Trump Entertainment Resorts, Inc. Rating: Hold

Transcription

1 GAMING Justin T. Sebastiano (212) Company Update April 14, 2008 Key Metrics TRMP - NASDAQ $2.87 Pricing Date 04/11/2008 Price Target NA 52-Week Range $17.52-$2.86 Shares Outstanding (mm) 31.7 Market Capitalization ($mm) $ Mo Average Daily Volume 316,183 Institutional Ownership 80% Debt/Total Capital 87.9% ROE NM Book Value/Share $5.59 Price/Book 0.5x Dividend Yield NA LTM EBITDA Margin 15.20% EPS($) FY: December Prior Curr. Prior Curr. 2007A 2008E 2008E 2009E 2009E 1Q-Mar (0.26) -- (0.41)E Q-Jun (0.38) -- (0.30)E Q-Sep E Q-Dec (0.63) -- (0.45)E FY (1.05) -- (0.92)E -- (0.48)E P/E NM NM NM Revenue($mm) Prior Curr. Prior Curr. 2007A 2008E 2008E 2009E 2009E 1Q-Mar E Q-Jun E Q-Sep E Q-Dec E FY ,010.2E -- 1,085.4E 1 Year Price History for TRMP Q1 Q2 Q3 Q Created by BlueMatrix Company Description: Trump Entertainment Resorts ( owns and operates three properties in Atlantic City: Trump Taj Mahal, Trump Plaza, and Trump Marina. The three properties offer both gaming and non-gaming amenities, including ballrooms, conference space, restaurants, player lounges, health spas, and retail outlets Trump Entertainment Resorts, Inc. Rating: Hold Transitioning Coverage; Most Pieces In Place But Difficult Road Still Ahead Investment Highlights: We are transitioning coverage of Trump Entertainment Resorts with a Hold rating. The company appears to have most of the pieces in place to begin its turnaround, but external forces (many of which still exist) have made it a very difficult road to travel. The company continues to face serious competitive threats within and outside the Atlantic City market. Longer term, we expect capacity to increase substantially. Pennsylvania and New York slot facilities continue to perform well at the expense of Atlantic City operators, especially those that cater to the convenience player like Trump Plaza and Marina. Longer term, we expect three more PA facilities to open, which will likely add 4,500-6,500 slots within driving distance of Atlantic City. The removal of maintenance covenants related to leverage and coverage has lifted a tremendous weight off the still heavily leveraged balance sheet. At 12/31/07, debt leverage was 10.9x and interest coverage was 1.1x. We estimate that those ratios will be 10.3x and 1.3x at 12/31/08. We estimate that Trump will turn in 1Q08 EPS of ($0.41) versus consensus of ($0.38) and the Street's range of ($0.41) - ($0.32). Our forecast is at the bottom of the range, reflecting the Y/Y decline in March gaming revenue. Also, we believe promotional expense remained high in the quarter as Trump continued to roll out the retail component of its TrumpONE card. Our FY08 EPS estimate of ($0.92) is below the consensus of ($0.77) but within the Street's range of ($1.06) - ($0.36). We believe we are a bit more conservative than most when modeling the staggered opening of the Taj Mahal tower. Our FY09 EPS estimate is ($0.48). Consensus is ($0.29), but when the outlier estimates are removed, consensus falls to ($0.43). To determine fair value, we typically apply an enterprise multiple in the historical 5x to 7x range on small-cap gaming operators. However, given that Trump operates solely within the gaming-tax-friendly confines of Atlantic City (the second largest domestic gaming market) and finally has the tools in place to begin a turnaround, albeit at a slow pace, we believe shares should trade at a slight premium multiple of 7.5x. The stock currently trades at 8.8x our FY08 EBITDA estimate (7.5x when adjusted for developable land); therefore, we believe TRMP is fairly valued at this time. The Disclosure section may be found on pages 6-7 of this report.

