what the property is capable of generating. Net to Trump, total revenues for this quarter were $1.1 million.
In aggregate, revenues for the quarter ending June 30th, 2002 were $313.4 million vs. $301.4 million in 2001. EBITDA for the quarter ending June 30th, 2002 was $81.4 million vs. $64.4 million in the comparative quarter of 2001.
Profits on an after tax basis amounted to approximately $.384 million in the second quarter of 2002. This represents earnings per share of approximately $.01 (fully diluted). The fiscal quarter just ended represents a significant improvement vs. a loss of $(12.2) million or $(.33) fully diluted in the same quarter of 2001.
2002 Forecast
There has historically been some seasonality in the revenue of Trump Casino and Resorts. In previous years, the revenue stream peaked in the third quarter, with the second quarter being somewhat lower. The first and fourth quarters tend to be shoulder periods, with lower revenues. The first and fourth quarters also tend to show the highest expenses, as marginal cost incentives (known as “comps”) rise in order to create more revenue.
The third quarter of 2002 looks to continue the strength of the quarter recently ended. All operations should post record results. This report suggests that total revenues may reach $335 million, with EBITDA of $93 million and EPS fully diluted of $.32 being achieved.
A 13% expansion of the slot machine count at the Gary Indiana casino will be completed by the end of the 3rd quarter of 2002. In addition, recent legislative changes in Indiana have been enacted which permit Trump to provide dockside gaming. Trump intends to be permanently docked no later than September 1st. This will serve to significantly enhance revenues in 2003, net of increased taxes for the right to engage in dockside gaming.
The Trump 29 Casino in Coachella, California will have its expansion fully completed in September. One full quarter of revenue participation from this property will serve to reduce the seasonal revenue swings from Atlantic City.
Overall, 2002 should prove out to be a record breaking year. Total revenues may exceed $1.25 billion. EBITDA of $322 million is forecast. On a fully diluted basis, EPS should total $12 million or $.32 per share.
2003 Forecast
This report summary has been prepared using a 2003 forecast growth rate of 2% for the Atlantic City operations. The opening of a major new casino (The Borgata) will initially draw off some revenues from all casinos in Atlantic City. However, the creation of 2000 additional hotel rooms in Atlantic City should result in the total overall casino market growing. In addition, two casinos have major renovations planned in 2003. The disruption caused by these renovations will result in some redistribution of casino revenues. The Trump operations are forecast to be able to pick up their traditional share.
Revenues from Gary Indiana are forecast to grow by 15% in 2003, as the 13% expansion of the slot machines floor will be fully completed and one full year of dockside gaming will be realized in the financial results.
The Trump 29 Casino revenues are forecast to be $24 million net to DJT in 2003. This number represents gaming revenues per square foot of approximately $6,500. Atlantic City and Indiana casino revenues are forecast to exceed $30,000 per square foot in 2003. Most other jurisdictions which publish gaming revenues show that by and large, few casinos fail to generate annual revenues of less than $10,000 per square foot. Therefore, the revenue forecast for the Trump 29 casino should be considered low. Furthermore, this management stream of revenue is unencumbered by depreciation of fixed assets on the scale of Atlantic City or Indiana. Accordingly, the profit potential of the Trump 29 Casino is much higher than the top line revenue suggests.
The 2003 forecast incorporates revenues expected to be $1.30 billion. EBITDA is forecast to be
$344 million and earnings are estimated to be $24.5 million. On a fully diluted basis, this is forecast to exceed $.64 per share.
Future Developments
As stated earlier, investors and analysts alike have been greatly concerned with the highly leveraged balance sheet of Trump Casino and Resorts. However, this leverage will gradually diminish in the next 18 months. The capital expenditures required to maintain and grow the revenue stream are estimated to be roughly $45 million in both 2002 and 2003 respectively. Total indebtedness is forecast to drop to approximately $1.95 billion by the end of 2003.
As a result of the forecast improvement in EBITDA, Trump should face little difficulty in refinancing approximately $460 million of debt due and/or callable in 2003. This debt carries an aggregate coupon of roughly 13.3%. Trump has recently refinanced approximately $75 million of 10.25% coupon debt for an aggregate rate of approximately 7.3%. Provided that Trump is able to refinance the remaining maturing/callable debts in 2003 for comparable interest savings of 2.95%, the net effect would be approximately $.34 per share after tax fully diluted for the next 12 months. The estimated interest savings are not included in the forecasts contained within this report.
