Some months ago, April actually, I posted an analysis on a small cap named Lakes entertainment. From that point on, lakes’ shares ran uphill from 1.87$ to a little over 3$ (may 29) for a net return over 60% in 2 months or an annualized return of 362%! That would be great if I could produce this type of return on every investment…but I cannot. Actually, Lakes saved my portfolio this year. I invested 10% of my portfolio in it and everything else tanked in the last two months. Anyhow, I’m sure you are more interested in LACO then my personal records, and so should you.
Let’s update the situation following the numerous activities and news on lakes since our first post.
Lakes bought back its partners in Evitts last week for under 600k cash. They are now the sole owners of Evitts resort.
The resort got a license to establish a 1000 slot machine operation in its walls, the first casino to open in the state. Estimates of EBITDA are hard to make, but Lakes management assured the they could get up to 27m in taxes in the first full year.
Rocky Gap has the potential to earn enough as a slots emporium to satisfy everyone, according to Lyle Berman, chairman of the board and CEO of Lakes Entertainment, who has said the firm estimates Maryland could earn as much as $27 million during the first full year of operations. Berman has said the lodge at Rocky Gap will remain open during construction.
The financing required to upgrade Evitts is not settled yet. They need over 62m for phase one and up to 148m total including phase 2 (hotel rooms, event center, etc.). They plan to invest 17.9 in cash and finance the rest.
What is the confidence level on this would you ask? Fairly good. I would expect operations (phase 1) to start in 2014 or more after a year or so of construction and 3-6months of financing and architectural design. Building permits are scheduled to be reviewed on June 20th.
27m expected EBITDA still adds a great deal of value to LACO even if it is postponed or sold to someone else. You may then account for 4m interest (10% on 40m) and no taxes (evitts and lakes posted losses in many of the previous years which resulted in taxes provisions of 5m) and you are still left with an healthy profit of 23m.
Is the 27m a wished target or a reasonable one? Well, the original plan is to install 850 slots. If a casino operating 2100 slots generates an EBITDA of 135m (penn), a 850 slots could generate up to 60m! I know, penn offers all kind of games and have economy of scales but cutting profits in half seems reasonable.
But these are wild guesses.
Rock Ohio Ventures
The Cleveland casino started its operations this month. We will see the results shortly, but Cincinnati is in progress to. Target opening of Cincinnati in 2013 will double the profitability of this venture. I assume most of the free cash flow in 2012 derived from phase 1 will be used to finance phase 2. Lakes should not have to invested more money before phase 2 completion. But even so, they still have 39m ready if need be (less 17m reserved for Evitts) and the additional amount that may be required is 9m. Our estimated 15m return per casino per year still seems reasonable (10% interest in 80% ownership).
I’ve also found out in the last 10k that the Cinccinati racetrack is included in the deal!
This investment was not reevaluated in 2012 and is still accounted at cost. Investment will probably be restated in the next quarter or two due to Cleveland operations. I expect major non-cash profit on investment in 2012.
Expenses have been reduced and the company is now trying to get as much as possible from the receivable. Cash actually increased in q2 (1-2m). Evitts is now consolidated in the financial statements. It is unclear Evitts portion from the rest but it does not seems to pull LACO down.
Original thesis was 10xEBITDA but I did not include Evitts (still waiting license approval).
Now let’s see EBITDA values
Total 57m EBITDA per year.
EBITDA valuation for casinos usually is between 8 and 12. Let’s use 8 and cut expected EBITDA in half and we still get a company value of 228m compared to a market cap of 80 and we could even substract the net cash from it (40m) to get a company value of 40m at the current market price. But assuming the projects will require the cash I’ll assume a full market cap.
Share expected price would then be 228/26.5 shares or 8.60$/share a gain of 5.60 or 186% on the current market cap.
Disclosure : author is long LACO.