Jim Hodges has contributed today’s guest post on Century Casinos Inc (NASDAQ:CNTY) using the Socratic method beloved by Soros, Munger, and…er…Socrates:
Century Casinos, Inc. is a new holding for me. Following is a condensed version of how I valued the business’ assets and was able to find the existence of significant value after a margin of safety was applied without the need of adding its positive “owner earnings” year over year.
Much of the value of Century Casinos, Inc. is tangible in the form of Cash and their Property. I first valued their Property by obtaining the most recent Property Assessments of where each of their Properties reside. Incidentally, these Properties are 100% owned by Century.
Property #1: Central City, CO
Market Value: $28,289,378
Assessment Date: 2009
Property #2: Calgary, Alberta, Canada
Market Value in U.S.: $15,366,479.84
Assessment Date: December 26th, 2009
Property #3: Edmonton, Alberta, Canada
Market Value in U.S.: $28,485,487.12
Assessment Date: December 31st, 2009
Property #4: Cripple Creek, CO
Market Value: $7,811,715
Assessment Date: 2009
Total Assessed Market Value Of Properties: $79,953,059.96
At this point, a few questions need to be asked concerning the justification of the Properties values.
Q: How do we know these prices are relevant to the value that could be realized on the open market?
A: A quick scan of various real-estate websites reveal that, in every location of these properties, similar buildings are being offered for sale in excess of their Assessed values and nearly every relative property that sold did so for at least its assessed value.
Note: It would be impossible to make available this information due to its length, therefore I’m leaving it up to the individual investor to come to his own conclusion. The providing of the source is sufficient for you to carry on your research.
Q: What does the Assessed Value include?
A: The structural building and land. It does not include property such as slot machines and gaming tables that are within the casino.
Q: What is not included in this Valuation?
A: Century Casinos, Inc. 33% ownership in a Polish Casino chain. It was nearly impossible for me to value those assets because the Polish commercial real-estate market is not within my circle of competence. However, I did come to the conclusion that the value Century places on their books concerning this property is most likely correct. That value represents an additional $2+ Million. I also did not add the value of the 4 luxury cruise ships in which Century does not directly own the cruise ships itself but does own the rights to have an operating casino on those cruise ships. All of the cruise ships are very similar and I found through discovery that until recently they had operations on 5 cruise ships. They recently sold their rights on one of the cruise ships for more than $1 Million. These items are all “sugar on top of it” and I’ve elected to not include their values regarding this write up for simplicity sake.
Back to the Properties of this discussion:
The four casinos own, collectively, 2,150 Slot Machines. A new casino grade slot machine costs between $9,000 – $12,000 per slot machine. They have a lifespan on average of 7 years before they need to be upgraded, repaired, or completely replaced. On the open market, the average price of a repaired used casino grade slot machine sells for $1,000.
2,150 Slot Machines x $1,000 = $2,150,000
In addition, Century owns all 154 of the slot machines used for their luxury liner casino operations but to keep with my condensed valuation, I am not adding their appraisals to this valuation nor have I included the 90 table games that Century owns.
Property Asset Value: $82,103,059.96
Q: Is the reported Book Value ($88.24 Million)of Century Casinos PPE reliable?
A: It certainly seems so.
Other Assets: Century Casino has $25.49M of Cash on hand ($11.5M not deducted on recent 10-K for the acquisition in Calgary.
Property + Cash Value: $107,595,060
Not taking into account the value of Inventory, Recievables, or any other tangible assets that could be readily liquidated and turned into cash – we can form our decision from this basis alone.
Century Casino currently owes $27.02 Million in Total Liabilities.
$107,595,060 – $27,020,000 = $80,575,060
As of today, April 13th, 2010, Century Casinos, Inc. is selling for $59.52 Million.
Not taking into consideration the excess cash Century generates or the additional asset values, I believe an investment in Century Casino is more than justified.
[Full Disclosure: I do not hold CNTY. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]
A good post Jim, was not aware of this counter.
In reply to Mike’s post, yes it is true that an asset in a going concern situation cannot be valued independently on a stand alone basis.
However, if management has the desire to dispose of the asset, excluding it out of the going concern operation, it is possible that the assets will be worth more than the low $6 mil EBITDA that it is showing. The value of the real estate will then be worth based on surrounding assets, on lack of property, type of users etc.
Therefore with the new casinos coming up, value of the casino will definitely drop but in terms of real estate, then its different. Imagine someone comes along and develop it into warehouse or houses for example (Mike stated it himself). Caps cannot be applied blindly, usage of properties together with cashflows are both important.
Lastly I do share and understand Mike’s concerns and it is about risk of buffer for illiquid assets. I guess theres no hard and fast rule but discounts should be applied to both the casino slots as well as to the assessed land values based on an individual’s understanding of the demand and supply economics of slot machines and land there.
One question I have is that the tax assessor estimates..are they for the land itself or the property? It seems that the margin of safety is rather large (assuming property values fall 30%) even excluding the slots,ships and the Polish casino potentially $5-6m worth.
