Thelongview wrote: As a starting point, let’s first look back to the three year period of 2012 – 2014.
This was the best consecutive three-year period in our Company’s history, a period in which we had average revenues of $79.3M and average free cash flow of $24.1M.
2012 2013 2014 Average
Revenues $76.6M $77.6M $83.7M $79.3M
Free Cash Flow $24.2M $22.1M $26.0M $24.1M
Not coincidentally, this occurred when WCS, always quoted in USD, had its best consecutive three-year period, when converted to CAD, averaging $76.47.
2012 2013 2014 Average
WTI¹ (USD) $94.05 $97.98 $93.17 $95.07
WCS² (USD) $73.17 $72.77 $73.60 $73.18
FX³ (USD / CAD) 1.0000 1.0301 1.1043
WCS (CAD) $73.17 $74.96 $81.28 $76.47
¹ From the Energy Information Administration
Cushing, OK WTI Spot Price FOB (Dollars per Barrel) (eia.gov) ² From Statista
• WCS oil price 2005-2021 | Statista ³ Foreign Exchange from OFX
Monthly average rates | OFX The future three year period from 2022 – 2024 may turn out to be the highest consecutive three year period that WCS has ever traded at when converted to CAD. It is the period ending December 31, 2024 that I’ll use to answer the question: how high can the dividend go?
To be able to answer this question, we need to estimate what our future revenue will be, and more importantly, estimate what our future free cash flow will be, as it is free cash flow that allows the return of capital to owners.
In a well-managed company, and one that has a competitive advantage, increased revenue not only leads to increased free cash flow but also, over time, to increased free cash flow as a percentage of revenue. The competitive advantage allows the company to grow its revenues at a faster rate than its competitors and to dilute its fixed costs.
In a well-managed company that does not have a competitive advantage, revenue increases are smaller and produce flat to unsatisfactory increases in free cash flow.
In a poorly managed company, without a competitive advantage, costs often escalate at a faster pace than revenue does, leading to, at best unsatisfactory increases in free cash flow, and at worst, diminishing free cash flow or negative free cash flow, a situation that if not rectified, leads to insolvency over time.
We are owners of a business that has very good management. Darcy Will and Elston Noren have decades of experience and have a lot of skin in the game, something I consider to be essential to achieving top results.
Our competitive advantage is still strong, albeit not as strong as it was one year ago, and is
at least of medium duration. This competitive advantage may become diminished as a result of the lifting of the moratorium on new casino licenses being issued by the AGLC. A moratorium had been in place on new licenses being issued since 2008 and was lifted in 2021 with a new four step process put in place by the AGLC.
Our competitive advantage is the location of our three casinos. Fort McMurray has no competition. Grande Prairie has virtually no competition. While Calgary has numerous competitors, we are shielded to a great extent by our location within the city, in Ward 12 which is far, relatively speaking, from our competitors and whose population is growing the fastest of all Wards.
At this time it remains unclear how accommodative the AGLC will be in issuing new licenses, if they are requested, but one has to think that by having changed the process, the AGLC is quite open to more gaming in the province. This needs to be monitored closely.
How can we increase free cash flow? As already said, it is free cash flow that allows for the healthy payment of dividends.
You can increase free cash flow even if your revenues are flat or falling as long as you can reduce the sum of costs and capital expenditures, but this is not healthy and you can only reduce these items by so much.
The only way to increase free cash flow in a healthy, sustainable way is to increase revenues while paying attention not to let costs get out of control.
Our management is very good at keeping costs in line and so we should focus our attention on increasing revenues.
There are obviously many ways to increase revenues, but I would like to keep this analysis only to some of the factors that are currently in place that were not in 2014.
What are some of the factors that will allow for increased revenues and not in place in 2014? - Increased population
- Consumer Price Index (CPI)
- Casino square footage
- Renovated casinos
Increased Population I’m going to focus this analysis on the population of Calgary and Grande Prairie as in the case of Fort McMurray, it is very difficult to get accurate recent population statistics as the data I’ve seen is all over the map and hard to draw an accurate conclusion.
To estimate the population at the end of 2024, let’s look at the growth of the past period of 2014 – 2019 for Calgary and Grande Prairie:
Population 2014 2019 Growth
Calgary 1,195,194 1,285,711 +7.6%
Calgary (Ward 12) 94,933 110,175 +16.1%
Grande Prairie 65,118 69,088 +6.1%
From 2014 – 2019, Calgary’s population has increased at a compounded rate of 1.47% per year and its population is expected to grow by 1.61% per year for the next 24 years. Using the more conservative of the two figures (1.47%), I’ll project Calgary’s population to be 1,383,030 at the end of 2024.
From 2014 – 2019, Ward 12’s population has grown at a compounded rate of 3.02% per year. This is more than twice as much as Calgary’s population growth over the same period. This is very important to us because it is where the Deerfoot is located and you won’t travel all the way across Calgary to go to a casino when you have a very nice one in your own neighborhood. That being said, I won’t use Ward 12’s 3.02% growth figure in projecting its population in 2024. I’ll be conservative and use the same figure that I used for Calgary (1.47%). Doing so gives us a projected population of 118,514 at the end of 2024.
Grande Prairie’s population grew at a compounded annual rate of 1.19% from 2014 – 2019 and is expected to grow by 1.59% per year for the next 24 years. Using the more conservative of the two figures (1.19%), I’ll project Grand Prairie’s population to be 73,298 at the end of 2024.
