HIGHLIGHTS
We met with Great Canadian (GC) & Gateway management and visited several properties in the Vancouver marketplace on June 24th. Overall, we walked away more positive on GC and continue to believe that the stock can continue to work on the back of several second half catalysts. Below is a summary of our takeaways from the trip.
- Economic impact has not worsened since 1Q09
- Cost reductions are continuing
- Competition remains rational and marketing spend is ROI focused
- Gateway's leverage issues certainly are benefitting GC
- Construction disruption at River Rock is less severe than Jan/Feb
- Hastings ramp continues to be slower than expected
The market remains stable and is potentially improving. Going forward there are a number of positive catalysts including:
- Canada line opening & relocation of the bus hub
- Opening of expansions at View Royal & Georgian Downs in 3Q09
- Easy comparisons in 4Q09
- Benefit from the Olympics in 1Q2010 - Hastings will close for 17 days, and Edgewater will have pedestrian access only, however we expect GC's other properties to benefit
THE MARKET
The British Columbia (BC) gaming market is a duopoly between Great Canadian ("GC") (41% market share) and Gateway Casinos (38% market share). Gateway was acquired by Macquarie & Crown Entertainment in November 2007. The transaction put a substantial amount of leverage on the company which will likely require a restructuring in the near future.
For the TTM ended March 31, 2009, the BC gaming market grew 1.5%. However, when we strip out the new community gaming centers ("CGC") which opened during this period, the opening of Starlight Casino, and the addition of slots at Hastings, the market actually contracted approximately 4.5%. In 2009 & 2010, there are only a couple of CGC's opening and no planned expansions. The BCLC is forecasting that BC gaming revenues will be flat to slightly down in 2009.
Assuming that there is normal weather this winter, the 4Q comparison is easy given the severe weather in 4Q08. The Olympics should provide a temporary benefit to gaming revenues in 1Q2010. Already, the infrastructure construction ahead of the Olympics seems to be benefitting the Vancouver economy. It's unclear what the impact will be post Olympics in 2H2010. Will the economy take a leg down once the infrastructure spending ends? Will the additional real estate built for the Olympics further depress pricing? Will the spotlight of the Olympics stimulate population growth?
Great Canadian Gaming Takeaways
Economic Impact: Since GC gave guidance in 1Q09, there hasn't been a material change to the trends in the BC market. It appears that things have remained stable, and even improved from Jan & Feb 2009, as the fear of a huge downturn has subsided. The infrastructure work related to the coming Olympics is surely helping employment figures in the greater Vancouver area.
Cost cutting: Cost cuts will continue to have a meaningful beneficial impact on results through 2009. The main cuts include reduced operating hours, staff reductions (both on-site and at corporate), and supplier renegotiations. We believe that these changes are sustainable until there is an improvement on the demand side to justify longer operating hours and staff. The deferred capex (like the hotel at River Rock) can come back when the demand is there.
Ron Baker: the controversial shareholder/ consultant is actually being quite helpful in instilling discipline to the organization. We personally think that the scrutiny by the sell-side of the transaction was overblown last quarter.
River Rock:
- Construction disruption has definitively subsided to a minimum. There was noise in the entrance area, and the facility felt a lot smaller, but otherwise the impact was minimal especially compared to December & January.
- Preparing to shut down the buffet for a few weeks. However, it has already been downsized and impacted by the construction.
- Canada line will be complete by Labor Day, but the grand entrance with the curving escalators won't be complete until November 2009. There is also a hub bus stop being moved right near the Canada line stop which should bring more traffic to this location.
- The convention business is holding up better than expected as many companies are keeping conferences local.
- Also getting some "staycation" business on the weekends.
Hastings:
- Still one of the most challenged properties in the GC portfolio. Ramp up from slots installed in Aug 2008 is still disappointing.
- As background, the location was and still is highly contested from the surrounding residents. The bylaws in the area prohibit any signage, making it difficult to find the property. The facility is also prohibited from serving alcohol anywhere but designated eating/ bar areas. The opening of Grand Villa shortly after the slot opening didn't help either.
Other
- Dawson's Creek CGC & Nainamo are the two properties seeing the greatest impact from the economic slump. View Royal is holding up surprisingly well as are card rooms in Washington.
- 4Q09 will benefit from easy comps, opening of the Canada line, and the opening of the new gaming additions at View Royal & Georgian Downs
- 2Q09 Earnings tentatively set for August 10th
The Competition
River Rock, Boulevard, Starlight, Grand Villa, Hastings, and Edgewater are all located within (16 miles of each other)
Gateway:
- Grand Villa is a very nice property, however, the question remains if the product is "too nice" for the demographics - ramping slower than expected, although since it has lapped the one year anniversary of the smoking ban that went in effect in April 2008, revenues and EBITDA are on an upward trend
- Focused on cost cutting (enforcing early outs, ROI focus on marketing initiatives)
Edgewater:
- Seems to be doing really well from a revenue standpoint. They have been aggressive on the marketing side, going after the lower end grind customer. Unclear if they are buying the revenues or if the marketing programs are adding to the bottom line. Either way, Hastings at least is feeling the heat.
