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Hail Caesars

Preparing for the coming-out party

Hail Caesars

Caesars Entertainment recently held what might be called a pre-coming-out party.

The company hosted sell-side analysts at a day-long program in Las Vegas to give a view of what CZR will look like after it reorganizes based on the structure approved by bankruptcy court in January.

Aside from the financial details, the clear message is that Caesars will, for the first time in years, be free to act like every other major casino company in growing its business and serving shareholders.

The company also used the opportunity to make the point that has long been a theme of CEO Mark Frissora—that operationally, CZR has steadily been growing EBITDA through higher revenues and lower expenses during his two years at the helm.

Some statistics to support Frissora’s point:

  • EBITDA margins have improved from 18.4 percent in 2014 to 26.4 percent.
  • Revenue in Las Vegas has grown 13.1 percent from 2014 to 2016, outpacing MGM Resorts, Las Vegas Sands and Wynn.
  • CZR exceeds fair share in every market except Atlantic City, Philadelphia and Iowa, where it is exactly at average.
  • The company has added $756 million in EBITDA even though constrained by the bankruptcy process. Part of that is because of greater efficiency. Marketing expenses have fallen from 27 percent to 22 percent of revenue, while revenue per full-time employee has grown from $167 to $204.

So, where will CZR be upon reorganization? As has been well reported, CZR will be an operating and property-owning company, though many properties will be owned by a new, as yet-to-be-named REIT.

Debt will be reduced and leverage ratio cut from 14 times in 2014 to 4.2 times, or 5.7 times counting obligations to the REIT and a $1.1 billion convertible note that matures in 2024.

CZR will put a new emphasis on cash flow rather than EBITDA, and projects free cash flow to grow to $507 million next year and reach $940 million in 2021.

While CZR is still the world’s biggest casino operator with 47 properties globally and a big regional presence in the U.S., Las Vegas will generate 66 percent of EBITDA.

CZR expects to get there through a variety of ways:

  • Hotel room upgrades, which have already helped raise hotel revenues by 17 percent. By 2020, 88 percent of Las Vegas rooms will have been refurbished, allowing for higher room rates. Each $10 in cash average daily rate adds $70 million in EBITDA.
  • Other refurbishments will be elsewhere in the properties, including updating slots in casinos.
  • Costs. CZR has removed $800 million a year in expenses and expects further reductions with much of that thanks to new technology, such as replacing the multitude of proprietary software systems with far fewer systems provided by a handful of leading vendors.
  • Higher revenue opportunities in various areas. CZR expects to reverse the percentage of EBITDA growth from 70 percent coming from savings to 70 percent coming from higher revenues.

Finally, CZR expects to be a full competitor to its peers, assertively seeking to grow through acquisitions, pursuing major international development opportunities, including Japan, and further developing its excess land along and near the Las Vegas Strip.

Where does that leave investors?

The number of shares will grow from 157.751 million now to 713.3 million upon reorganization, to 856.629 million after the note conversion.

At present, and based on the recent stock price of $11.20, CZR figures it is valued at 8.7 times enterprise value to EBITDAR.

With the reorganization having won court approval, CZR is now in the process of winning regulatory approvals, and expects to launch its new structure in September or October.


Oh, Boy. Boyd Is Back

Boyd Gaming has been making steady progress for several years, and the company looks like it could break out in 2017.

The results were clear in the first quarter as earnings per share jumped 45 percent to a consensus-beating 22 cents, and adjusted EBITDA jumped 13.15 percent to $155.8 million.

Those strong results and Boyd’s confident outlook caused the company to restore a quarterly dividend, starting with a 5-cent-a-share payout in July.

Boyd also reiterated its previous outlook that it will generate $585 million to $605 million in EBITDA this year.

One reason for Boyd’s strength is its decision to buy three more casinos in the Las Vegas locals market.

In the first quarter, BYD reported a big jump in EBITDA thanks to those casinos—Aliante and Cannery in North Las Vegas and the East Side Cannery on the Boulder Strip.

EBITDA jumped 49.59 percent to $66.23 million. The locals market comprised 38.07 percent of BYD’s property-level EBITDA.

Further, Boyd appears to be getting a bigger boost as those submarkets grow, at least if April is an indication. North Las Vegas revenues leaped 18.02 percent to $23.572 million and Boulder Highway jumped 19.03 percent to $63.875 million.

North Las Vegas and Boulder Highway far outpaced the overall locals market, which rose 8.97 percent.

In addition, revenue in April for Downtown Las Vegas jumped 21.89 percent to $52.295 million. Given that Boyd has nearly 40 percent of Downtown revenue, that nearly 22 percent gain is a boost to BYD, assuming it maintained market share.

Downtown provided BYD with 7.84 percent of its property-level EBITDA in the first quarter.

So, draw a few inferences from April’s sub-market revenue growth and extrapolate based on first-quarter results, and Boyd might be getting a bigger boost in Las Vegas than many had expected.

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