TD upgrades GC to BUY and increase PT to $70 from $51report can be found at the following link: https://docdro.id/bOkvqfS
Great Canadian Gaming Corp.
(GC-T) C$46.43
Q3/18: Upgrading to BUY After New Threshold Disclosure Event
GC reported Q3/18 revenue of $343.2mm, versus our estimate of $325.6mm and
consensus of $327.7mm. EBITDA (net of non-controlling interest) in Q3/18 was $103.5mm, versus our estimate of $97.2mm (consensus not reliable as some estimates include NCI and some exclude NCI).
Impact: POSITIVE
On the quarterly conference call, management noted that current gross gaming revenue (GGR) in the GTA and West GTA bundles are above the peak levels that the gaming thresholds will reach in four years (GC's partnerships receive 70% of gross gaming revenue above the thresholds). In our view, this disclosure removes one of the biggest sources of uncertainty for modelling. We estimate that annual GTA GGR is currently ~$1.3bln and West GTA GGR is currently ~$425mm and we now reflect peak thresholds in our DCFs of $1.25bln (previously $1.5bln) and $400mm (previously $500mm), respectively.
These lower-than-previously-anticipated thresholds have resulted in material increases in our DCF valuations for the GTA and West GTA Bundles. We now value GC's legacy business at $31.00/share ($28.00/share previously), the GTA bundle at $28.00/share ($17.00/share previously), and the West GTA bundle at $11.00/share ($7.00/share previously). As a result of this increase to our estimates and target price ($70.00 versus $51.00 previously), and the current return to our target, we are upgrading GC to BUY (from Hold).
Additionally, all of the property groups performed ahead of our expectations for the quarter. This is particularly notable for B.C., given a labour disruption that took place during the quarter and the money laundering investigation that concluded just prior to the start of Q3/18. Additionally, the addition of tables and incremental slots at Woodbine also had a greater impact than forecast.
TD Investment Conclusion
With one of the major sources of uncertainty now largely removed, we can forecast the economics of the Ontario gaming bundles with increased confidence. Our DCF values for these bundles lead us to conclude that GC shares are currently trading at a very compelling value and we believe that the risk-reward trade-off is now compelling. GC has an excellent management team with a track-record of execution, good growth opportunities, and a strong balance sheet. We are upgrading GC to BUY.