PENN’s transaction has implications for most gamers – all positive – but none potentially more significant than for ASCA.
Obviously from our comments today, we think ASCA is the most likely pursuer of PENN’s real estate strategy. In fact, we think it is actually likely – only the timing is uncertain. Even if it’s not for two years – following the opening of Mojito Point in Lake Charles – the market is right for ascribing value now. While the stock is already up 16% today, we don’t think the market has gone far enough today. We project total company value at $49 to $70 with a $59 midpoint in two years. Discounted, the midpoint value is still $47. And that’s with EBITDA/EPS projections below Street consensus.
Why does it make sense for ASCA? While leverage is not necessarily low, ASCA generates a huge amount of free cash flow. The balance sheet is in good shape. ASCA owns a lot of real estate. The only development is Mojito Point in Lake Charles which will open in 2014. That is probably the only real hold up and the reason why we are projecting a 2 year timeline of consummation. ASCA’s management team is up there with PENN as the two most focused on creating shareholder value and they are great operators. Leverage, while somewhat high at 5.5x will drop considerably following the opening of Mojito Point.
Even if ASCA decides against this strategy, investors should and will likely focus on free cash flow rather than EV/EBITDA following the PENN announcement. This bodes well for ASCA’s valuation. Even after the big move today, the FCF yield for 2013 is still 18%. The stock could support a yield that is half that in our opinion. So without a transaction (and our $47 valuation), ASCA could still be worth $35-40 with the re-value. We're not ready to go quite that high but the theoretical case can be made. Stay tuned.
Assuming a structure similar to PENN’s OPCO/PROPCO design, we came up with a value of $49-70/share off of our 2015 projections.
- Big picture assumptions
- ASCA has assets that will meet REIT requirements for a tax-free spin
- Ability to obtain an IRS ruling and get approval from all the jurisdictions in which they operate in
- ASCA 2015 forecast
- $1.5BN of net revenue
- $504MM of property-level EBITDA
- $446MM of Adjusted property-level EBITDA
- Net debt of $1.9BN
- 34MM shares outstanding
- ASCA PROPCO REIT
- Adjusted EBITDA of $225MM
- 5.5x leverage or total debt of $1.24BN at a cost of 6.5%
- $15MM of overhead and other expenses
- AFFO: $130MM
- 90% payout ratio gets you a dividend of $3.46
- Similar to PENN, we think ASCA should be valued at a 7-9% yield or a 12x implied 2015 EV/EBITDA multiple ($38-$49/share).
- ASCA OPCO
- Adjusted EBITDA of $221MM
- Remaining debt at OPCO of $760MM or 3.4x leverage at a cost of 6.5%
- Maintenance of $77MM or 5% of net revenue
- Based on today’s $19 share price, ASCA trades at roughly 7x 2013E EBITDA
- We believe that ASCA OPCO should trade at a material discount of 5.0-6.5x ($10-$20/share).
- A $10-$20 valuation would represent a 20-10% FCF yield