Trump Entertainment Resorts, Inc. Rating: Hold

Transcription

1 GAMING Justin T. Sebastiano (212) Company Update May 29, 2008 Key Metrics TRMP - NASDAQ $3.40 Pricing Date 05/28/2008 Price Target NA 52-Week Range $16.41-$2.29 Shares Outstanding (mm) 31.7 Market Capitalization ($mm) $ Mo Average Daily Volume 232,080 Institutional Ownership 80% Debt/Total Capital 88.9% ROE NM Book Value/Share $5.04 Price/Book 0.7x Dividend Yield NA LTM EBITDA Margin 14.20% EPS($) FY: December Prior Curr. Prior Curr. 2007A 2008E 2008E 2009E 2009E 1Q-Mar (0.26) -- (0.59)A Q-Jun (0.38) -- (0.30)E Q-Sep E Q-Dec (0.63) -- (0.45)E FY (1.05) -- (1.10)E -- (0.48)E P/E NM NM NM Revenue($mm) Prior Curr. Prior Curr. 2007A 2008E 2008E 2009E 2009E 1Q-Mar A Q-Jun E Q-Sep E Q-Dec E FY ,010.8E -- 1,085.5E 1 Year Price History for TRMP Q2 Q3 Q Trump Entertainment Resorts, Inc. Rating: Hold Agrees to Sell Marina; High Price Tag Does Not Mark Start of Takeout Frenzy Investment Highlights: Coastal Marina, LLC has agreed to purchase the Trump Marina for $316mm. The price tag is 12.1x our FY08 EBITDA estimate of $26.1mm and 10.1x our FY09 EBITDA estimate of $31.4mm. Looked at a different way, the acquisition cost equates to $19.75mm per acre. Any way you slice it, Coastal Marina has over-paid for the Trump Marina. We believe there is another reason for such a high price tag. The acquisition of the Trump Marina by Coastal Marina has led Trump Entertainment to withdraw its lawsuit against Richard T. Fields. Mr. Fields is the Chairman of Coastal Marina. This sale does not necessarily mean that we have re-entered a consolidation stage in the gaming industry, like the most recent one that was sparked by the acquisitions of Mandalay Resort Group (by MGM MIRAGE - MGM - $ NYSE) and Caesars Entertainment (by Harrah's) in mid The debt markets still are far too expensive to make a flurry of sales/acquisitions forthcoming. We believe the deal will likely close over the next six months, given that it is only one property. Moreover, Coastal Marina has grand plans for the site, which includes rebranding it a Margaritaville (Jimmy Buffett). We expect the New Jersey Gaming Commission to look favorably on the deal considering that Margaritaville would likely generate more tax revenue for the state than the Trump Marina is capable of producing, in our opinion. We believe the optimal choice is to pay down debt. We calculate that the divestiture will be accretive to our FY09 EPS estimate by $0.14, which brings our forecast to ($0.34). This assumes Trump repurchases $300mm of the 8.5% senior secured notes. We will not change our model until the deal as closed. This is a move in the right direction, but Trump Entertainment still has a long way to go. We maintain our Hold rating on shares of TRMP. 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. The Disclosure section may be found on pages 5-8 of this report.

