Century Casinos Undervalued With Significant Upside Potential, Says Analyst

Posted on: July 20, 2020, 09:12h. 

Last updated on: July 20, 2020, 03:05h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Century Casinos (NASDAQ:CNTY) trades at valuations that are significantly below those sported by comparable gaming companies. But at least one analyst says that disconnect should evaporate as more investors embrace the Century story.

Century Casinos Undervalued, Says Analyst
The sportsbook at the Mountaineer Casino in West Virginia, one of the properties boosting the case for Century Casino’s stock. (Image: WTRF)

In a note to clients today, Roth Capital analyst David Bain reiterates a “buy” rating on the regional casino operator and a 12-month price forecast of $11, implying significant upside potential from the $3.80 area at which the stock currently resides. In the US, Century operates a pair of casinos in its home market of Colorado, as well as gaming venues in Missouri and West Virginia. Like many of his colleagues, Bain currently favors regional operators.

“We continue to favor regional casino assets in the current environment, given proximity to patrons, lower fixed costs than destination/Strip properties, less reliance on food and beverage/conventions/hotel room occupancy/rate and less unionized labor,” said the analyst.

“Further, low-margin amenities, such as buffets, and higher cost competitive marketing programs are unlikely to return to pre-COVID levels in the near-to-intermediate term, structurally augmenting margins,” he continued.

With a market capitalization of $113.61 million, Century is one of the smallest publicly traded domestic gaming companies. The stock was hammered by the industry shutdown forced by the coronavirus, plunging to $1 in March from around $9 in February. Shares of Century rallied to trade above $6 last month, but subsequently gave back much of those gains.

Cheap Compared to Peers

Bain estimates that Century trades at just 3.8x expected 2021 free cash flow (FCF), and 3.6x and 3.0x 2021 and 2022 enterprise value/earnings before interest, taxes, depreciation and amortization (EBITDA).

Those are substantial discounts to the broader regional gaming peer group, which trades at 8.8x and 7.7x next year’s and 2022’s enterprise value/EBITDA, according to the analyst. Bain notes that if Century were to trade at the average multiples of comparable operators, the stock could jump to around $14.50, or roughly quadruple where it resides today.

“Combined with its extraordinarily low valuation (in our view) is CNTY’s weighting to hyper-local markets, structural shifts to higher margins, unique ability to acquire potentially underpriced regional assets, and lack of new company-specific competition for ~two years,” said Bain.

Profitable Acquisitions

Last year, Century agreed to acquire the operating rights of the Mountaineer Casino Racetrack and Resort in West Virginia, and the Isle Casino Cape Girardeau and Lady Luck Casino – both in Missouri – from Eldorado Resorts (NASDAQ:ERI). Those deals are paying off, as June gross gaming revenue (GGR) at the Missouri properties jumped 27 percent, while GGR at the Mountaineer was up 25.5 percent compared to a broader West Virginia increase of just one percent.

Outside of the US, Century owns stakes in nine Poland casinos and five in Canada, as well as the Southern Alberta pari-mutuel network. Bain notes channel checks indicate play at the company’s Poland venues returned to 80 percent of pre-COVID levels.

The analyst points out that with $50 million in cash, Century has the resources to survive seven months in a zero-revenue environment and that it could alter credit agreements and potentially sell one of its smaller Canadian assets to extend that timeline if need be.