We are extremely impressed by Asia Entertainment & Resources (AERL) management who overwhelmingly prove their interests are fully aligned with their public shareholders.
The 2011 dividend is estimated to be $0.25 per share for an implied yield of 3.9%. This is based on a 2011 net income forecast of $70.7 mn vs. $65.2 mn. The 2011 forecast is conservative since it assumes $1.6 bn rolling chip turnover per month for the remainder of the year vs. $2.0 bn indicated last month. The 2011 net income estimate would be $10 mn higher, assuming a $2.0 bn rolling chip turnover per month. A higher win rate of 1.25% is assumed without the drag from the MGM win/loss commission structure.
The 2 mn share buy back provides a meaningful additional back stop to the share price considering the 9 mn share public float and the average daily volume of about two hundred thousand shares.
AERL Much More Compelling Than Its Peers
This news should erase doubts of the validity of AERL's business and as a result AERL should break away from the China small cap bear market and start to catch up to the strong performance of its large cap peers who have had a great run during the past few months.
Simply put, why would an investor pay 12.3x 2012 EV/EBITDA for Galaxy (27 HK) when they can buy one of Galaxy's most significant revenue generators for 2.8x 2012 EV/EBITDA and get paid an attractive yield? Similarly, in the US market, investors have bid up Melco (MPEL) to close to a 52 week high valuation of 11.5x 2012 EV/EBITDA with no dividend, when they could buy AERL at 1/5 the valuation and with an attractive dividend yield.
AERL's dividend and buyback demonstrate the advantages of AERL's asset light business model. While AERL's bricks and mortar peers have significant debt commitments and capex projects, AERL's cash balances have reached the level where it has the financial flexibility to invest in its business for continued growth and the ability to return capital to its shareholders via dividend and share repurchases.
- Expect 2011 net income guidance range to be raised towards when Q2 results are released in early August.
- Initiation of sell side coverage – currently no sell side coverage.
- Continued strong monthly chip turnover updates.
No Signs of Too Good to Be True Metrics/Fraud
- Net income / chip turnover of about 0.40% is in line with report results from other public listed VIP operators Neptune (70 HK), Dore (628 HK) and Long Success (8017 HK).
- Casino partners are top tier publically listed Galaxy (27 HK), Sands China (1928 HK) and MGM Macau (2282 HK) which gives assurance that revenues of AERL are easily auditable.
- Management has been buying stock in the open market.
- $800k of purchases in May.
- Short interest is low, 303,689 shares as of 06/15/11.
This announcement should mark the end of AERL's downtrend and the beginning of new uptrend. AERL is a strong buy at current levels.
At $13.00 AERL would trade at a 45% discount to peers, $23.00 to be in line with peer valuation