2 Sale of the Trump Marina...Finally Coastal Marina, LLC has agreed to purchase the Trump Marina for $316mm. The price tag is 12.1x our FY08 EBITDA estimate of $26.1mm and 10.1x our FY09 EBITDA estimate of $31.4mm. Looked at a different way, the acquisition cost equates to $19.75mm per acre (Trump Marina is on 14 acres + 2 developable acres). Any way you slice it, Coastal Marina has over-paid for the Trump Marina. We believe there is another reason for such a high price tag. Prior Unrelated Litigation Will End On December 30, 2004, Trump Entertainment sued Richard T. Fields, Coastal Development, Power Plant Entertainment, and a few other entities in the Circuit Court of the 17th Judicial District for Broward County, Florida. Trump alleged that Power Plant Entertainment "improperly obtained certain agreements with the Seminole Tribe of Florida for the development of gaming facilities in Hollywood and Tampa, Florida." In April 2008, the court upheld Trump's claims against all defendants for fraud and conspiracy and Trump's claim against Mr. Fields and Coast Development under the Florida Deceptive and Unfair Trade Practices Act. The case was scheduled to be heard in August However, the acquisition of the Trump Marina by Coastal Marina, LLC has led Trump Entertainment to withdraw its lawsuit. Mr. Fields, one of the defendants in the lawsuit, is the Chairman of Coastal Marina, LLC. Sale Does Not Mean Takeover Frenzy Will Re-emerge Trump Entertainment should be applauded for negotiating such a high price for the Trump Marina. It appears they had leverage and used it to their full advantage. This sale does not necessarily mean that we have re-entered a consolidation stage in the gaming industry, like the most recent one that was sparked by the acquisitions of Mandalay Resort Group (by MGM MIRAGE) and Caesars Entertainment (by Harrah's) in mid The debt markets still are far too expensive to make a flurry of sales/acquisitions forthcoming. Moreover, stocks of casino operators, especially those that operate in riverboat markets such as Ameristar Casinos (ASCA - $ NASDAQ; Sell), Pinnacle Entertainment (PNK - $ NYSE; Hold), Boyd Gaming (BYD - $ NYSE; Hold), and Isle of Capri (ISLE - $ NASDAQ; Hold), do not deserve to trade up on this news. Details of the Deal Trump put out a scant press release announcing the deal but will likely add more details to the 8-K that should be filed by Monday the latest. We believe the deal will likely close over the next six months, given that it is only one property. Moreover, Coastal Marina has grand plans for the site, which includes rebranding it a Margaritaville (Jimmy Buffett). We expect the New Jersey Gaming Commission to look favorably on the deal considering that Margaritaville would likely generate more tax revenue for the state than the Trump Marina is capable of producing, in our opinion. Trump Entertainment has 12 months to decide how to utilize the proceeds of the sale before it must make an offer to its bond holders to buy back some of the 8.5% notes. The company stated that it will look at all opportunities including development in and outside of Atlantic City and reducing debt. We believe the optimal choice is to pay down debt. The new Taj tower is already funded and we believe the company must wait and see how well it is accepted before it decides to build another one. While we believe diversifying away from A.C. is important, given the status of the credit markets we believe generating adequate returns on an acquisition or new build would be inadequate. As such, debt reduction is the way to go, in our opinion. 2 MORGAN JOSEPH & CO. INC.