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Mervyn,
All slot machines were discounted more than $12,000 each. Some of the slot machines they own are new. A new slot machine can cost in excess of $20,000 per machine. Not knowing which are new and which are old, I discounted each by finding the lowest price a commercial slot machine in working order sells for. The answer is $1,000. Therefore, some machines that are really valued at $5K & $10K, I’ve valued at $1,000.
The assessed values from each respective assessor are for both land and building. In the case of Central City, Colorado – the company states in their 10K that they own one casino their. After pulling documents from that city, I found they actually own 3 independent properties and building in that location that one would not know about going off their 10-K.
I’m as conservative of an investor as I have knowledge of, I couldn’t have “discounted” any valuation more than I already have. I appreciate your message.
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Thanks for the analysis, Jim.
I’d just like to add that unfortunately, there is a poison pill involved in that play:
“We have a fair price business combination provision in our certificate of incorporation, which requires approval of certain business combinations and other transactions by holders of 80% of our outstanding shares of voting stock. In addition, our certificate of incorporation allows our board of directors to issue shares of preferred stock without stockholder approval. These provisions generally have the effect of requiring that any party seeking to acquire us negotiate with our board of directors in order to structure a business combination with us. ” – 10K FY2009
So you’re pretty much dependent on the board (which I don’t like, even if the two CEOs each hold 5.5% and therefore should have a relatively strong interest in the price of the shares)
regards,
gino
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Good point Mike and thanks for sharing. Currently, I like the way management has operated so this doesn’t concern me to a large degree.
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I meant, good point GINO. Sorry about that.
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also, I don’t know if this company has a moat. Its Colorado assets appear to be relatively small and older casino properties…
According to the 10K, at least one glitzy new casino is opening up nearby. And a smaller new casino is opening across the street from one of their properties. How do you get comfortable that these new casinos are not going to impair the Colorado assets by taking their business?
With States having such budgetary troubles, it’s not a stretch to think that licensing is going to be relaxed over the next few years… That all else equal will lower the barriers to entry.
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A moat exists within the company in the fact that in some of the areas Century operates, new issuance’s of building permits are not being granted and in another area, no additional casino’s are being allowed to operate for at least the next 5 years unless they are a non-profit or charitable one time event in which they’d need a special one time granting of a permit for that event. The entire business is not protected by a moat, only parts of their business is and that’s a huge thing in the casino business where moats hardly ever exist to any degree.
In my analysis, I provided the basis outlay for someone to continue their research of the company. If you find it an interesting subject to embark on your analysis work – I suggest you do that as I’m not interested in doing ALL the work for someone; so I won’t continue to go back and forth with you detail for detail. Good luck to you and all the best.
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to end this debate, circa 2005, in western Europe, I did participate (on the leveraged finance side, I was financing the transaction) in sale leaseback operations on casinos. It frequently happens when a casino company needs some cash for expansion. They keep the operating side and monetize the real estate value and move on to acquire more properties. These operations are secured by the hard assets of the property (the building itself, which can usually used for other pruposes-conference center, hotel- and is very often in appreciated areas, but also the equipment). The cap rates are not interesting for the companies, usually 9% even in good times, maybe 10% these days. But you could probably do that with Century Casinos and get 30mln in cash (that would obviously diminish your cash flows).
I do believe this company would be a great idea for an activist or a PE acquirer. The deal finances itself.
Thankd for the good work Jim
Sebastien
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I believe this analysis is very flawed. I do not believe this is as good of a bargain as it seems. Two of the main assets you mention, cash and properties, do not possess a margin of safety. First, as it has been pointed out, Casinos cannot just sell their property to any buyer. This limits the value of the property, as liquidity is a limiting factor. Additionally, the value of slot machines of $1,000 per machine is too general. All slot machines they own may not have the same life as those being old in the market. E.g. may be fully depreciated. Also, the same limiting factor applies to slot machines, as these cannot be sold to anyone. In liquidation, I would expect Casinos to get 20%-30% of the original slot values, especially in this economy.
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I respect your opinion even though I completely disagree with it. I’ll refrain from being detailed other than to point out one of your points of mention that is 100% incorrect.
“Also, the same limiting factor applies to slot machines, as these cannot be sold to anyone.”
They can be and are sold to anyone.
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By the way, 20 – 30% of the original slot value would be in excess of $1,000 since the average slot machine costs $9,000 – $12,000 and many sell in excess of $20,000.
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I guess what I’m trying to say is…
What are your thoughts on how much the casino can actually earn? Assuming the economy improves somewhat over the next 3 years or so.
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CNTY looks interesting… But I don’t understand how you can just go by the county assessor’s records to figure out what the buildings are worth.
Casinos are not just generic pieces of real estate. You can’t exactly turn a casino into a Wal-Mart or a office building.
CNTY doesn’t make much money. It looks to be barely breakeven today and has lost money in the last couple of years. If the cash flows from the casino cannot support the real estate valuation, how can you value the real estate?
I mean, I understand if you have a struggling strip mall or warehouse or office building, because the management stinks or whatever. You fire the management team, maybe repurpose the property, switch out some tenants, put some capex into it and raise the rent, etc–and cash flows improve enough to justify the “liquidation value” property price.
