To paraphrase Marty Whitmann; rarely do more than three or four factors matter when selecting a stock, everything else is merely noise. That appears to be the case with Century Casinos which is currently trading near the low end of its historic price to book ratio while raising it book value per share from 1.62 to 4.67 in the last ten years.
The results are even more impressive when one views the gains in terms of tangible equity. In ten years the management of CNTY has increased share holder tangible equity from approximately $1.06 per share to approximately $4.5. That translates into a compound increase in tangible equity of approximately 15% a year.
| Avg P/E||Price/ Sales||Price/ Book||Net Profit Margin (%)|
Book Value/ Share
|Debt/ Equity||Return on Equity (%)||Return on Assets (%)||Interest Coverage|
Description of Business and Properties
Century is a casino operator with four wholly-owned casino properties, agreements to run casino operations on eleven cruise ships, a casino management contract with Radisson Aruba Resort, Casino & Spa, and a 33% interest in Polish casino operations.
The following is a description of the companies' various operations from the most recent 10K:
Century Casino & Hotel – Edmonton, Alberta, Canada
In November 2006, we opened the casino portion of the Century Casino & Hotel in Edmonton, Alberta, Canada, and in March 2007, we opened the attached 26-room hotel. Edmonton is the capital of the Canadian province of Alberta, serving a metropolitan population of over one million people. The facility has 684 slot machines, 35 table games (including a 24-hour poker room), 4 video lottery terminals, 26 hotel rooms, a 400 seat showroom and 4 food and beverage outlets. In addition, in October 2010, we acquired the franchise license to operate the Yuk Yuks Comedy Club, where we host comedic performances at the casino.
Century Casino Calgary – Calgary, Alberta, Canada
In January 2010, we acquired Century Casino Calgary (formerly known as The Silver Dollar Casino) in Calgary, Alberta, Canada. Calgary is the largest city in the province of Alberta, serving a metropolitan population of over one million people. The casino includes 504 slot machines, 17 table games, 25 video lottery terminals, 2 restaurants, 1 lounge, a 5,000 square foot showroom, an 18,000 square foot showroom and a 30-lane bowling alley. In November 2010, we rebranded the casino under the name Century Casino Calgary.
Century Casino & Hotel – Central City, Colorado
In July 2006, as part of a joint venture, we opened the Century Casino & Hotel in Central City, Colorado. On December 31, 2007, we acquired the remaining 35% interest in the joint venture that we previously did not own. Central City is located approximately 35 miles west of Denver, serving a metropolitan population of over two million people. The Century Casino & Hotel is located in Central City at the end of the Central City Parkway, a four lane highway connecting I-70, the main east/west interstate in Colorado, to Central City. The facility has 496 Ticket In/Ticket Out ("TITO") slot machines, 11 table games (three of which are player-banked poker tables), 26 hotel rooms, 1 bar, 2 restaurants and a 500-space on-site covered parking garage.
Century Casino & Hotel – Cripple Creek, Colorado
Since 1996, we have owned and operated the Century Casino & Hotel Cripple Creek in Cripple Creek (formerly known as Womacks Casino & Hotel), Colorado. The town of Cripple Creek is located approximately 45 miles southwest of Colorado Springs, the second largest city in the state of Colorado, serving a metropolitan population of over 500,000 people. The facility has 438 TITO slot machines, 6 table games, 21 hotel rooms, 2 bars, 1 restaurant and 271 parking spaces neighboring the casino. In October 2010, we rebranded the casino under the name Century Casino & Hotel Cripple Creek.
In addition to our land-based casinos, we operate ship-based casinos pursuant to casino concessionaire agreements that give us the exclusive right to install and operate casinos aboard these vessels. These agreements also give us the right of first refusal to install casinos aboard any new ships built or acquired by these companies. The agreements with the cruise ship operators provide for cancellation by the operators with a limited notice period in the event of our default under the respective agreements.
The following table summarizes the cruise lines for which we have entered into agreements and are currently operating ship-based casinos, the associated ships on which we operate ship-based casinos and the dates we entered into agreements with the cruise lines.