3 The company will likely have sufficient NOLs to offset most of the gains from the sale. In our model, we use net proceeds of $300mm to reduce the debt load. This discount to the sales price should more than account for the likely premium/prepayment penalty that Trump would have to pay its bondholders. We assume the deal closes by the end of the year. As such, the sale will only affect our FY09 estimates. We calculate that the divestiture will be accretive to our FY09 EPS estimate by $0.14, which brings our forecast to ($0.34). This assumes Trump repurchases $300mm of the 8.5% senior secured notes. We will not change our model until the deal as closed. 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 QA 2QE 3QE 4QE 2008E 2009E Net Revenues 1,026, , , , , , , , , ,761 1,010,800 1,085,462 Y/Y change 3.4% -1.4% -4.6% -2.5% -6.4% -3.7% -2.8% 1.5% 3.3% 7.1% 2.3% 7.4% EBITDA Taj Mahal 114,300 27,397 24,000 37,000 18, ,797 21,000 25,242 41,760 27, , ,263 Plaza 40,700 6,797 8,200 16,900 6,000 37,897 7,100 9,559 14,884 8,197 39,740 44,941 Marina 48,200 8,097 7,500 9,800 3,900 29,297 2,672 7,346 10,553 5,567 26,138 31,370 Property EBITDA 203,200 42,291 39,700 63,700 28, ,991 30,772 42,147 67,197 41, , ,574 Property EBITDA margin 19.8% 18.1% 16.3% 22.7% 12.4% 17.6% 13.5% 17.0% 23.1% 17.1% 18.0% 20.8% Corporate expense (22,800) (6,164) (7,100) (5,200) (5,267) (23,731) (5,300) (5,325) (5,300) (5,250) (21,175) (20,226) Adjusted EBITDA 180,400 36,127 32,600 58,500 23, ,260 25,472 36,822 61,897 36, , ,348 Adjusted EBITDA margin 17.6% 15.4% 13.3% 20.8% 10.1% 15.2% 11.2% 14.9% 21.3% 14.9% 15.9% 18.9% Y/Y change 11.1% -2.9% -26.6% -2.7% -40.5% -16.7% -29.5% 13.0% 5.8% 58.5% 6.9% 27.8% Depreciation & Amortization (68,091) (15,266) (16,316) (17,700) (16,392) (65,674) (17,121) (16,900) (18,000) (20,300) (72,321) (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 7,451 19,022 42,997 15,306 84, ,448 Interest income 10,363 1,383 1,834 2,256 2,080 7,553 2,031 1, ,360 2,000 Interest exp, net of cap int (130,144) (31,442) (32,534) (33,476) (33,582) (131,034) (33,860) (33,040) (33,784) (33,983) (134,667) (139,820) Other income (expense) Income Before Taxes (20,030) (10,434) (15,316) 8,680 (25,294) (42,364) (24,378) (12,589) 10,113 (18,677) (45,531) (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) (24,378) (12,589) 10,113 (18,677) (45,531) (19,371) Fully Diluted GAAP EPS ($0.59) ($0.26) ($0.43) $0.21 ($5.89) ($6.37) ($0.59) ($0.30) $0.24 ($0.45) ($1.10) ($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) (24,378) (12,589) 10,113 (18,677) (45,531) (19,371) Adjusted EPS ($0.50) ($0.26) ($0.38) $0.21 ($0.63) ($1.05) ($0.59) ($0.30) $0.24 ($0.45) ($1.10) ($0.48) Avg Diluted Shares Out 40,374 40,428 40,480 40,477 40,666 40,513 41,319 41,319 41,319 41,319 41,319 40,669 Source: Company reports and Morgan Joseph & Co. Inc. estimates 4 MORGAN JOSEPH & CO. INC.

5 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 06/15/07 Buy:$18 08/08/07 Buy:$14 04/14/ Research Coverage Assumed by Justin Sebastiano on April 14, 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 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/ Research Coverage Assumed by Justin Sebastiano on March 12, MORGAN JOSEPH & CO. INC.

6 Rating and Price Target History for: Isle of Capri Casinos Inc. (ISLE) as of /09/06 I:Buy:$29 01/23/06 Buy:$31 02/17/06 Buy:$34 03/22/06 Buy:$39 05/09/06 Buy:$42 08/02/06 Buy:$36 08/25/06 Buy:$31 10/11/06 Buy:$29 12/08/06 09/10/07 Buy:$24 12/05/07 Buy:$ /14/08 Research Coverage Assumed by Justin Sebastiano on April 14, Rating and Price Target History for: Boyd Gaming Corp. (BYD) as of /09/06 I:Buy:$57 04/26/06 Buy:$62 07/26/06 Buy:$48 08/16/06 Buy:$50 10/27/06 Buy:$47 01/19/07 03/06/07 Buy:$56 03/12/ Research Coverage Assumed by Justin Sebastiano on March 12, MORGAN JOSEPH & CO. INC.

7 Rating and Price Target History for: Ameristar Casinos Inc. (ASCA) as of /09/06 I:Buy:$28 01/26/06 02/24/06 Buy:$28 04/21/06 07/24/06 Buy:$23 10/06/06 Buy:$29 12/14/06 Buy:$37 01/15/08 Buy:$27 03/25/08 Sell:$ Research Coverage Assumed by Justin Sebastiano on March 25, Rating and Price Target History for: MGM MIRAGE (MGM) as of 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. 7 MORGAN JOSEPH & CO. INC.

8 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.