Description

Isle of Capri Casinos, Inc. owns and operates 16 riverboat, dockside and land-based casinos at 14 locations, plus Pompano Park Harness Track in Broward County, FL. ISLE owns operating licenses in the Bahamas, Colorado, Florida, Iowa, Louisiana, Mississippi, and Missouri. The Group owns and operates gaming facilities located in Lake Charles and Bossier City, Louisiana; Lula, Biloxi, Vicksburg and Natchez, Mississippi; Kansas City and Boonville, Missouri; Bettendorf, Davenport and Marquette, Iowa.

Valuation

ISLE trades at 7x 2005 and 6.3x FY 2006 (April) EV/EBITDA estimates. After a lot of earning disappointments the 2005 earnings expectations are now very conservative. 2006 should be a more relevant number since the majority of ISLE's expansion and renovation projects should be done by the beginning of that fiscal year. The riverboat gaming group historically traded in a range of 5.5-8x EBITDA but is currently trading at 8x. Using a 7x multiple on 2006 EBITDA, equates to a $32 price target. On the downside, ISLE got as low as $16 in July when the company announced that the construction was having a greater impact on their properties than they previously thought it would. Based on its current asset base and expansion projects in the pipeline, cutting 2006 ebitda by 10% and place a 6x multiple on that EBITDA, equates to a downside target of $20. 2006 EBITDA estimate does not include anything for the UK, Rosemont, FL, or the potential new property in IA described below. As mentioned below, each of these first three projects could be worth an additional $2 per share.

Earnings estimates for ISLE have come down significantly throughout the year as ISLE has experienced larger than expected construction disruptions at its properties where casinos and hotels are being expanded or renovated. While some of this disruption is over, construction will be ongoing at several properties over the next 2-4 quarters and could continue to pressure results. Earnings estimates for fiscal 2005 have come down from $1.79 a year ago to the current mean of $1.33. ISLE has come in at the low end or missed consensus estimates in 4 of the last 12 quarters.

The key assumptions in analyst models revolve around the impact of changes in ISLE's markets - from competing casinos coming on-line in existing markets to renovations and expansions being completed and adding to revenue. In general the street is modeling in a decline in EBITDA and EBITDA margin in 2005 as ISLE will likely continue to experience construction disruption, and then EBITDA and margins should rebound in FY2006 as most of the projects are completed.

Catalysts
1) Expansions at existing facilities. ISLE has renovated or expanded or is in the process of expanding several properties which they feel will add meaningfully to EBITDA in the next several years

Colorado - Isle has 2 properties next to each other - they are expanding them and connecting them in a 2 phase project. Phase 1 consists of a new parking garage and connection of the 2 properties. These properties have been restrained by a significant lack of parking. This phase should be complete by spring 2005. Phase 2 consists of additional hotel rooms and should be ready by the spring of 2006. ISLE is spending $75mm total on the expansion, including $19mm on improvements to Highway 6, the main artery to the casinos. Think they will be able to generate an additional $10-$15mm to EBITDA once both phases are complete.

ISLE is expanding their facility in Biloxi, MS They are spending $79mm for a 1,000 car garage and a 400 room hotel, which is set to open in May '05. The existing hotel is running at 95% occupancy and does not have enough parking to accommodate the casino. ISLE believes these additions should add $10-$15mm in run rate EBITDA.

In Boonville, MO ISLE will add a 120 room hotel/special events center to open in fall 2005.

2) Potential new facility openings. ISLE has the potential to open several new facilities over the next 2-5 years that could meaningfully add to earnings.

Florida - ISLE owns Pompano Park in Broward County. In November 04, the state voted on a referendum to allow Dade and Broward counties to decide for themselves if they want slots at racetracks in their counties. The amendment passed by 90,000 votes. Local elections should happen by early March. The constitution says it has to be considered in the next legislative session and be effective July 1 '05. Pompano will be northernmost location – which should be a huge benefit in drawing customers from north of Broward county. They have 200 acres there. Feel very confident about legislation going through - there will be some headline risk from the opposition, but the state needs the money for education. It should take them 6-9 months to get it set up once legislation becomes effective. They plan to start with a temporary facility and likely spend $100 - $150mm, depending on how many slots they get approval for, probably between 2,000 and 3,000 slots per facility. Smaller casinos in not great locations are doing $400 win/day/machine, ISLE thinks they will do $250-$300. Tax rate probably will be in low 50% off the top, which will get them to low 20% EBITDA margins = $40 - $50mm EBITDA/year. With 2,000 slots at $275 win/day and 20% EBITDA margin, subtracting interest and depreciation, the result is $0.40+ accretion to eps. Placing a 15x multiple on this equates to a $6 value on this new facility. Upside can come from: more slots, slightly higher margin, higher win per day.

UK - ISLE has received a license to operate a gaming facility in the UK. ISLE's casino will be a part of the Coventry Arena facility which is being constructed near Birmingham, which is about 100 miles northwest of London. The facility will be a sports/entertainment complex hosting conferences, banquets, hotels and restaurants, a concert hall and a new soccer stadium for the local professional team. The facility in scheduled to open in mid 2005. ISLE thinks the casino will likely be 40 tables and 1200 slots, which is the current definition UK Parliament is looking at for regional casinos. It is widely believed that Parliament will pass legislation on gaming in Spring 05 and ISLE thinks the casino will be able to open in early 2006. It is difficult to estimate the final cost or expected earnings of this facility before tax rates and table and slot limits are finalized, but ISLE is currently using an estimated cost of $75-100mm. Based on a reasonably conservative estimate for table and slot win and EBITDA margin, ISLE should be able to generate $20-$25mm in EBITDA. This should be worth approximately $0.40 per share in eps or $2-$3.50 in per share value using a 6-8x EBITDA multiple.

Rosemont, IL. Rosemont was awarded the 10th gaming license in Illinos and selected ISLE as its operator. Since the city was awarded the license, the Attorney General of Illinois has been fighting the selection process of the state's gaming commission. The Attorney General does not want Rosemont to have the state's final license, as she alleges that Rosemont city officials have mafia connections. The City has already built a new parking garage based on winning the license. The gaming commission currently doesn't have a quorum - 1 member resigned and the terms of 2 others expired. The Governor will have to appoint new members. If the facility goes forward under ISLE's current understanding of the economics in IL, it will take them 9 months to build it and will cost them $518 for the license and $150 to build the facility. ISLE thinks they can do $100mm in EBITDA. Depending on the final tax structure in IL and the resulting EBITDA the facility can generate, this could be worth another $1-$3 per ISLE share.

Iowa - Iowa has decided to award 2 licenses for new properties. ISLE is working on proposals for Waterloo and Des Moines. ISLE has been selected as the preferred operator in Waterloo. Management thinks this could be a mid-teens EBITDA sized facility and that there is a reasonable probably that Waterloo gets selected as a site. The state will apparently award the licenses in early 2005.

Catalyst

Expansions at existing facilities and new facility openings.