May 27, 2000 *
March 28, 2003
March 28, 2003
March 28, 2003
June 23, 2010 **
November 24, 2008
March 10, 2010
March 10, 2010
March 10, 2010
Regent Seven Seas Cruises
Seven Seas Voyager
June 23, 2010
Regent Seven Seas Cruises
Seven Seas Mariner
June 23, 2010
Regent Seven Seas Cruises
Seven Seas Navigator
June 23, 2010
*The Silversea Cruises concessionaire agreement expired on March 24, 2011 and was not renewed.
**The ship-based casino aboard the Marina opened on January 22, 2011 on the ship's maiden voyage.
As of January 31, 2011, we had a total of 404 slots machines and 58 table games aboard the 12 cruise ships.
In March 2007, we acquired 33.3% of the outstanding shares issued by Casinos Poland Ltd ("CPL"). CPL owns and operates seven casinos in Warszawa in the Hyatt Hotel, Warszawa in the Marriott Hotel, Krakow, Poznan, Katowice, Wroclaw and Gdynia, Poland and has been operating since 1989. We account for this investment under the equity method.
Radisson Aruba Resort, Casino & Spa Management Agreement
In December 2010, we entered into a long-term management agreement to assist in the operation of the casino at the Radisson Aruba Resort, Casino & Spa. We were not required to invest any amounts under the management agreement. We receive a management fee consisting of a fixed fee, plus a percentage of the casino's gross revenue and a percentage of Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"). The casino at the Radisson Aruba Resort is a 14,000 square foot casino centrally located within the hotel and operates with approximately 250 slot machines, 15 table games and one food and beverage outlet. On the island of Aruba there are 200,000 inhabitants as well as up to 70,000 tourists on any given day. The casino is located on Palm Beach, the main tourist spot on the island, approximately 2 miles from downtown Oranjestad, the capital of Aruba.
The Company completed an assessment of whether the management agreement at the Radisson Aruba Resort, Casino & Spa is a variable interest. We have concluded that our management agreement for Radisson Aruba Resort, Casino & Spa is a variable interest, however, we do not have a controlling financial interest and therefore we are not required to consolidate.
Century Casinos (CNTY) offers a compelling valuation in terms of its price to book and its price to tangible book ratio. The casino industry average is for price to book is around 2.8x, CNTY currently trades at around .61 its current book value with a tangible book value of approximately 4.5 per share which translates to about .64 tangible book. The goodwill is probabably justified since it principally relates to it top performing property which located in Edmonton. The majority of the companies' goodwill was removed from the books in 2007.
If we use a ten-year cyclically-adjusted enterprise value to modified free cash flow ratio, the company trades at approximately 16 times its average 10-year multiple. That multiple is derived by calculating the 10-year average cash flow from operations (CFFO) less the companies' average depreciation expense, then dividing the sum into the companies' current enterprise value (EV/CFFO-Depreciation).
Since the company owns the land and buildings for the four casinos which comprise almost its entire cash flow and carries a net cash position on its balance sheet, the stock can be compared to a highly-rated corporate bond which yields 6.25% in after tax returns. The assumption is based upon belief that the land and property which Century owns will hold its value over time and could be sold for a sum at least equal to its price on the books.
It is important to note that the 10-year average 6.25% cash yield has been almost completely reinvested back into the business, resulting in tangible equity gains of around 15% over the 10-year period. The gains in tangible equity have been largely due to the ability of management to buy properties on-the-cheap and resell them at a profit. (See Evaluation of Management).
Price to earning ratios are virtually worthless is accessing the profitability of casino stocks which are capital-intensive businesses. Casino owners are generally more interested in accessing the amount of free cash a casino generates, improving the value of their existing properties, and using the free cash to purchase new properties or pay down debt.
The historic business model of Century Casinos has been to purchase properties at discount prices, fix the properties while improving cash flow, then sell the properties at a large premium to their purchase price. That business model is largely responsible for the high rate of appreciation (approximately 15% per annum) in the tangible price per book value per share of CNTY is the last decade.
