Century Casinos Inc.: Reopening Is A Positive, But Don't Roll The Dice For More Upside

Summary

• Century Casinos reported Q1 earnings in May impacted by temporary closures of worldwide properties amid the pandemic.
• While the stock is still down in 2020, CNTY has rallied an incredible 510% from its low in March with a stabilizing outlook as its casinos are set to reopen.
• We expect overall weak fundamentals, including negative earnings and a high debt position, to limit upside from current levels and also considering ongoing uncertainties.
• This idea was discussed in more depth with members of my private investing community, Core-Satellite Dossier. Get started today »

Century Casinos Inc. (NYSE:NASDAQ:CNTY) reported Q1 earnings highlighted by the unprecedented disruption as the company was forced to temporarily close all properties amid the COVID-19 pandemic. While the stock traded with an extreme level of volatility in March, a stabilizing outlook has driven an impressive rally in shares that has gained momentum with reports of facilities on reopening. The company benefits from its small-market focus by catering to local residents. Management expects this segment of gaming can recovery faster compared to "destination" casinos that are more dependent on air-travel vacationers. Recognizing some positive developments, we take a cautious view on shares of CNTY considering ongoing social distancing rules that will continue to pressure the earnings outlook. We think the rally has run its course and the risks are now tilted to the downside.

(Source: finviz.com)

CNTY Q1 Earnings Recap

Century Casinos reported its Q1 earnings on May 20 with a non-GAAP EPS loss of $1.55 per share representing negative income of -$45.9 million. Revenue on the quarter at $87.7 million beat expectations by $2.4 million and was up $92% on a year-over-year basis.

The increase here is related to the company's acquisitions of three properties in December 2019 including "Mountaineer Casino, Racetrack & Resort", "Century Casino Cape Girardeau", and "Century Casino Caruthersville". Also, keep in mind that the casino closures from March 14 occurred at the tail end of the quarter while it was large business as usual in the period between January and February. Separately, the company also opened the Alberta, Canada "Century Mile Racetrack and Casino" property in April 2019 which contributed to the year-over-year sales gain.

(Source: Company IR)

Management noted that trends early in the quarter through mid-March were strong across various properties, up on a comparable basis compared to Q1 2019 prior to the closures. The operating loss and negative income included a $33 million impairment charge considering the circumstances with management citing the impact to goodwill and the license value of operations. Excluding this amount, a measure of "adjusted EBITDA" at positive $9.6 million was up from $6.7 million in the period last year. Still, as most of the properties remained closed through April and part of May, the financial impact is expected to continue through Q2.

The strategy in recent months has been to cut expenses and conserve cash. Century Casinos furloughed 90% of employees while most variable operating costs were also significantly reduced. That being said, other expenses like rent, utilities, real estate taxes, and debt interest payments continue to represent a significant cash burn with essentially no revenues through the shutdown period.

The company drew $17.4 million on its revolving credit line. Management estimated the company was losing approximately $8 million in cash per month, while it reported $50 million of cash on hand. The company expects to have an adequate liquidity for the immediate term. From the conference call:

"The Company has no remaining availability under these credit facilities. As of April 30, 2020, the Company had $50.0 million in cash on hand. The Company currently is not generating any revenue from its properties, and estimates that the net cash outflow during the time the operations continue to be fully suspended will be, on average, approximately $8.0 million per month. Management estimates that the Company will need approximately $19.8 million to reopen operations and cover short-term cash needs at the casinos."

Considering the debt-funded acquisitions from 2019, the company ended the quarter with $204 million in total debt at the end of the quarter compared to $69 million in Q1 2019. Based on a current net debt position of $140 million, Century Casinos reported a net debt to adjusted EBITDA leverage ratio of 4.2x. While elevated, the company has no near-term maturities and remains in full compliance with covenants. With Q2 expected to be again weak for earnings, the leverage ratio should climb higher before improving and stabilizing through Q3 as operations normalize. Overall, the debt position is a weakness in the company's fundamentals, but we believe the company will at least remain financially solvent through this challenging environment.

(Source: Company IR)

Properties are now Reopening

The latest development has been ongoing progress in reopening the casino properties beginning with the Poland operations of eight casinos in the country on May 18. For context, Poland represented about 10% of the company's adjusted EBITDA prior to closures. At Century's West Virginia ”Mountaineer Casino, Racetrack & Resort", the first horse race occurred on May 31st while the gaming floor restarted on June 5th.

While the schedule for reopening each property is dependent on local regulations, the company expects most facilities to reopen in June and no later than August. Importantly, the Missouri casinos are expected to reopen in the coming weeks, which is the largest market for the company driving over half of firm-wide adjusted EBITDA.

