Have done a brief write up on Century Casinos on my website and have pasted it below.
My largest setback in analysing them is that a) I don't gamble so I've never even entered a casino! and b) I don't know places like Alberta well enough to know what the gambling community there are like. I'm just judging the business from the financials that I see.
Tbh, I don't even think I'm ever going to buy shares in them. Seems a little immoral, but working the exact situation out is quite fun! Haven't written out the whole full history because it's quite dense and boring, but am happy to answer your questions.
Century Casinos, Inc. (contrarianstocks.com)
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....Century Casinos (NASDAQ: CNTY) who operate mid-sized casinos primarily across North America in places such as Missouri, Colorado and Alberta -- they also operate a handful in Poland. In the past year, the share price has crashed more than 70% to a valuation of about $80m or $2.75/sh. This equates to a PSR (Price-to-Sales Ratio) of less than 0.2x (whilst revenues are actually expected to increase over the next twelve months!).
The reason for the sharp decline comes down to onerous long-term liabilities combined with higher risk-free rates. There is seemingly too much leverage embedded within the operations of the business and necessary capex is proving to be very expensive which will be discussed in more detail later on in the piece.
As an aside, these are the situations I love the most. The stock is stuck in no man's land and the question that needs answering is simple. Is it going to zero or are Century Casinos going to survive long enough to generate positive earnings once more? The stock, from a fundamental standpoint, has no choice but to resolve either significantly up or down. And you have a rare, golden opportunity to piece it all together faster than the market. Let's delve deeper...
If we casually eye operating income for the last four quarters, you'll realise that Century have earned $63m before interest and tax. This means that NOPAT (assuming a 21% tax rate) totals about $50m for that period. At a market cap of $80m, you'd be paying 1.6x NOPAT (ttm). Perhaps it's even cheaper if we consider the future with macroeconomic conditions seemingly improving. For what its worth, TEV/EBIT also stands at a reasonable 11x.
The problem, as you can probably guess, is the interest. Interest expense in the first nine months of 2023 totalled more than $67m which amounted to close to 17% of sales. Such a situation is burdensome when cash flows are still pretty weak at this point - more so, when you consider revenue has increased 26% annually between 2018 and 2022 (inorganic growth, of course). For reference, in the first three quarters of 2023, Century generated only $28m from operations and they spent $150m on two acquisitions. You can claim "one-time" but, even then, they spent $42m on capex. Again, you can break it up into growth and maintenance. Assuming D&A charges equal maintenance capex, Century still don't cover maintenance capex (which would have totalled about $30m for that period).
So, how are they financing all of these acquisitions and capital expenditures? Well, they utilised a $160m sale-leaseback this year and (in 2022) they borrowed $350m (in the form of a Term Loan) from Goldman Sachs that matures in 2029 meaning they were sitting on $189m in cash at the end of the third quarter. It is important to note that the term loan requires quarterly payments of $875k (or $3.5m annually) and the remainder ($330m) will be paid at maturity. The annual interest rate on the Term Loan is floating and, as of 3Q 2023, that rate stood at a steep 11.15%. (No part of my thesis relies on rate cuts but it'd undoubtedly be a speculative catalyst to throw into the mixer). What you should also note about the Term Loan is that 100% of asset sales and 50% of excess cash flow must be used should be used to reduce the debt balance.
There is also a $30m revolving credit facility that Century can tap into should they need to (maturity in 2027). You should note that they did use the facility for one of their acquisitions in July 2023 and paid it back in full by September.
The above would undoubtedly frighten most shareholders and should delight the Goldman bankers. They've done a pretty neat job in tying the noose around Century's neck. Well, if it did frighten you, you should probably cover your eyes right about now. Wait until you read about the long-term financing obligation...
The long-term financing obligation (aka the Master Lease), formally recorded as a failed sale-leaseback obligation, was created in 2019 between Century and VICI PropCo when Century bought, sold and leased back casinos that they had acquired. The idea at the time was by borrowing money to acquire casinos, selling the real estate and by keeping the operations, Century could comfortably double their revenues and maintain margins. Unfortunately, just as they made the arrangement, the pandemic hit.