Considering the above facts, the key valuation metric of CNTY should be its price to tangible book value ratio and the key return metric should be its rate of increase in tangible equity per share, in my opinion.
To reiterate those metrics, CNTY valuation is currently about .64 its tangible book value with a 10-year average annual increase in tangible equity per share of approximately 15%.
Balance Sheet and Margin of Safety
Most casino operators are highly leveraged and frequently illiquid in terms of current ratios. The average debt to equity ratio for the industry is 1.2, the average current ratio for the industry is 1.0. CNTY has a debt to equity ratio of .1 and a current ratio of 1.9. Additionally, the company currently has a cash to current liability ratio of 1.68.
It is extremely unusual to find a casino operator which has a net cash position. When all debt is subtracted from the CNTY balance sheet the company has a net cash position of around 9.4 million dollars as of its last quarterly report.
Highly-leveraged companies which are economically sensitive such as casino companies are extremely risky propositions, particularly if they operate with extremely low liquidity ratios. One merely has to review the frequent bankruptcies of Trump casinos to understand the precarious nature of investing in highly leveraged casino stocks.
Century Casinos offers one of the few companies in the sector with a legitimate margin of safety in the form of a substantial discount to tangible book value, a net cash position and excellent liquidity ratios. Typical casino operators carry massive debt to equity ratios, extremely low current ratios and tiny current assets to debt ratios.
Reason For The Current Mispricing
It seems puzzling that CNTY has continued to trade well under its intrinsic value for the last few years, particularly in light of the fact that it trades at a tiny multiple of other stocks in the sector in terms of price to cash flow (9x to 18x) and all the other aforementioned ratios.
CNTY also appears cheap in relation to other casino stocks in terms of EBITDA/EV at just over 8 times the multiple. Century's trailing EBITDA/EV is less than half the number for many of the mega resorts.
I believe that CNTY is currently mispriced for the following reasons:
1) It is tiny and under followed.
2) It properties are regionally-based with no exposure in Las Vegas or Macao.
3) The company experienced large accrual losses from fiscal 2007 to 2009. (See the chart at the top of the article)
4) The company has increased shareholder equity by unconventional methods (See Evaluation of Management).
Evaluation of Management
The following is a description of the two principle executives of Century Casinos:
Erwin Haitzmann holds a Doctorate and a Masters degree in Social and Economic Sciences from the University of Linz, Austria (1980), and has extensive casino gaming experience ranging from dealer through various casino management positions. Dr. Haitzmann has been employed full-time by us since May 1993 and has been employed as either our Chief Executive Officer or Co Chief Executive Officer since March 1994. In determining that Dr. Haitzmann should serve as a director, the Board identified Dr. Haitzmann's extensive experience in the gaming industry and general executive management experience. In determining that Dr. Haitzmann should serve as Chairman of the Board, the Board identified Dr. Haitzmann's length of service with the Company, his vast and extensive knowledge of practically all aspects of the casino industry and his knowledge of the Company's overall business.
Peter Hoetzinger received a Masters degree from the University of Linz, Austria (1986). Thereafter, he was employed in several managerial positions in the gaming industry with Austrian casino companies. Mr. Hoetzinger has been employed full-time by us since May 1993 and has been our Co Chief Executive Officer since March 2005. In determining that Mr. Hoetzinger should serve as a director, the Board identified Mr. Hoetzinger's extensive experience in the gaming industry, general executive management experience and his knowledge of the Company's overall business.
The Co-CEOs own just over 15% of the outstanding stock and "chair" the board of directors as well.
According to Buffett, one of the best ways to determine the ability of management is to monitor the gains in tangible equity which the company has produced under their tenure. Every Berkshire Annual Letter includes a summary of the companies' gains in tangible equity over time; increases in tangible equity indicate that the company is creating shareholder value on an ongoing basis.
If a company does not return cash its shareholders in the form of dividends, it must create shareholder value either by retiring stock at discounted prices or efficiently reinvesting it profits back into the business.