Estimates for 2004 are $1.33 billion in total revenues, with EBITDA of $350 million, net profits of $43 million and fully diluted EPS of $1.12. Interest coverage rises to 1.9x.
Comparative Analysis
Several methodologies have been employed. This summary includes the four most relevant metrics
ECONOMIC VALUE/EBITDA FORECAST
Company Current 2001 2002 2003
& Symbol Share Price EV/EBITDA EV/EBITDA EV/EBITDA
Aztar (AZN) $16 7.2 7.6 7.4
Park Place(PPE) $8.00 8.8 8.6 8.4
Mirage (MGG) $30.20 10.8 9.5 8.6
Harrahs (HET) $41.65 8.1 7.8 7.5
Station (STN) $12.15 10.1 10 9.5
Boyd (BYD) $13.50 9.7 10.2 9.0
Mandalay (MBG) $25.31 7.0 6.9 6.9
Trump (DJT) $2.48 8.2 6.6 5.9
The median forecast 2003 EV/EBITDA for the peer group is 8.2x. Trump traditionally sells for a discount of as little as 7% to as much as 23% from its peer group. Assuming that a discount of 15% to 23% is applied to DJT for fiscal 2003, Trump’s EV/EBITDA should be in the range of 6.3x to 6.4x by the end of 2003. This implies a share price range of $5.27 to $6.43. Given the rapidly improving trend in EBITDA, it may be more appropriate to assign a smaller discount than has historically been observed. Any narrowing of the discount vs. the peer group would render the fair market price range to be conservative.
EBITDA/INTEREST EXPENSE FORECAST(ADJUSTED*)
Company 2001 2002 2003 2004
Name Interest Interest Interest Interest
Coverage Coverage Coverage Coverage
Aztar 3.4x 2.9x 2.8x 2.9x
Park Place 2.3x 2.2x 2.3x 2.4x
Mirage 3.1x 3.2x 3.3x 3.3x
Harrah’s 2.0x 2.1x 2.2x 2.3x
Station 2.3x 2.2x 2.2x 2.3x
Boyd 2.2x 2.0x 2.0x 2.1x
Mandalay 2.0x 2.1x 2.2x 2.4x
Group Average 2.5x 2.4x 2.4x 2.5x
Trump 1.2x 1.46x 1.7x 1.9x
An adjusted methodology is required, which differs from 10-k reported interest coverage for the peer group. Many of the companies in this peer group capitalize interest expense on various expansion or renovation projects. This serves to increase interest coverage, but does represent an obligation nonetheless. In addition, companies (notably Park Place and Harrah’s) have sale and leaseback agreements on numerous properties, and guarantee the mortgages on these properties. The sale/leaseback process artificially reduces the total debts and also improves the debt/equity ratios, but does not truly eliminate the obligation. Finally, several of the companies take into account the earnings from unconsolidated subsidiaries on their revenue statements, but do not account for the interest expense. Once again, this artificially inflates the interest coverage of several companies within the peer group.
Much has been said about Trump’s inadequate interest coverage. The table confirms that Trump’s interest coverage is indeed significantly weaker than the peer group. However, a trend has been clearly established with EBITDA improving significantly due to sharp permanent reductions in SG&A. The overall drop in expenses comes from the elimination of lobbying efforts on behalf of an Indian band seeking status, reduction in wages due to improved scheduling, and tighter cost controls with newer management. By fiscal 2004, Trump will still have the weakest interest coverage of the peer group, but will be within levels that will allow for easy comparisons with other highly levered casino firms.