2 Investment Thesis We are transitioning coverage of Trump Entertainment Resorts with a Hold rating. The company appears to have most of the pieces in place to begin its turnaround but external forces have made it a very difficult road to travel. New technology (unified player loyalty card, yield management system, data warehouse, etc.), a refreshed gaming/hotel product, and the nearly finished 782-room hotel tower at the Taj Mahal were long overdue, in our view. More importantly, the removal of maintenance covenants related to leverage and coverage has lifted a tremendous weight off the still heavily leveraged balance sheet. However, the proliferation of slot machines at Pennsylvania and New York City racetracks, combined with a partial smoking ban at Atlantic City casinos, made the turnaround move at a snail's pace. Additionally, and maybe more importantly, these external forces crushed the takeover hopes of Trump shareholders. Valuation We typically apply an enterprise multiple of EBITDA in the historical 5x to 7x range to determine fair value on small-cap and regional gaming operators. However, given that Trump Entertainment Resorts operates solely within the gaming-friendly confines (from a tax perspective) of Atlantic City, New Jersey (the second largest gaming jurisdiction in the United States) and finally has the tools in place to begin a turnaround, albeit at a slow pace, we believe shares should trade at a slight premium multiple of 7.5x. The stock currently trades at 8.8x our FY08 EBITDA estimate (7.5x when adjusted for developable land). Therefore, we believe the shares are fairly valued. Competitive Landscape The company continues to face serious competitive threats within and outside of the Atlantic City market. Harrah's Atlantic City recently added 960 hotel rooms and Borgata plans to open 800 new rooms by the end of June. This does not bode well for Trump Marina because both properties are located in the Marina District. The addition of the new Trump Taj Mahal tower in 2H08 should help results at that property, but will likely do little for the Trump Plaza and Marina. Longer term, we expect capacity to increase substantially. Revel Entertainment expects to open a casino-resort with 4,200 slots, 150 tables, and over 1,900 hotel rooms in late 2010 at the northern end of the Boardwalk. MGM MIRAGE (MGM - $ NYSE) is in the design phase of its CityCenter East project located in the Marina (located between the Borgata and Harrah's). Early indications call for 5,000 slots, 200 table games, and 3,000 hotel rooms. Pinnacle Entertainment (PNK - $ NYSE; Hold) will likely build a casino-resort on the center Boardwalk that is on par with that of the Borgata but the status of the credit market has put a potential construction start date in limbo. We believe the project will open in 2012 or Pennsylvania and New York slot facilities continue to perform well at the expense of the Atlantic City operators, especially those that cater to the convenience player like Trump Plaza and Marina. Longer term (late 2009/2010), we expect three more PA facilities to open, which will likely add 4,500-6,500 slot machines within driving distance of Atlantic City. 2 MORGAN JOSEPH & CO. INC.

3 Earnings We estimate that Trump will turn in 1Q08 EPS of ($0.41) versus consensus of ($0.38) and the Street's range of ($0.41) - ($0.32). The robust gaming revenue growth that Trump posted in February did not continue in March. February numbers were artificially inflated, in our opinion, by an extra day (leap year) and an extra Friday. More specific to Trump, the Y/Y comp was extremely beatable at -4.8%; the March comp was +1.3%. More importantly, we believe promotional expense remained high in the quarter as the company continued to test the waters of the retail component of its TrumpONE card. Hefty promotional expense in 4Q07 hurt EBITDA in that quarter by an estimated $3.5mm. We expect a similar drag in 1Q08. Our FY08 EPS estimate of ($0.92) is below consensus of ($0.77) but within the Street's range of ($1.06) - ($0.36). We believe we are a bit more conservative than most when modeling the staggered opening of the Taj Mahal tower that is scheduled to begin around Labor Day. Our FY09 EPS estimate is ($0.48). Consensus is ($0.34), but when two outliers (one high, one low) are removed, consensus falls to ($0.43). Financial Overview At the end of December 2007, Trump refinanced its first lien credit facility at an interest rate of LIBOR basis points. Given the current rate environment, the new rate alone makes the fiscal move a meaningful one; however, the real story behind the refinancing is the removal of maintenance covenants related to leverage and coverage. At 12/31/07, debt leverage was 10.9x and interest coverage was 1.1x. We estimate that those ratios will be 10.3x and 1.3x at 12/31/08. As a result, without the refinancing, Trump would have breached its covenants and likely would have had to pay a penalty and/or increase the margin above LIBOR, resulting in higher interest expense. Trump has about $75mm in cash (excludes $45mm in cage cash), $53mm in restricted cash reserved for the Taj Mahal tower project, and $100mm available under its credit facility. As a result, we believe the company is in good shape to finish the tower, make necessary maintenance cap ex, and meet working capital requirements. 3 MORGAN JOSEPH & CO. INC.