Below is a summary:
Population 2014 2024 (est) Growth over 2014
Calgary 1,195,194 1,383,030 +15.7%
Calgary (Ward 12) 94,933 118,514 +24.8%
Grande Prairie 65,118 73,298 +12.6%
Let’s assume that the population of Fort McMurray will be the same in 2024 as it was in 2014. No gain, no loss.
Knowing that we do more business in Calgary than in Fort McMurray and Grande Prairie combined, I’ll use the following weightings for each location.
Location weighting Pop Growth over 2014 adjusted pop growth
Calgary 0.25 +15.7% +3.9%
Ward 12 0.25 +24.8 +6.2%
Fort McMurray 0.25 0% 0%
Grande Prairie 0.25 +12.6% +3.2%
Total growth +13.3%
Notice I included Calgary twice. Once for Calgary as a whole, and then Ward 12 which is part of Calgary. The reason for this is that there are a disproportionate amount of Deerfoot customers that come from Ward 12 relative to Calgary as a whole.
You’ll notice that I attributed no growth in the population of Fort McMurray over 2014. The reason for this is the amount of lost jobs in the energy space and the difficulty in finding workers along with the lack of good data on recent population levels. If the population does grow, then we will have erred on the side of caution.
We can reasonably assume that our revenues in 2024 can be positively impacted by 13.3% due to increases in the population.
Consumer Price Index (CPI) While consumers initially pull back on spending when prices increase as a result of a psychological shock to seeing sharp increases in prices that outpace increases in income, inflation does lead to increased spending.
Over time, offsetting forces such as increased salaries, the indexing of pension plans and government benefits have the opposite effect on the consumer. Psychology then tends to awaken the desire for increased spending, including the spending on gaming and the amounts wagered. This leads to an increase in revenues for our Company.
From 2014 – 2021, the CPI increased from 125.2 to 141.6, an increase of 13.1%. The compounded annual increase was 1.77%.
We know that the CPI will be much more elevated in 2022 but by how much is very hard to tell. I always want to err on the side of conservatism as the point of this post is to conservatively estimate the dividend GH could pay at the end of 2024. For this reason I will not use high CPI levels for the next three years. For 2024, I’ll use 6%. For 2023, I’ll use 4% and for 2024 I’ll use 2%.
2021 2022 2023 2024
CPI 141.6 150.1 156.1 159.2
2014 2024 Growth over 2014
CPI 125.2 159.2 27.2%
As you can see, the total growth in the CPI from 2014 has been 27.2% and this represents a substantial amount of increased spending.
From this, we can reasonably assume that our 2024 revenues will be positively impacted by 27.2%.
Casino Square Footage (in square feet except for rooms)
2014 2021 Change
Gaming area 109,726 114,356 +4.2%
Non-gaming 21,130 26,074 +23.4%
F&B¹ + Live seating 578 886 +53.3%
Total 131,434 141,316 +7.0%
¹Food and Beverage
While the number of games has remained about the same over 2014, we don’t have a lack of them. The increases in non-gaming, F&B + live seating and hotel rooms allow for an increased amount of customers, who invariably will spend more on gaming.
Knowing that all areas of our venues are important in generating gaming business, let’s assume that our revenues in 2024 will be positively impacted by 7%.
Renovated Casinos Renovated casinos that look nicer will attract more people. A broader offering of food and entertainment will attract new customers. As with above, once inside, more money will be spent on gaming. Gaming is the key. That is where the best margins are.
Once again, erring on the side of cation, I won’t attribute an increase in revenues to this factor.
Putting All of This Together Our revenues in 2014 were $83.7M.
We’ll gross up this amount by:
Population growth factor 13.3%
CPI factor 27.2%
Increase in casino square footage factor
7.0% Total Increase in Revenues 47.5%
Grossing up our peak 2014 revenues of $83.7M by 47.5% would translate in 2024 revenues of $123.5M.
The key assumption in all of this is that for the next three years, WCS, when translated into CAD will trade at higher levels than the average of 2012 – 2014. This is a crucial element in the thesis. Without this, we will not meet the revenue estimate.
To offset this risk, we need to add a margin of safety into our calculation. Let’s take off 20% form our revenues estimate of $123.5M and replace it with 2024 projected revenues of $98.8M.
Now that we have our revenue estimate for 2024 we can calculate our free cash flow estimate for that year.
From 2012 – 2014, GH had an average free cash flow margin of 30.4%. Let’s add a margin of safety here as well and use our Company’s 2011- 2019 average free cash flow margin of 29.0% instead.
A 29.0% free cash flow margin on revenues of $98.8M would produce $28.7 in free cash flow.
Dividing this $28.7M in free cash flow by the 22,686,248 shares outstanding at the end of 2021 would result in $1.27 of free cash flow per share.
Our Company could comfortably pay a $1.14 dividend per share ($0.095 / month) and have the equivalent of $0.13 per share for either debt reduction, growth capex or share buybacks.
Keep in mind we have added a margin of safety in our calculations by discounting 2024 estimated revenues by 20%, by using the lower free cash flow margin of 29.0%, by not attributing population growth to Fort McMurray and by not recognizing any increases in revenues from the cosmetic surgery done to make our casinos look more appealing.
Also keep in mind that nobody knows for certain how the future will unfold and these estimates should not be relied upon to make investment decisions but are simply meant to show what is possible and not necessarily what will occur.