From Mcdermid
LAKE CITY GAMING (LCG-V, $3.74) – BUY SCOT ATKINSON, CFA
(604) 659-8225
Penticton Casino Gets the Green Light
Lake City has received final approvals from the BC Lottery Corporation (BCLC) and the provincial
government to go ahead with the establishment of a casino in the city of Penticton, British Columbia.
Construction of this new casino, which was approved in principle in August 1998, has started and
we anticipate an opening in May, 2000. The casino will be an addition to The Penticton Lakeside
Resort, a 200+ room hotel located on the beach front of Lake Okanagan. As stated in our initial
report dated December 8, 1998, this site has the potential to add up to $0.18 to EPS on an annual
basis.
Earlier this week, the New Democratic Party provincial government made an announcement that
there would be no further expansion of gambling in BC. Lake City's Penticton site was one of the
few locations pre-approved to go ahead. The government's announcement is both good news and
bad news for Lake City. With a moratorium on new casinos in BC, Lake City will have limited
competition and the Company's premier casino locations will be that much more attractive as
destinations for tourists and bus tour operators. However, the opportunities for Lake City to grow
within BC are now restricted to acquisitions of existing casinos. Although Lake City has aspirations
of expanding outside of BC, we believe this will be a significant challenge and we have not yet
factored this potential into our estimates.
The BCLC has also amended its agreement with Lake City to place constraints on the ownership of
shares in the Company. Going forward, no investor will be able to own more than 10% of the
outstanding shares without prior consent of the BCLC. In addition, an owner who does own more
than 10% will not be able to trade an aggregate block of shares exceeding 1% of the issued capital
without prior consent of the BCLC.
In a related announcement, the pending agency agreement to allow Fred Glasgow, Lake City's
majority shareholder, the right to sell 7,000,000 shares did not receive the required government
approvals and the agreement will expire. We view this as a negative announcement because we
believe the sale would have enhanced liquidity and removed majority voting control but we are not
overly concerned. Any future sale by Mr. Glasgow is subject to the amended share ownership
constraints.
Additional employee training costs at the new Kelowna facility should impact the current fiscal
fourth quarter and we estimate EPS for the fiscal year ending June 30, 1999 to come in around
$0.29. With the delay in the startup of the Penticton site (we originally anticipated Penticton would
open in December, 1999), we now expect F2000 EPS to be $0.46. In F2001, with all four casinos
fully operational, we believe Lake City has the earnings power to generate EPS of $0.65. Our
12-month target for Lake City shares remains $5.00, providing a return of more than 33% from
current levels. Without factoring in any additional expansion, our longer term target is $6.50 based
on F2001 EPS of $0.65 and we rate Lake City shares a BUY.
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