In the case of CNTY, the management has been extremely effective in creating shareholder value by utilizing its business model of purchasing under performing casinos, fixing the casinos and then reselling them at a large profit. The best current example of this process is the former Silver Dollar Casino in Calgary which was purchased in early 2010 at a discount to its tangible assets. It is currently being rebranded under the Century name.
Here of two examples of how the management of CNTY increased the tangible equity of the company by unconventional means, from the 2010 10K:
1) "In 2006 we sold an option towards a casino development project in Johannesburg, South Africa for approximately $5.3 million, less commissions of $0.1 million. As a result of the transaction, we recorded other income of approximately $5.2 million".
2) "In 2009, we completed the sales of CCA and Century Casino Millennium ("CM"). We received total proceeds of $47.9 million for CCA and $2.0 million for CM. We recorded gains of $21.9 million for CCA and $0.9 million for CM, both reflected as a component of discontinued operations".
Clearly, the value of the management is not reflected by the companies' operational results. The management has been instrumental in using their skills to obtain properties well below their intrinsic value with the goal of selling them at a latter date at a substantial profit. That methodology has been extremely successful in creating shareholder value in the form of gains in tangible equity.
Competition and Competitive Advantage
Century Casinos faces significant competition, particularly within its Colorado properties which have significantly lagged the performance of its Edmonton property. The Edmonton property holds some small competitive advantages in the form of limited gaming licenses vs. the population base, its stature as a hotel and entertainment center vs. its competition, and its distance from competition (10 miles).
The renovated Calgary casino may hold some of the same advantages but they have not yet showed up in the operational results.
The following is a summary of the properties and their recent operational results:
|For the year ended December 31|
|Amounts in thousands||2010||2009||Change||Percentage Change|
|Hotel, Food and Beverage Revenue||5,357||4,699||658||14.0|
|Less Promotional Allowances||(704||(575||(129||22.4|
|Net Operating Revenue||21,844||20,364||1,480||7.3|
|Hotel, Food and Beverage Expenses||(3,460||(3,119||(341||10.9|
|General & Administrative Expenses||(5,213||(4,530||(683||15.1|
|Total Operating Costs and Expenses||(16,388||(14,540||(1,848||12.7|
|Operating earnings from continuing operations||5,456||5,824||(368||(6.3|
|Earnings from continuing operations||4,148||3,311||837||25.3|
|For the year ended December 31,|
|Amounts in thousands||2010|
|Bowling, Food and Beverage Revenue||2,543|
|Less Promotional Allowances||-368|
|Net Operating Revenue||8,090|
|Bowling, Food and Beverage Expenses||-2,523|
|General & Administrative Expenses||-2,833|
|Total Operating Costs and Expenses||-8,555|
|Operating loss from continuing operations||-465|
|Earnings from continuing operations||266|
*On January 13, 2010, we acquired Century Casino Calgary (formerly known as The Silver Dollar Casino) in Calgary, Alberta, Canada
|For the year ended December 31|
|Amounts in thousands||2010||2009||Change||Percentage Change (%)|
|Hotel, Food and Beverage Revenue||2,288||2,186||102||4.7|
|Less Promotional Allowances||(3,885||(3,664||(221||6.0|
|Net Operating Revenue||17,368||16,736||632||3.8|
|Hotel, Food and Beverage Expenses||(1,940||(1,906||(34||1.8|
|General & Administrative Expenses||(3,422||(3,349||(73||2.2|
|Total Operating Costs and Expenses||(16,083||(15,639||(444||2.8|
|Operating earnings from continuing operations||1,285||1,097||188||17.1|
|Earnings (loss) from continuing operations||821||(734||1,555||211.9|
|For the year ended December 31|
|Amounts in thousands||2010||2009||Change||Percentage Change -%)|
|Hotel, Food and Beverage Revenue||1,317||1,532||-215||-14.0|
|Less Promotional Allowances||-2,405||-2,850||445||-15.6|
|Net Operating Revenue||10,351||10,644||-293||-2.8|
|Hotel, Food and Beverage Expenses||-1,455||-1,599||144||-9.0|
|General & Administrative Expenses||-2,858||-2,673||-185||6.9|
|Total Operating Costs and Expenses||-9,936||-10,111||175||-1.7|
|Operating earnings from continuing operations||415||533||-118||-22.1|
|Earnings from continuing operations||257||241||16||6.6|
Net operating revenue increased by $11.0 million or 22% for the year ended December 31, 2010 compared to the year ended December 31, 2009. The increase in revenue is mainly attributable to the addition of the Century Casino Calgary which contributed $8.1 million in revenue during 2010. Also, revenue in Edmonton, Central City and on board cruise ships increased and the average exchange rate between the U.S. dollar and Canadian dollar increased by 9.8% for the year ended December 31, 2010 compared to the year ended December 31, 2009. These increases were slightly offset by a decline in revenue in the Cripple Creek market for the year ended December 31, 2010 compared to the year ended December 31, 2009.