PRICE TO TANGIBLE SHAREHOLDERS EQUITY FORECAST
Company 2001 P/TE 2002 P/TE 2003 P/TE 2004 P/TE Name Forecast Forecast Forecast Forecast
Aztar 1.6x 1.2x 1.1x 1.0x
Park Place 2.1x 1.5x 1.2x 1.0x
Mirage 2.7x 1.8x 1.7x 1.5x
Harrahs n/r n/r n/r 16x
Station 26x 7.3x 4.2x 2.9x
Boyd n/r n/r n/r n/r
Mandalay 4.0x 2.8x 2.2x 1.8x
Trump 6.1x 3.7x 2x .90x
Price to tangible shareholders equity is a useful tool when evaluating downside risk of an investment. Companies in casino industry tend to trade for a premium over and above tangible shareholders equity when the growth rates are clearly evident. For companies that are deemed to have little growth potential, the premium that investors are willing to pay over tangible equity diminishes. However, there are few instances over the last ten years of research where shares of any of these companies traded below their tangible shareholders equity for more than one quarter. After using this evaluative tool, an argument could be made that downside risk on Trump is roughly defined as being around the current share price.
PRICE TO EARNINGS RATIO FORECAST
Company 2001 P/E 2002 P/E 2003 P/E 2004 P/E
Aztar 10.8x 9.4x 8.4x 7.3x
Park Place 25.0x 14.0x 11.2x 8.8x
Mirage 21.9x 13.3x 12.2x 11.6x
Harrahs 20.4x 14.1x 12.3x 11.4x
Station 26.4x 17.6x 12.6x 11.3x
Boyd 33.7x 12.0x 10.4x 9.0x
Mandalay 34.0x 13.3x 10.5x 9.1x
Peer Group Avg. 24.6x 13.4x 11.0x 9.8x
Trump N/R 7.8x 3.9x 2.1x
Price to Earnings ratios represent an important evaluative tool for retail investors. Due to Trump’s high degree of financial leverage, even modest improvements in earnings will result in significant increases in the bottom line. Donald Trump has several agreements in place with Trump Casino and Hotels that would effectively reduce increases in net earnings by up to one quarter per annum. This must be accounted for when determining the appropriate price to earnings ratio that should be applied. Nevertheless, it appears clear that given further improvement in EBITDA, expansion in the price/earnings ratios being accorded to Trump in the marketplace should occur. *Please note that Trump has significant tax loss carry forwards. However, the price/earnings ratios being used in this analysis assume a 35% tax rate.
Provided that investors and analysts award Trump with a price/earnings ratio of 8 times 2003 forecast earnings, this would imply a fair market value of $5.12. Bullish investors typically are willing to pay for price/earnings estimates that are approximately twelve months forward. This implies that in the latter half of 2003, investors will be looking at 2004 earnings. Should this prove to be accurate, then a fair market value estimate of $5.12 would prove to be quite conservative.
CONCLUSIONS
Trump Casino and Hotels has long been ignored by retail investors and financial institutions alike. This is entirely due to the high degree of financial leverage employed by Trump, the high interest rates paid on corporate debt and the lack of diversification in the revenue base. In addition, there has been some criticism leveled against Trump Casino with respect to financial reporting. After conducting a thorough review of the financial reporting of the peer group, it is clear that Trump’s degree of disclosure is in fact far better than many of the more highly rated companies. Dramatic improvements in operations, coupled with adequate capital spending to maintain the properties in good repair, have resulted in a steadying of the financial picture.
The market has not yet fully grasped the magnitude of the turnaround at Trump. Nor has the market come to appreciate the significance of the benefits of dockside gaming to the Indiana operations. In addition, analysts and investors alike have not yet seen the significant bottom line financial benefits that will accrue from the management contract at the Trump 29 casino.
Based upon the methodologies employed in this report, Trump shares would be fairly valued at a price of $5.12 to $6.80 at some point in fiscal 2003. As fiscal 2003 draws to a close, investors should then be looking ahead and willing to pay a price that could be significantly higher. Downside risk appears to be roughly the current share price.
The catalyst will may propel shares of Trump Casino and Hotels will become evident in the in the third and fourth quarters of 2002. Dockside gaming is forecast to be in place no later than September 1st, and the Trump 29 Casino’s expansion will be fully complete by the end of September. This will lead to very strong EBITDA comparisons going forward.
Catalyst
Completion of the Trump 29 casino expansion and completion of the Indiana expansion coupled with implementation of dockside gaming on or about September 1st. Record 3rd quarter revenues should result in recored EBITDA for the balance of 2002.