4 Justin T. Sebastiano Trump Entertainment Resorts (TRMP) Income Statement Model ($ in thousands except per share) Year Ends December Q 2Q 3Q 4Q QE 2QE 3QE 4QE 2008E 2009E Net Revenues 1,026, , , , , , , , , ,761 1,010,214 1,085,436 Y/Y change 3.4% -1.4% -4.6% -2.5% -6.4% -3.7% -3.1% 1.5% 3.3% 7.1% 2.2% 7.4% EBITDA Taj Mahal 114,300 27,397 24,000 37,000 18, ,797 25,058 26,474 41,760 27, , ,227 Plaza 40,700 6,797 8,200 16,900 6,000 37,897 6,353 9,559 14,884 8,197 38,993 44,984 Marina 48,200 8,097 7,500 9,800 3,900 29,297 5,954 7,346 10,553 5,567 29,420 31,337 Property EBITDA 203,200 42,291 39,700 63,700 28, ,991 37,365 43,378 67,197 41, , ,548 Property EBITDA margin 19.8% 18.1% 16.3% 22.7% 12.4% 17.6% 16.5% 17.5% 23.1% 17.1% 18.8% 20.8% Corporate expense (22,800) (6,164) (7,100) (5,200) (5,267) (23,731) (5,275) (5,325) (5,300) (5,250) (21,150) (20,200) Adjusted EBITDA 180,400 36,127 32,600 58,500 23, ,260 32,090 38,053 61,897 36, , ,348 Adjusted EBITDA margin 17.6% 15.4% 13.3% 20.8% 10.1% 15.2% 14.1% 15.3% 21.3% 14.9% 16.7% 18.9% Y/Y change 11.1% -2.9% -26.6% -2.7% -40.5% -16.7% -11.2% 16.7% 5.8% 58.5% 12.2% 21.8% Depreciation & Amortization (68,091) (15,266) (16,316) (17,700) (16,392) (65,674) (17,400) (17,400) (18,950) (20,450) (74,200) (83,300) Stock-based compensation (5,197) (1,036) (900) (900) (433) (3,269) (900) (900) (900) (900) (3,600) (3,600) Pre-opening & dev expense (7,361) (200) (200) Total OPERATING INCOME 99,751 19,625 15,384 39,900 6,208 81,117 13,790 19,753 42,047 15,156 90, ,448 Interest income 10,363 1,383 1,834 2,256 2,080 7,553 1,400 1, ,500 2,000 Interest exp, net of cap int (130,144) (31,442) (32,534) (33,476) (33,582) (131,034) (32,012) (33,011) (33,234) (33,333) (131,590) (139,820) Other income (expense) Income Before Taxes (20,030) (10,434) (15,316) 8,680 (25,294) (42,364) (16,823) (12,057) 9,713 (18,177) (37,344) (19,371) Provision for Income Taxes (6,356) (200) - - (150) (350) Tax Rate 31.7% 1.9% 0.0% 0.0% 0.6% 0.8% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Extraordinary items 1,700 - (2,274) - (214,080) (216,354) Discontinued operations GAAP Net Income (Loss) (23,952) (10,634) (17,590) 8,680 (239,524) (259,068) (16,823) (12,057) 9,713 (18,177) (37,344) (19,371) Fully Diluted GAAP EPS ($0.59) ($0.26) ($0.43) $0.21 ($5.89) ($6.37) ($0.41) ($0.30) $0.24 ($0.45) ($0.92) ($0.48) RECONCILIATION TO ADJUSTED EPS Extraordinary items (1,700) - 2, , , Discontinued operations (734) Preopening and other 6, Adjusted Net Income (Loss) (20,221) (10,438) (15,316) 8,680 (25,444) (42,518) (16,823) (12,057) 9,713 (18,177) (37,344) (19,371) Adjusted EPS ($0.50) ($0.26) ($0.38) $0.21 ($0.63) ($1.05) ($0.41) ($0.30) $0.24 ($0.45) ($0.92) ($0.48) Avg Diluted Shares Out 40,374 40,428 40,480 40,477 40,666 40,513 40,666 40,666 40,666 40,666 40,666 40,666 Source: Company reports and Morgan Joseph & Co. Inc. estimates 4 MORGAN JOSEPH & CO. INC.