The high operating margins of the Edmonton property compared to the other companies' other properties would seem to indicate that it holds a slight competitive advantage although I would not factor that advantage into the intrinsic value of the company.
Century possesses two potential catalysts which could propel the price per share upward in upcoming months.
The first is the companies' return to accrual profitability. In 2010 CNTY returned to profitability and the first quarter of 2011 showed improvement as well. The stock has moved upward somewhat in recent months, likely in response to the accrual earnings.
The second catalyst is the weakness in the US Dollar versus the Canadian Dollar (CAD). As the CAD strengthens against the Dollar, CNTY earnings should increase since the bulk of their profits are recorded in CAD which translates into higher profits in dollars. The favorable currency translation could result in an upward earnings surprise in the upcoming quarters.
US Dollar vs Canadian Dollar Forex Chart[ Enlarge Image ]
As the chart clearly depicts, the CAD has strengthened against the dollar at approximately a 5% rate since the beginning of 2011. When the second and third quarter earnings for CNTY come out the currency translation will be very favorable so long as the Edmonton property continues to earn operational profits. In the event the Calgary property increases profitability the favorable currency translation will be magnified.
Although no stock is free of risk or no bond for that matter, the risk of Century Casino burning substantial equity or losing its ability to generate cash flow is limited.
The main risk involved with any casino stock is a macroeconomic downturn which compromises the discretionary income of consumers. Other risks involve the threat of adding additional gambling licenses in jurisdictions where Century owns casinos which would increase competition. Increased taxes on gambling revenues which would diminish casino profits. Microeconomic downturns in regional areas where Century owns casinos. Extremely adverse weather over extended periods which would diminish traffic to regional casinos. A death or debilitating illness to key management personal of Century Casinos. A significant uptrend in online gaming could also affect the forward profits of the company.
Severe inflation could significantly decrease casino profitability by increasing the cost of performing maintenance capital expenditures for the casinos. Errors in judgement in acquisitions of new casinos could also result in additional risk to the profitability and the liquidity of the company.
Summary of the Value Proposition
Century Casinos (CNTY) is an asset-based play with a substantial margin of safety in the form of a sizable discount to its tangible book value which will likely cap its downside risk.
The stock has a significant potential catalyst in its recent return to profitability, which will likely be enhanced by recent gains in the Canadian Dollar vs. the US Dollar. Those gains should result in a positive currency translation which could result in an earnings surprise in second and third quarters of the current fiscal year.
The current management has compounded tangible book value at a rate of approximately 15% per annum in the past 10 years. The steady increases in tangible equity are not currently reflected in the price of the stock; it is trading near the bottom of it historic price to book value range.
When compared to other stocks in the casino industry, CNTY is significantly cheaper in virtually all valuation metrics and carries extremely safe liquidity ratios. It represents one of the few casinos which carries a net cash position.
The ten-year modified free cash flow average yield for the company is 6.25% after taxes using its current enterprise value. That rate is favorable vs. a highly-rated corporate bond since the company owns most of its cash generating assets and the properties carry a reasonable probability of returning at least their purchase price if they were sold.
Disclosure, long CNTY