ASCA: THE REFI

We think ASCA will soon close a major refinancing that will reduce average borrowing cost and combined with the buyback, will be hugely accretive.  P/E multiples anyone?

 

 

For the first time in years, a gaming stock is looking attractive on a P/E basis.  That stock is ASCA and its earnings multiple on our 2012 estimate is only 9x.  It also carries the highest free cash flow yield at over 20%.  Sure, the huge free cash flow will go to paying down debt for a couple of years but longer term, the cash will flow to equity holders.

 

ASCA has a couple of near-term catalysts including improving regional gaming demand and a likely Q1 earnings beat.  The company should also close a major refinancing in the next week or two that will substantially lower average cost of debt.  The refinancing combined with the already announced buyback of stock from the Craig Nielsen Trust, should result in huge EPS and FCF per share accretion.

 

Our 2011 EPS estimate of $1.50 is substantially higher than the Street at $1.10, mostly as a result of the refinancing and share buyback.  Other discrepancies may include no cash taxes this year,  lower debt and the elimination of a significant amount of non-cash interest expense from the retirement of the swaps on July 19, 2010.  Our EBITDA estimate is also higher by approximately $6 million. 

 

Some analysts may have some of these factors reflected in their model.  We do not believe any other analyst have the refinancing in their models.  Per our math, despite the repurchase of 27 million shares, interest expense should not be that much higher.  Average borrowing rate could go down 120 bps, almost offsetting the $360 million increase in average debt for 2011 as a result of the buyback.  We think most analysts just assume a high yield raise and not a complete restructuring of the debt including a new credit facility.

 

In the years we’ve been covering ASCA, we’ve found that the best time to own it is when the FCF yield climbs over 20% and the company starts beating estimates.  We believe we are in that scenario here ahead of the Q1 earnings release.


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