Century Casinos Sell-Off Overdone, Free Cash Flow Enticing, Says Analyst

Posted on: April 10, 2024, 05:03h. 

Last updated on: April 11, 2024, 09:53h.

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

Shares of Century Casinos (NASDAQ: CNTY) joined the broader gaming equity complex to the downside Wednesday as the March reading of the Consumer Price Index (CPI) came in higher than expected, indicating inflation is proving more persistent than economists hoped.

Rocky Gap Casino
Rocky Gap Casino Resort in Maryland. An analyst believes the selloff in operator Century Casinos is overdone. (Image: Oregon Live)

That concerning economic data point obfuscated some positive news pertaining to Century. In a new report to clients on Wednesday, Macquarie analyst Chad Beynon upgraded the regional casino stock to “outperform” from “neutral” while maintaining a $5 price target. That implies upside of almost 53% from Wednesday’s closing price of $3.27.

Beynon said the sell-off in the stock, which has seen it shed 32% since the end of last year while the Russell 2000 Index is up 2% over that time, is overdone.

In the past 18 months, OpCos have traded down 1.3x turns to 5.4x (OpCos down ~30%), while WholeCo multiples remained flat at 8.9x (WholeCos up 30%). Meanwhile, CNTY shares traded down from 4.8x to 3.6x (stock down 50%), the cheapest OpCo in our coverage universe (vs S&P 500 +38% and Russell 2K +17%),” wrote Beynon.

Because it doesn’t own all of the real estate on which its gaming venues reside, Century is considered an operating company (OpCo).

Catalysts Abound for Century Casinos Rebound

With the stock currently struggling, there’s increasing belief that Century is a 2025 story, indicating investors may have to be patient with the name.

That patience could be rewarded because the operator could generate earnings before interest, taxes, depreciation, and amortization (EBITDA) of $168 million on revenue of $700 million next year, according to Beynon. With that comes the possibility that the operator could notch 85 cents a share in free cash flow — an impressive sum for a company with a $101 million market capitalization and a $3.27 share price.

Beynon sees Century’s pair of Missouri casinos as well as its Maryland and Reno venues acting as potential catalysts for the shares.

“Several near-term catalysts, including The Riverview opening (April 4), Poland re-licensing (currently run-rating ~$6m of EBITDA vs ~ $12m prior), and completion of Caruthersville (4Q24). Moreover, we now anniversary the takeovers of Rocky Gap (July 2023) and Nugget (April 2023), which had some initial learnings,” observed the analyst.

Century Casinos Has Growth, Value Traits

At the end of last year, Century’s leverage stood at 4.9x, but that’s expected to jump to 5.6x by the end of this year due to the operator’s Missouri plans and efforts to ramp up the Nugget and Rocky Gap. However, that leverage ratio could decline to 4.8x “marking the largest one-year deleveraging in our coverage,” noted Beynon.

Reducing debt could foster confidence among investors as could solid execution at the Maryland and Reno properties, which are viewed as integral to the long-term thesis on the stock.

“CNTY is a unique value/growth story with two renovation projects that we believe will earn a mid-teens return on $82mn spend. In addition, the Nugget and Rocky Gap acquisitions should further drive medium-term growth,” concluded Beynon.