Shares of Century Casinos, Inc. (NASDAQ:CNTY) rallied Thursday after an analyst initiated coverage of the micro-cap company with a bullish rating, noting that the operator of two Colorado casinos is among the most attractively valued in the regional gaming space.
In a note provided to Casino.org, Macquarie gaming and leisure analyst Chad Beynon started coverage of Century Casinos with an “outperform” rating and an $11 price target, implying upside of more than 25 percent from the shares trade at this writing.
Century recently completed purchases of the Mountaineer Casino Racetrack and Resort in West Virginia and the Isle Casino Cape Girardeau and Lady Luck Casino – both in Missouri – from Eldorado Resorts Inc. (NASDAQ:ERI), a move applauded by Beynon.
Over the last ten years, CNTY doubled the company’s earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) (EBITDAR) in 2015 and will again in 2020, in our view,” said the Macquarie analyst. “This is, in part, due to the $107m acquisition of three mature Eldorado Resorts properties.”
Some analysts recently argued that Century’s move to acquire those properties, significantly expanding the company’s US footprint outside of Colorado, hasn’t been adequately reflected in the stock price.
A Good Deal
With a capitalization of just under $241 million, Century Casinos stock dwells in micro-cap territory, a market segment that often trades at premium valuations because of its higher growth prospects. Benyon says the gaming company is attractively valued relative to its peer group.
CNTY currently trades at 6.3x/5.6x our 2020/21E EBITDA compared to peers trading at 8.6x /7.9x and <$500M market cap companies at ~7.5x,” said the analyst. “Given every 0.5x turn in EBITDA = ~$1.30 of equity, or ~10%, a stock re-rate closer to market multiples could provide for major upside.”
Shares of Century are up almost 13% this month, indicating the stock has been responsive to the early November passage of sports betting in Colorado, where the company operates a pair of gaming properties bearing the Century name.
“With three of the state’s 33 casino licenses, CNTY will be able to operate or sell the sports licenses,” said Beynon. “Sports could provide ~3-10% growth.”
Heading into 2020, Century has multiple tailwinds, including the ability to bolster free cash flow (FCF). Beynon believes the three properties acquired from Eldorado Resorts could add as much as 21 cents per share in FCF for Century.
With a solid balance sheet, the company could pursue other acquisition opportunities that could expand its domestic portfolio.
“With traditional leverage at ~2.2x (lease-adjusted of 4.1x), CNTY still has M&A opportunities, particularly if they choose to partner with a real estate investment trust,” said Beynon. “In Nov 2017, CNTY raised equity at $7.50, and we believe CNTY remains open to all financing options.”
Century partnered with Vici Properties on the deals to buy the aforementioned Eldorado venues.