Some of the measures legally required to reopen include enhanced safety precautions such temperature checks and reduced levels of gaming, restaurant, and entertainment spaces. The use of gloves and face mask by employees along with continuous disinfection will be utilized at all locations. Management mentioned that slot machines represent the largest source of revenue for the company and a 50% capacity rule is logistically easy to implement. Favorably, since the company always has an abundance of slots at its casinos, it is rare for occupancy to be above 50% at any given time during normal operations anyways. By this measure, they do not expect gaming revenues to be significantly impacted given new social distancing rules, but there is more uncertainty to traffic trends going forward.

Management Outlook

While not offering financial guidance for the year, management maintains an optimist outlook looking forward to a ramp-up period. There is an expectation that the first customers returning should be "pure-gamers" while amenities and entertainment options will be limited for the immediate future. Early reports suggest there was a surge of visitors to the properties in the recent opening weekends, possibly driven by pent-up demand.

The company as an independent casino operator benefits from its focus on small markets and "local gaming" catering to community residents. Management believes this segment of the industry is better positioned to recover faster compared to "destination gaming" like those in Las Vegas which are more dependent on vacation travelers. Century Casinos counts on a loyal customer base of older people including retirees with fixed income, which is seen as a more resilient gaming customer, compared to other segments amid economic uncertainty. From the conference call:

"In addition, we offer a comparatively inexpensive gaming experience, one that is often still affordable in economically difficult times. So, from everything we can see and from what industry consultants are forecasting, local gaming should ramp up considerably faster than destination gaming. The reopenings will probably be limited from an amenity perspective and we will probably see a more pure gamer that comes to the facilities, at least initially. On top of that, don't forget, most of our customers in the local markets are people who are not in the active workforce, people with pensions with fixed income plus, they also get the stimulus check from the government."

In terms of the market consensus, estimated full-year revenue at $243 million represents a year-over-year increase of 11.4%. This includes the boost from the major acquisitions in 2019 which doubled the size of the company, adding approximately $220 million in revenues. The annualized run rate from Q4 2019 revenues was $335 million considering a full year of operations with its current property portfolio. An estimate of negative EPS of -$2.64 this year compares to -$0.65 in 2019. For 2021, the market expects revenues to rebound to $351 million while the loss would narrow to -$0.07 per share.

(Source: Seeking Alpha Premium)

Analysis and Forward-Looking Commentary

With an expectation that the worst of the pandemic is behind us, Century Casinos can look forward to a gradual normalization of its operating outlook. The other side to that is the significant financial damage that has already been done. The company will end 2020 with a weaker balance sheet position of higher debt and higher leverage. Even by management's admission, there should still be lingering affects of reduced capacity given social distancing rules and regulations. Added costs associated with safety measures and PPE equipment for employees further pressure cash flow and earnings potential for the foreseeable future.

The biggest challenge for the company is its growth outlook beyond the current property portfolio. As recently as January, CEO Peter Hoetzinger was quoted as looking at further acquisitions for growth. Given the financial challenges this year, any plans for a further expansion will need to be placed on hold until cash flows and debt can stabilize.

Across the gaming and resorts industry, it is a difficult environment for all companies challenged by recent closures and the same ongoing uncertainties. Century with a market cap of just $180 million is one of the smallest publicly traded casino stocks. With its focus on the "local gaming", compared to the mega operators with resorts in Las Vegas and Macau, China, recognized as the leaders in "destination" resorts. Given the number of differences, including business strategy, market focus, growth opportunities, and balance sheet strength, there really isn't a direct comparable to CNTY.

Golden Entertainment Inc. (GDEN) with a market cap of $355 million is one of the most similar to Century Casinos Inc. by size. Curiously, both stocks trade with a very close EV to Revenue multiple of 1.7x based 1-year forward "2021" consensus estimates. GDEN and CNTY also present a similarly high debt to equity ratio of 5.2x and 4.5x each, respectively. While Golden has some key differences, it benefits from a larger and more diversified operation. An outlook of negative earnings for both companies through next year highlights similar challenges. Trends like economic growth and market sentiment are likely driving both stocks.

Data by YCharts

Verdict

Century Casinos remains speculative with overall weak financials and large debt position. Considering the stock is up an incredible 520% since its low of $1.01 per share in March, the setup here is that CNTY is still down about 20% year to date. We believe this discount compared to conditions at the start of the year is at least fair. We rate shares of CNTY as a hold until there is more evidence of improving earnings and revenue growth.

The risk here is that the outlook for a recovery deteriorates. Weaker than expected results could renew bearish sentiment towards the stock and add to downside pressure.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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