Company history and business
Back in 2014, Full House Resorts Inc. (FLL, Financial) was a badly managed regional casino operator with a couple of run-down properties. Activist Bradley Tripak, a former employee of Bruce Kovner, took control. He installed Dan Lee as CEO.
The company owns a number of properties, of which the Silver Slipper Casino and Hotel is the most important. Rising Star is of a similar size in terms of gambling capacity, but it is not as profitable. Here's an overview of the company's individual properties:
Financial strength
The balance sheet is a key part of the attractiveness of Full House Resorts, but also central to the risk. The company has about $110 million in debt maturing in 2024. Interest on the debt is three-month London inter-bank offered rate (minimum 1%) plus 7%, meaning at a minimum of 8% (currently 9.12%).
Mandatory prepayments of the debt is required if the company sells certain assets. The notes can also be redeemed early, but with a penalty.
A leverage ratio of 6.1 adjusted earnings before interest, taxes, depreciation and amortization is high. Casinos can afford quite some leverage, but even for this industry, it is high. And note I’m using adjusted Ebitda, which is less conservative than using generally accepted accounting principles.
With a market cap of close to $50 million, the debt-equity ratio is also rather high.
However, 2024 is still five years out. This gives Lee and team time to grow Ebitda (which he’s growing at two times the rate of revenue). Because both the amount of debt and the interest rate are high, this leaves a lot of room for value creation through incremental improvements.
An acquirer, with better access to capital and paying lower rates, could be attracted to Full House because it could immediately improve cash flow by taking out the debt.
Over time, it will also become possible for Full House to renegotiate better rates (if Ebitda does improve).
Management
Lee briefly worked as an analyst on Wall Street, but then went into the casino business where he developed an excellent reputation as a successful CEO. Since 2014, when Lee came in, revenue is up 37% and Ebitda is up 69%. Meanwhile, the company's share price is up only 35%. Granted, there were times it was up a lot more.
Lee and other executives together own 11% of the company. Since the activist campaign in 2014, insiders have generally been savvy traders of the stock. Selling some in the $3 to $4 range last year and predominantly buying between $1 and $2. Lately, the sentiment among insiders seems positive:
Valuation
Full House trades at about 7.5 times enterprise value to Ebitda. Competitors Golden Entertainment (GDEN, Financial), Eldorado Resorts (ERI, Financial) and Century Casinos (CNTY, Financial) trade at 9 times, 9 times and 12 times respectively. Because of the excellent management team with substantial skin in the game, I expect it to perform better than its average peer.
In a bull case, we’ll see both substantial Ebitda growth and multiple expansion. Another lever for shareholder value creation could come from optimizing the capital structure, which currently contains too much debt at too high rates. The latter would decrease both risk and lead to better bottom line figures.
Risks
The company owns several different properties. The Silver Slipper is the most important. That property is doing great. Then there’s a somewhat important acquisition in Billy Bronco’s, where there is room for growth. However, an important slice of revenue is coming from the Rising Star, which is a problematic property. Management has put quite a bit of money and effort into improvements, but revenue is about flat. Management is still planning further investments. They are also going to make a deal for an on-premise sportsbook, which could help a lot with profitability. But a key and not unfathomable risk for the company would be an unprofitable Rising Star.
The company also has a lot of debt ($110 million at 9% interest rate) as discussed under the financial situation. This is not an immediate threat, but can become problematic if multiple things go wrong at once. Refinancing only needs to take place five years from now, but the interest significantly restricts the freedom of management to spend or invest freely to optimize the business.
A recession could be quite problematic given the leverage and the vulnerability of some of the properties.
Outlook
Even though I’ve specifically highlighted Rising Star among the risk factors, the new RV park seems to be doing better and Lee installed new management at the property level. Full House also developed a ferry service that’s potentially unlocking new traffic to this property (service has been up since 2018, but likely takes time for people to find their way). There’s also a new restaurant opening on the property.
The company is operating in Indiana and Colorado and will likely benefit from sports betting legislation in both places going forward. It is already benefiting in Mississippi, but that’s brick and mortar only. Regulations are set up so that online sports betting needs to be tied to a brick-and-mortar casino. This allows Full House to negotiate a cut from up to three online operators that it facilitates.
In Indiana, tax rates on brick-and-mortar casinos will be lowered (mainly for small operators), which could result in up to $2.5 million dropping to the bottom line.
Lee, who tends to be rather optimistic at times, thinks Ebitda will go to the mid-20s once the drivers the company has visibility on materialize. He also figures Full House will be on a 5 times total debt to Ebitda multiple by next summer.
If I look at a reasonable but admittedly favorable scenario like growth toward $25 million Ebitda and multiple expansion toward peers of 9 times enterprise value-Ebitda, shares could appreciate 56% in a reasonably short timeframe.
The sports betting unknown grants significant potential for surprises to the upside, especially if the market takes a granular view to this revenue stream and awards it a higher multiple. Another avenue to value realization is if Full House gets acquired or if it is able to refinance prematurely at more attractive terms.
Disclosure: No position.
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