PNK: SUGARCANE BAY OPTION > SUGARCANE BAY

As reported by the American Press, CEO Dan Lee intimated that PNK may begin construction of Sugarcane Bay by August.  The Lake Charles sister property to L'Auberge is now expected to cost $407 million, up from $350 million.  The improving credit markets were cited as the catalyst to resume construction.

Now, there is a lot to like about PNK.  Lumiere Place is ramping faster than expected, no doubt aided by the removal of the $500 loss limit in Missouri.  The company maintains significant exposure to Louisiana which has been the strongest performer among the gaming states.  The valuation at about 6.5x EV/EBITDA is reasonable and the FCF yield of almost 15% is attractive.  Last but certainly not least, PNK management has shown uncharacteristic restraint in terms of capital deployment, until recently.

My issue is not that Sugarcane Bay will be a disaster.  It's just that levering up to build at 8x EBITDA (maybe even higher if there is cannibalization of L'Auberge), when the incremental cost of borrowing will fall in the 7-10% range, doesn't seem to make sense.  We calculate only $0.09 in free cash flow accretion per share from Sugarcane Bay.  PNK could generate that level of accretion from the repurchase of only $50 million worth of stock.  PNK's cost of borrowing is going higher anyway - making the 15% FCF unsustainable - but pursuing Sugarcane Bay will expedite and elevate the hike.

PNK: SUGARCANE BAY OPTION > SUGARCANE BAY - pnk sugarcane bay 

Given the higher incremental cost of capital, exercising any development options would seem to detract from the company's value.  A story of harvesting cash flow and open development options seems like the better story for now.


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