Gamehost as an investment platformBefore I get into GH as an investment platform, I’d like to briefly touch upon our Q2 results. They are solid.
Operating revenue was $17.9M vs $16.8M in 2019 (pre-COVID) and EBITDA was $6.6M vs $6.5M in 2019. That is a 6.5% increase in operating revenue and a 1.5% increase in EBITDA.
While it is true that the Quarter was the first since the onset of the COVID pandemic where GH operated without COVID restrictions of any kind, we are still being impacted by a lingering effect that will slowly fade away over time but for now suppresses our revenues.
A certain part of the population is still cautious about going into public settings for leisure. I see this in the restaurant establishments that I frequent. Younger people are out in droves but I see less people over the age of say 50 than I did before. The lack of people – relative to my pre-COVID memory – increases as the age group increases. This is surely not only affecting restaurants but other leisure activities as well.
Our biggest casino – the Deerfoot in Calgary – is being disproportionately impacted by this behaviour relative to the GNC in Grande Prairie and the Rivers in McMurray due to a larger, older and more cautious population versus the other two cities:
Calgary Grande Prairie McMurray
Population 1,306,780 64,141 68,002
Pop over 50 422,485 15,775 14,380
% over 50 32.3% 24.6% 21.1%
Median age 38.0 34.0 34.4
After tax income $40,000 $44,000 $62,400
The above is taken from Statistics Canada’s 2021 Census.
As you can see from the above, 1 out of every 3 people in Calgary is over the age of 50, versus 1 out of every 4 in Grande Prairie and 1 out of every 5 in McMurray. This makes a big difference in our operating income when our biggest casino is located in a city whose population is 10 times larger than the population of the cities where our other 2 casinos are located. Combined!
The above is taken from Statistics Canada’s 2021 Census.
So, there are two “wild cards” that are not being talked about that will have a significant positive impact on our future revenue over time and they are:
- The over 50 age group eventually resuming their pre-COVID lifestyle
- The impact the Rivers will have on our results as these residents have an after tax income well above Calgary and Grande Prairie residents and the eventual adding of oil jobs in McMurray will increase cash rich foot traffic into our Rivers casino.
I would like to leave this part of the post with two comments from management:
“A lack of investment in the energy sector since 2014 and disruption to supply resulting from Russia's invasion of Ukraine has, at least temporarily, shifted the narrative away from climate change objectives to energy security. This is net positive for the economies in Fort McMurray and Grande Prairie where energy companies are flush with cash and field activity has increased. Grande Prairie is also benefitting from investments and work related to construction of the Coastal Gas Link pipeline and anticipated needs of the west coast LNG export facility that the pipeline will feed.”
“Alberta has returned to surplus fiscal performance and the prospects of strong commodity prices for the foreseeable future look to bolster these results going forward. Strong job growth and net migration to the province sets Alberta up to lead the nation in economic growth over the next two years. And, with all of Gamehost's properties newly refreshed, it feels like a new day, a sunny one at that.”
Gamehost as an investment platform Our casinos are refreshed. People are learning to live with COVID. Every day, older people are venturing further and further into the pre-COVID lifestyle. Oil is looking good and eventually workers will be found for good paying industry jobs. Population is increasing in Alberta. Any recession would be a temporary factor – after all no recession lasts forever. The positives will still be there after a recession – if one does occur.
Management will be paying down debt. Some may say there are better options but paying down debt is never a bad choice. By mid-2023, debt will be at low enough levels than even our conservative management would think of doing something else with the cash flow.
What should be done?
Buy back stock?
Increase the dividend?
Do a bit of both?
You all know my view. Buying back stock makes the most sense mathematically for wealth creation. We all know management’s view: keep a small NCIB but increase the dividend. They have a louder view than mine and so a dividend increase is in the cards.
Option 1
GH view: increase the dividend payout ratio back to 80% (in terms of free cash flow) with a small rise in stock price, likely in the range of about $9.00 - $9.50 for an estimated return of 9% - 15% + the dividend.
Option 2
TLV view: with GH stock at $8.25 it is undervalued and must rise by 52% - 73% to reach its estimated intrinsic value of $12.50 - $14.29.
Hard to believe something is better than option 2 but there is.
Option 3
Keep the $0.36 dividend (after all, you lose credibility if you keep adding and removing it), keep the NCIB (after all our stock is incredibly undervalued), and add the purchase of stocks that are even more undervalued than our GH stock.
Yes, you have read correctly. I’m suggesting that GH uses its free cash flow to buy two types of stocks.
- Canadian oil and gas stocks which are currently even more undervalued than our GH stock.
- Companies that have a competitive advantage, strong management, a long runway for growth, and are available at attractive prices relative to their intrinsic values
Adding a portfolio of marketable securities, using the above criteria, would create a separate growth engine for our Company. We would no longer only be operating in an industry where there are no acquisitions to be made and where organic growth is only modest. In time this platform would be the main driver of free cash flow and would open up a world of possibilities.
The oil and gas stocks are still a no-brainer today. They have free cash flow yields in the mid 20% to mid 30% range. Their future is bright – at the very least the next 5 years.
There are companies in other industries that have tremendous growth possibilities – over decades – that are trading at very cheap valuations and whose stock prices will greatly increase over the next decade or so.
All you need is a management with a willingness to think outside of the box. Some operating businesses and some marketable security investments in great businesses at undervalued prices. Think of GH as a hotel/casino operator inspired by Berkshire Hathaway.
A good investor is capable of compounding money at a high rate of return. Lets’ be conservative and say 15% per year (as high as this may sound, for a good investor this is conservative – trust me on this one). At 15%, the portfolio would double approximately every 4.8 years. So $20M would become $327M in 20 years. Imagine if GH adds $10M each and every year to the portfolio.
Again, all you need is management willing to think differently and a person who really understands business analysis and valuation and devotes himself to this pursuit full-time.
I wonder who that could be?