5 Gaming Company Comparative Valuation Analysis Estimated Price Price (as of) 52-Week 52-Week FD Mkt EPS P/E EBITDA EV/EBITDA Company Tkr Rtg Target 4/12/08 High Low Shares Cap 2008E 2009E 2008E 2009E 2008E 2009E 2008E 2009E Casino Operators Ameristar Casinos ASCA Sell $16 $17.62 $38.00 $ ,025.8 $1.28 $ x 12.5x x 7.2x Boyd Gaming BYD Hold NA , x 12.8x x 6.4x Isle of Capri (1) ISLE Hold NA (0.17) 0.15 NM 49.8x x 6.1x Monarch Casino MCRI Hold NA x 13.8x x 6.2x Pinnacle Entertainment (2) PNK Hold NA NM 27.5x x 5.5x Trump Entertainment TRMP Hold NA (0.92) (0.48) NM NM x 8.3x Arithmetic avg 14.4x 23.3x 7.1x 6.6x Mkt wtd avg 10.1x 17.4x 6.9x 6.5x Ex-Trump Entertainment Arithmetic avg 6.7x 6.3x Mkt wtd avg 6.8x 6.4x (1) Isle of Capri's fiscal year ends in April. Our 2008 and 2009 estimates correspond to Isle's fiscal years ending FY09 and FY10. (2) Our FY09 EBITDA estimate for PNK excludes the partial year expected contribution from River City casino ($14M) for this table. For further information regarding our valuation methodologies, go to Source: Morgan Joseph & Co. estimates and company reports. 5 MORGAN JOSEPH & CO. INC.

6 Required Disclosures Rating and Price Target History for: Trump Entertainment Resorts, Inc. (TRMP) as of /09/06 I:Buy:$23 03/02/06 Buy:$22 05/04/06 Buy:$26 08/02/06 Buy:$23 11/13/06 Hold:NA 06/15/07 Buy:$18 08/08/07 Buy:$ Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q Research Coverage Assumed by Justin Sebastiano on April 14, Created by BlueMatrix Rating and Price Target History for: Pinnacle Entertainment, Inc. (PNK) as of /09/06 I:Buy:$33 02/22/06 Buy:$34 03/15/06 Buy:$38 04/17/06 Buy:$37 04/24/06 Hold:NA 05/19/06 Buy:$38 01/05/07 Buy:$35 02/15/07 Buy:$39 05/09/07 Buy:$36 11/07/07 Buy:$40 03/12/08 Hold:NA Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q Research Coverage Assumed by Justin Sebastiano on March 12, Created by BlueMatrix I, Justin Sebastiano, the author of this research report, certify that the views expressed in this report accurately reflect my personal views about the subject securities and issuers, and no part of my compensation was, is, or will be directly or indirectly tied to the specific recommendations or views contained in this research report. Research analyst compensation is dependent, in part, upon investment banking revenues received by Morgan Joseph & Co. Inc. Morgan Joseph & Co. Inc. intends to seek or expects to receive compensation for investment banking services from the subject company within the next three months. 6 MORGAN JOSEPH & CO. INC.

7 Investment Banking Services/Past 12 Mos. Rating Percent Percent BUY [B] HOLD [H] SELL [S] Meaning of Ratings A) Buy means reasonable outperformance relative to the market over months. B) Hold means market-type risk adjusted performance; potential source of funds. C) Sell means expected to underperform the market. Other Disclosures The information contained herein is based upon sources believed to be reliable but is not guaranteed by us and is not considered to be all inclusive. It is not to be construed as an offer or the solicitation of an offer to sell or buy the securities mentioned herein. Morgan Joseph & Co. Inc., its affiliates, shareholders, officers, staff, and/or members of their families, may have a position in the securities mentioned herein, and, before or after your receipt of this report, may make or recommend purchases and/or sales for their own accounts or for the accounts of other customers of the Firm from time to time in the open market or otherwise. Opinions expressed are our present opinions only and are subject to change without notice. Morgan Joseph & Co. Inc. is under no obligation to provide updates to the opinions or information provided herein. Additional information is available upon request. Copyright 2008 by Morgan Joseph & Co. Inc. Morgan Joseph & Co. Inc. 600 Fifth Avenue, 19th Fl New York, NY Tel Fax Sales and Trading New York Tel Fax Pittsford Tel Fax MORGAN JOSEPH & CO. INC.