BYD: LIQUIDITY, LAND, AND LONGEVITY

Opportunities like this don’t come around too often. I’ve never seen a gaming stock trade so far below what I would consider to be its true value. BYD’s net free cash flow yield (NTM) hovers around 40%. On 2010 numbers, the yield climbs to 50%. Even if I stress test the model and take EBITDA down 20% from my current 2010 projection of $485 million (includes 50% of Borgata EBITDA), the yield is still an astonishingly high 35%. The $485 million is already 21% below the level achieved in 2007.

So what explains this absurdly low valuation? Investors may not believe the numbers. I think I’ve addressed that concern by haircutting EBITDA another 20%, which still yields a very cheap stock. Second, investors believe that BYD will bust a covenant and possibly go bankrupt. We’ve run the numbers. As we pointed out in our 01/17/09 post “BYD: A NOT SO RISKY BUSINESS”, BYD has a number of levers to pull to avoid breaching the leverage covenant should business deteriorate below our projections. Management is not concerned.

Once through 2009, it is smooth sailing on the covenant sea. The maximum leverage restriction actually escalates from 6.5x in 2009 by 0.25x each quarter of 2010. Meanwhile, BYD will be generating positive free cash flow each quarter beyond Q1 2009 and reducing debt, even under dire projections. After taking EBITDA down another 20% in 2010, BYD still doesn’t bust the leverage covenant.

So if you’re willing to bet on BYD as a going concern how do you value the stock? I’m a cash flow guy so I’d rather look at multiples of free cash flow. EV/EBITDA is also appropriate. But there is more. BYD still owns the Echelon parcel, 65 acres right on the Strip. I know I’ll get push back on this but if you believe BYD is a going concern you have to include land in the value. I know of 3 groups/companies that would pay $5-10 million an acre for that parcel in a heartbeat. That’s $325-650 million in asset value that is not currently generating cash flow. By the way, BYD’s market cap is only $415 million. In a pinch, BYD has a huge cash source without changing the ongoing cash flow stream.

The first grid provides a valuation analysis based on per acre land assumptions and varying EV/EBITDA multiples. The second grid values BYD on a multiple of free cash flow, which is more appropriate in my opinion. The last grid assumes that 2010 EBITDA falls 20% below our expectations. Even under this assumption BYD appears grossly undervalued.


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