As promised, here is my second letter that I sent to a Gamehost executive. It was meant to be in enough detail to give the executive something to consider and to allow for an eventual dialogue to occur.
Here it is:
Here is a four-step plan that will transform Gamehost into Gamehost 2.0:
- Growth initiatives
- Capital allocation
- Increase stock valuation multiple
- Increase the size of the Board of Directors
Growth initiatives - Differentiated food offering in a separate structure next to casinos:
This will target a new customer that is not attracted to casinos and who eventually will find themselves inside of casinos by using restaurant loyalty points that are converted to cash for slot machine use only.
This provides Gamehost with a stronger competitive advantage versus its peers and targets a new customer demographic to mitigate against the decline of our typical customer.
- Acquiring minority interests in casinos in Alberta and BC:
The equity method of accounting can be used when 20% - 50% of the voting stock of an investee is acquired and where you can exert significant influence on the investee. This allows Gamehost to record the investee’s profit or loss in proportion to Gamehost’s ownership interest.
Since small stakes in strategic companies are taken, the prices paid will be more affordable and require less debt than buying the entire company. These stakes will provide for increased earnings for Gamehost and a higher stock trading multiple, if the Market becomes aware of Gamehost’s vision to grow. The Market becoming aware of Gamehost is very important as this will allow Gamehost to use its stock, due to its higher trading multiple, to acquire other minority interests in other companies or a bigger position in its current investees.
Gamehost would only need to use debt at the beginning of this acquisition strategy, as its trading multiple is too low to issue shares as this would dilute all shareholders. However, as the market recognizes Gamehost’s willingness to grow, it will attribute a higher multiple to its stock. At this point, the Company can issue additional stock, at this higher multiple, and pay down debt and use the remainder for additional minority interest acquisitions.
Alberta makes the most sense to look for minority interest acquisitions first as Gamehost is very aware of all competitors in this space, their quality, their earning power and their potential.
BC should then be looked into, in smaller cities where there is very little competition and where the potential for future growth looks appealing.
This would allow Gamehost to diversify its operations into a new province that is not subject to the same economic variables that are at play in Alberta.
Capital allocation This capital allocation strategy is based on Gamehost’s historical earning power from 2011 – 2019 and is post Trust years. The last two years, 2020 and 2021, are excluded as COVID distorts the Company’s earning power and will eventually no longer be an issue.
In this nine year period, Gamehost averaged $21,337,000 in free cash flow (ex-working capital items). Based on the 22,548,848 shares outstanding on March 28, 2022, the Company has averaged $0.95 in free cash flow per share.
The best consecutive three year period for WCS, 2012 – 2014, saw it average $76.47 CAD and in this span Gamehost averaged $24,089,000 in free cash flow, which translates into $1.07 per share based on shares outstanding on March 28, 2022.
Gamehost’s normalized earning power resides somewhere between these two levels of free cash flow per share of $0.95 - $1.07.
Gamehost currently pays a dividend of $0.36 per share, which leaves the Company with $0.59 - $0.71 per share of normalized earning power, and is after maintenance capex, to fund the growth initiatives referred to previously and to buy back stock. Not increasing the dividend further would allow the Company $13,000,000 - $16,000,000 annually to fund its growth initiatives and to buy back stock.
Debt repayment is not a good option as the balance sheet is strong.
Increase stock valuation multiple Investors and the financial community need to be aware of Gamehost to have a higher multiple attributed to its stock.
Too many investors are not aware that this company exists, yet it has been around since 2003, generates significant free cash flow in relation to revenues, is very well managed and its stock represents a lot of value as it is substantially undervalued.
Getting the message out will allow Gamehost to fund all future minority interest acquisitions by issuing stock instead of having to use debt as its stock trading multiple would expand and allow for the issuance of stock at higher prices.
This would make sense for all shareholders when our stock no longer trades at a discount to its intrinsic value and would permit the Company to grow faster and to maintain low debt levels.
For Gamehost’s stock to trade at a higher multiple, the financial community and investors will need to be aware of the Company’s growth plans and vision.
Without a willingness to make Gamehost’s vision known, the stock will continue to trade at a discount to intrinsic value.
Here are ways to increase the trading multiple of our stock:
- Implement a Substantial Issuer Bid (SIB):
This is in addition to the NCIB and will allow for a larger amount of stock to be purchased in a short period of time. The stock market is going through a period of uncertainty due to inflation and by extension interest rate concerns and this will result in volatility and downward pressure on stocks. Opportunities for larger purchases of our stock may materialize as investors look to exit due to the above mentioned concerns.
A SIB would get the message out that our stock is undervalued and generate interest from a longer-term horizon investor while allowing the Company to capitalize on any downward pressure put on the stock market in the shorter-term.
- The implementation of a quarterly conference call to discuss quarterly earnings: This is an opportunity for Gamehost to get its message out to investors and the financial community and will lead to recognition and interest in the Company due to its vision, growth plans, attractive dividend, stock buybacks and undervalued price.
- The implementation of an investor relations department to handle shareholder questions and interest adds another opportunity for the Company to get its vision across to investors.
- Improving the Company’s website and investor relations section of the website to make it more appealing to customers and to investors.
The implementation of these measures will bring more awareness to the Company as an attractive investment and will result in a higher stock trading multiple as investors see the value in Gamehost and its stock. This will allow Gamehost to use its stock as currency, instead of debt, to fund its growth initiatives.
Increase the size of the Board of Directors The adding of two board members who have been stock market investors for decades and have knowledge of how investors and the financial community think and function, will allow Gamehost to get its message out and for its stock to trade at a higher, more appropriate level.
In this light, Gamehost should increase its board from six to eight members.
Conclusion The above four-step plan will allow Gamehost to achieve growth in a disciplined and methodical fashion, while maintaining a strong balance sheet and for its investors to see an upward growth trajectory in the value and recognition of their stock.