But this doesn’t look true with casinos. If a casino doesn’t perform, it’s basically a stranded asset. Who would want that piece of property?
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I didn’t “just go by the county assessor’s records to figure out what the buildings are worth”. I started there and I explained that. As far as their cash flow, the recession has obviously had an impact on their business but they are still producing positive “owner earnings”. If you are referring to reported “net income” – that is much different than “owner earnings” and it would be easy to draw the incorrect conclusion by using “net income”. Furthermore, cash flow doesn’t have to support the real estate value, all there needs to be is enough cash flow to operate the business and currently they are doing and have done just fine with that. This is more of a turnaround situation that has a moat and also can back that up with a high asset valuation.
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“Furthermore, cash flow doesn’t have to support the real estate value, all there needs to be is enough cash flow to operate the business and currently they are doing and have done just fine with that. ”
Ok, so I have a casino, a stranded asset, that produces a free cash flow stream of say $10 million, normalized. I come up to you, and say the following:
The business’s free cash flows are worth $100 million. But the building itself is worth another $200 million. So you should buy the company from me for $300 million.
Would you buy that?
The cash flows cannot be divorced from the underlying business. A building has value only to the extent of the cash flows it can generate. It’s such a basic concept.
As to the guy above that claims he can finance a PE deal by sale/leaseback of the casino properties at a 10% cap rate…
Let’s say this deal raises $30 million.
CNTY is only running EBITDA of about $6 million run rate today, excluding equity earnings from the Polish assets. This recap would eat up about half of EBITDA right off the bat, and free cash flows would drop to nearly zero.
So, to make the deal make sense, the PE buyer would have to be confident that earnings will increase, because of cyclical trends or whatever. This brings the argument back to my original point–you never addressed the ongoing earnings power of the company.
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Mike,
In your scenario of the $300 Million business, I wouldn’t personally be interested since I’m a value investor and am in the business of purchasing a business for at least fifty cents on the dollar. But, that has more to do with the fact of how I purchase a business rather than what those businesses are actually worth.
I disagree with you on the subject matter of cash flow and I’ll use just one example of one of the investments I made in the last year with Vanda Pharmaceuticals. For several years, VNDA produced negative cash flow, had negative earnings, produced absolutely no revenue of any kind, yet it had a net asset value of approximately $3 per share and was selling for $1 and change at the time I purchased it. If one had valued the business purely on its cash flows without taking into consideration its assets, one would have missed out on the opportunity of seeing their investment go from $1 per share to $10 per share virtually over night.
Cash Flows, for me, are a way to measure the sustainability, potential growth, and potential future value of a business. That’s nice, but for me I like to know what a business is worth today and I find that often through the analysis of a company’s balance sheet. Therefore, I have an opposing view from yours on how to value a business and although your way may work for you – my way definitely works for me and I’m comfortable with that.
This may not be the type of investment that interests you and that’s perfectly fine. It should be a relatively easy pass for you then.
In regards to your statement: “This brings the argument back to my original point–you never addressed the ongoing earnings power of the company.”
It wasn’t my intention of doing so nor do I have an interest in doing all the work for you. It was a simple suggestion for the reader to carry out his own analysis and come to his own conclusion – not a stock picking board.
Have a great afternoon.
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Thanks for the detailed assets analysis.
I want to ask about the catalyst that you see for that investment. Seems like the only catalyst here is a takeover or a management decision to liquidate some assets in order to unlock value.
From the post, it is unclear to me whether any of these catalysts is likely. I havent read material about the company but maybe you can shed some light whether you know if the management has any intention to take value creating steps.
In the last 10Q I can see that the company was purchasing its stock but at very low sums. If they going to keep doing that in more substantial amounts that can help a lot. They have the cash for that.
I believe that the company is priced that due to the fact that its operations barely create any value for the shareholder.
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nice writeup! any thoughts on mgmt though and wacc vs. roic? a company can easily sell below asset value if management is value destroying
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How do you know how much it is selling for…where is that number $59.52 from?
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$59.52 is in reference to the Market Capitalization of the business. Market Price of company X Total Shares Outstanding = Market Capitalization. At the time I wrote this analysis, the company had a Market Cap. of $59.52. It’s less now.
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what do you use to quickly get an idea of market value of thee building ? real capital analytics ? cb richard ellis site ? any suggestion as to any relevant service ? thanks
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County Tax Assessor records are available online for nearly every county in the U.S. as well as Canada. You’ll have to do a little bit of Google searching to find the information but its all available free. County Assessments have historically always been known to be a lowball estimate of property values. But, I add an extra step that is also freely available information online. If I found a property in Houston Texas, for example, the steps I’d follow would be:
1. Search for which county Houston, Texas is in.
2. Search for that particular county’s Assessor’s website.
3. Look over the website and see if they offer Property information (most of them do).
4. Input all relevant fields of information for the property and receive the property information.
5. Search for property that is selling or has sold within the same area of the property you are trying to value.
6. Find the Assessment records for those particular properties to see the correlation between how much they are listed for, have sold for, compared to what their County Assessed market values were at the time of sale.
It takes a bit of doing, but, all this information is freely available online and a reasonable conclusion can be ascertained.
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