Seeking Alpha

# Douglas Hoyt's  Instablog

Douglas Hoyt
Send Message
I am a 55 year old transplanted resident of Colorado, originally from Massachusetts, and a graduate of Merrimack College. I have 15 years of experience investing in undiscovered value stocks with high growth potential.
• ##### 2011 EPS calculations for Asia Entertainment (AERL)
2011 net income guidance is \$62-68M.

Q1 RCT total is \$4.072B.

Translating to \$16,288,000 in net income for Q1. (NI is 0.040% of RCT.)

With no growth in RCT for the year that is \$65,152,000 in net income (\$16.288M x 4 quarters)

We know cage capital grows each month and that business in Macau continues to grow. So my assumption is they will pick up another \$3M in NI organically over the last 9 months and hit the high end of guidance making my baseline net income \$68M for 2011.

Based on management's comments relating to the new Galaxy room lets assume they start with 8 tables and get to 12 fairly quickly. So I'll use 10 as the average for the 7.5 months they'll operate the new room in 2011.

Using very round numbers, 10 tables is roughly 40% of the current table count. Lets use \$5.5M as the baseline monthly net income number (\$68M divided by 12 months is \$5.6M, slightly higher than what I'll use to calculate with). 40% of \$5.5M is \$2.2M, which I assume they will make from the new room for 7.5 months, so \$2.2M x 7.5 months = \$16.5M.

Add \$16.5M NI to my assumed, baseline full year net income of \$68M and you get \$84.5M in net income for 2011.

From the last CC we know they said the actual OS count at the end of 2011 will be 39M shares, and the weighted count to figure EPS against will be closer to 35M.

For the headline number...\$84.5M NI divided by 35M shares is \$2.41, for a forward p/e of 3.3.

For the number people will focus on....\$84.5M NI divided by 39M shares is \$2.16, for a forward p/e of 3.7.

This for a company with no fraud risk.

May 04 5:20 PM | Link | Comment!
• ##### Misunderstood in Macau

O

AERL's business is booming.

Full year revenue jumped to \$127M from \$60.5M in 2009, up 110% YOY. Income went from \$15.6M in 2009 to \$38.1M last year. GAAP EPS for 2010 based on the fully diluted weighted share count of 17.5M shares was \$2.17.

Eye popping numbers I'm sure you'll agree. So how did the market respond to the news? Not well. The stock lost \$0.93 or about 10% dropping to \$8.67 or 4x trailing EPS. The reason for the decline appears to be investor confusion about the issuance of shares to the founding owners based on income metrics that were met in 2010. Something the company gave granular detail about in its SEC filings. I think investors have been presented with a buying opportunity based on an over reaction to what should have been an anticipated event. Here's why.

First, it's important to understand the reasons for AERL's outstanding growth. Their revenue grows in relation to the amount of "cage capital" it has available for its customers to gamble with. The cage capital recently got a boost from the exercise of outstanding warrants that netted the company some \$35.5M in late 2010. Also in late 2010 the company acquired King's Gaming Promotion Ltd., allowing it to expand from operating in two VIP rooms to three. These events account for part of the growth story. The other part is due to the ever increasing amount of cage capital that accrues as AERL reinvests its profits creating a virtuous cycle of higher revenue.

Giving further comfort to those who may consider AERL's story to be "too good to be true" in light of the almost daily occurrence of fraud allegations in the Chinese small cap space (AERL is a Hong Kong based company) are the external controls over their reported revenue. Gambling regulators in Macau, as well as the casinos AERL operates in, regularly audit AERL’s results making the chance of inflated numbers a virtual impossibility. These results are announced on a monthly basis by AERL in the form of "Rolling Chip Turnover," a measure of gambling volume, to enhance investor visibility in to how the business is performing. This distinction from the often-opaque operations of other companies can not be overstated. In my opinion it means that the stock merits a multiple of earnings far higher than it currently receives since it appears to be lumped in with companies with high fraud risk exposure.

Looking forward to 2011 the company has guided for \$62-68M in net income, a roughly 70% increase over 2010 at the top end of the range. Based on the release of results for the first two months of 2011 the high end of guidance looks very achievable. Of significance here is that guidance does not include any additional VIP rooms they may add to their portfolio this year. This despite all indications that the company will accept an invitation to open a room in the new Galaxy Macau Hotel and Casino opening in May. AERL will need time to hire staff so they will likely not start operations there until July. Still, this room could add enough net income to put the annual figure close to \$80M. Even with the updated share count after the issuance of incentive shares for 2010 \$80M in NI would put EPS around \$2 in 2011. Management has indicated this room could eventually support as many as 12 baccarat tables, adding roughly 50% to the current count of 23 that they operate in the other three rooms. One more bit of good news coming out of Friday’s (4/1) conference call is that AERL has been the subject of industry analyst interest so coverage is a distinct possibility.

The combination of Macau’s continuing growth

ne of the more noteworthy secular growth stories happening in the world these days can be found in the bustling casinos of Macau. Asia Entertainment and Resources (AERL) is a NASDAQ listed company benefiting from Macau's emergence as a premier international gambling destination. The company is a VIP room gaming promoter operating in three casinos in Macau, the MGM Grand Macau Casino in downtown Macau, the Star World Hotel & Casino in downtown Macau, and at the Venetian Macao Resort Hotel on the Cotai Strip. The company just released its first, full year, audited financial report since they acquired all of the outstanding capital stock of Asia Gaming & Resort Limited on February 2, 2010. For a more complete overview of the company go to their web site at……ir.aerlf.com/index.cfm.http://finance.yahoo.com/news/Macau-Gaming-Revenue-indie-989768462.html?x=0&.v=1 and AERL positioning itself as a player in their niche, in my opinion, makes the stock a compelling investment at its current price of \$8.67, less than 5x 2011 (e) EPS. I believe a more appropriate valuation, at a minimum, given the high level of assurance that the numbers are real is 10x my forward EPS estimate for 2011 (not including potential additional rooms) of \$1.80 or \$18.00.
Tags: IKGH, LVS, WYNN, MPEL
Apr 06 10:11 AM | Link | Comment!
##### Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.