Since the recovery from the pandemic, Century have continued with the strategy by adding more properties to the Master Lease with the annual rent standing at over $55m. It is important to note that the annual rent increases by either 1% or the CPI rate annually. With inflation running much hotter than in recent years, we can assume that the 1% escalation won't be used often. It's another painful pill for shareholders to swallow.
What you should also note is that a portion of the payments under the Master Lease are recorded as interest expense with the remainder set to reduce the failed sale-leaseback financing obligation using the effective interest method. It is important to realise that the $654m obligation on the balance sheet is an estimate using a discount rate of 8.9% and a time frame of 35 years (the actual Master Lease has a term of only fifteen years with an option to extend four times for five years - Century have already exercised one five year extension).
With high rent costs, even higher interest costs and restrictive covenants put in place, you can understand why the market has brutally shrugged off Century.
On top of this, future capex has to be considered. Century are constructing a 69-room hotel opening in the first half of 2024 with an estimated $15m cost in 2024 (with the total cost being $31m). This example is growth capex, but what about maintenance capex? According to Century's management, renovations will set back Century another $35m when all is said and done. 2024 is looking to be pretty expensive...
When you fully consider rent, capex and interest payments you quickly realise that Century have roughly $150m worth of necessary cash outlays hitting them in 2024. I want to remind you that they had $189m in cash at the end of the third quarter and they are guiding to about $171m at the end of the fourth quarter.
And we're yet to even considered working capital requirements. With $93m in current liabilities and $38m in current assets (excluding cash which can be assumed to be prioritised on the above), there's a significant hole that needs filling through cash flows or their revolver. It's definitely going to be tight...
As an analyst, if I'm being honest, I haven't got high hopes for the next twelve months. We know Century can generate high yields (in relation to the market cap) of EBITDA and operating income but the real question is how does Century become free cash flow positive from here? Management have already answered that question citing that 2025 will be the year where the earnings potential of Century is proven through all of this capex. What I took from that statement is simple; 2024 can be assumed to be another write-off year.
In essence, the bet can be simplified to something along the lines of; can Century keep going for a year and will the economy remain strong until that point and thereafter? I'm not an economist so I cannot answer the latter but I'm fairly confident that Century can keep going for another year. They can also engage in more sale-leasebacks should they feel it necessary (though, they only own the real estate of two more casinos) and they can use cash flows to meet shortfalls in working capital. Further, should they need to (for liquidity purposes), they have access to the $30m revolver.
As an investor, I'm looking for a margin of safety, not in the form of liquidation value, but from a going concern value. (To be clear, I see very little value in the balance sheet even if on a GAAP basis the share price trade at 0.6x book. I actually think it's very possible that adjusted shareholders' equity may be negative.) If Century do pull through, how cheap does the valuation get for me to bite? I think a sub-$60m valuation is very tempting which is a 25% drop from here.
I have to point out (just in case you didn't realise) that Century aren't in the leagues of MGM or Caesars. They're more niche, operating in less flamboyant areas, catering to different demographics and, now, unlike periods in the past, they are more vulnerable to rising rent costs which almost puts them in an entirely different industry to the Las Vegas monsters that they are often lazily clumped together with.
For now, I own zero shares of Century. After all, whilst its cheap it's not irresistible. I'm also pretty happy with my portfolio and am fully invested in stocks mentioned elsewhere on this website. As for the near-term technicals, the stock is breaking its 52-week lows daily. Where is the support? At this moment, it is nowhere to be seen.
Having said that, both co-CEOs have recently (in the last six months) dipped their toes in the water buying $217k worth of stock at prices between $5-6/sh. It's important to note that both Mr Hoetzinger and Mr Haitzmann co-founded the business in the late nineties and have continued working at it. This must provide some reassurance to investors with longer-term horizons.
A final potential catalyst is that Century have the ability to repurchase $14.17m of the common stock which, at current valuations, amounts to close to 18% of shares outstanding! It's definitely an unlikely catalyst for stockholders at this time (when cash has to be used extremely carefully), but if the business stabilises and there is sufficient cash on hand a year (or two) from now, I don't see why management wouldn't start buying back the stock. |
