Isle of Capri Casinos Inc. Rating: Buy

Transcription

1 GAMING Adam Steinberg, CFA Patricia Oey Company Update / Price Target Change / Estimates Change October 11, 2006 Key Metrics ISLE - NASDAQ $23.89 Pricing Date 10/10/2006 Price Target $ Week Range $34.30-$18.98 Shares Outstanding (mm) 34.3 Market Capitalization ($mm) $ Mo Average Daily Volume 366,342 Institutional Ownership 63% Debt/Total Capital 81.1% ROE 12.3% Book Value/Share $9.39 Price/Book 2.5x Dividend Yield NA LTM EBITDA Margin 22.60% Price: EPS($) FY: April Prior Curr. Prior Curr. 2006A 2007E 2007E 2008E 2008E 1Q-Jul A Q-Oct (0.03) 0.03E (0.02)E Q-Jan E 0.03E Q-Apr E 0.28E FY E 0.50E 1.12E 1.10E P/E 23.4x 47.8x 21.7x ISLE has an April fiscal year end Revenue($mm) Prior Curr. Prior Curr. 2006A 2007E 2007E 2008E 2008E 1Q-Jul A Q-Oct E 248.2E Q-Jan E 244.6E Q-Apr E 309.1E FY 1, ,115.5E 1,075.9E 1,279.6E 1,288.1E ISLE has an April fiscal year end Isle of Capri Casinos Inc. Rating: Buy FY07 A Transition Year; Early Entry For FY08 Growth Story; PT to $29 From $31 Investment Highlights: We hosted management of Isle of Capri for two days of meetings on the West Coast. The company was candid in its assessment of risks and opportunities in the name. We believe the company is facing near-term challenges in Mississippi, Colorado, and Iowa and that FY07 remains a transition year. We anticipate the pressure to ease during December, as we gain some clarity on ISLE's future capital needs, and see some progress on the Pompano Park development, which should commence operations in F4Q07 (ended April). By the end of December, we anticipate knowledge about opportunities in Pennsylvania and Singapore. Absent either opportunity, we would anticipate the company to begin reducing its debt. Given the revisions to the Eighth Wonder proposal (which includes Isle of Capri) to include Melco/PBL Entertainment, we now believe the Eighth Wonder proposal moves to contender from long shot. We are fine-tuning our F2Q07 estimates to reflect the competitive environment in Mississippi, Colorado, and Iowa. Our new EBITDA estimate is $46.8mm and we now expect a loss per share of $0.02. We had previously estimated EBITDA of $50.1mm and EPS of $0.03. We are maintaining our Buy rating on shares of Isle of Capri, but recognize that the current levels represent an early entry point at an attractive EV/EBITDA multiple. Our price target moves to $29 from $31, which reflects the competitive environment in Iowa. 1 Year Price History for ISLE Q3 Q1 Q2 Q Created by BlueMatrix Company Description: Isle of Capri ( ) currently owns and operates 15 land-based and riverboat casinos in 11 distinct geographic markets located in 6 states, the Bahamas, and the United Kingdom. In addition to its casino operations, the company also owns and operates a pari-mutuel harness racing facility in Pompano Beach, Florida, in Broward County, and is developing a riverboat casino in Waterloo, Iowa. The Disclosure section may be found on pages of this report. The Valuation section may be found on page 11 of this report.

2 We hosted a series of meetings with Isle of Capri management and investors on the West Coast. The company was very forthright regarding the near-term challenges the company faces in the Mississippi Gulf Coast and in Colorado and provided updates on some interesting growth opportunities, such as the Pompano Park racino and the Waterloo, IA, riverboat. Management was most enthusiastic when discussing the development in West Harrison County, MS, which will be on a 50-acre tract of land near Bay St. Louis, MS. The proposed $250mm-$300mm budget will represent the company's most significant project to date and management is confident it can potentially exceed its 20% hurdle rate, providing meaningful EBITDA gains. Transitional FY07 ISLE experienced a several-month halo as one of only three properties to quickly reopen on the Mississippi Gulf Coast following Hurricane Katrina. However, several properties have since reopened and competition in the market has become pretty stiff. Results should remain significantly above year-ago levels during the October and January quarters, but that is principally due to easy comparisons as the property was only open for partial quarters last year following the damage from Hurricane Katrina. Likewise, management was candid in the assessment of its recent capital improvements in Black Hawk, as returns have been disappointing. The company continues to fine-tune its offerings and marketing expenditures to deliver the growth in operations it expects, but also indicated it would begin to look at cost cutting opportunities to ensure the property delivers expected returns. The company's riverboats in Davenport and Bettendorf, IA, have been impacted by increased competition. The Iowa Racing and Gaming Commission (IRGC) voted in May 2005 to issue four additional gaming licenses, with three of the four having commenced operations since April The Riverside Casino and Golf Resort opened the last day in August 2006 and has been impacting results at ISLE's Quad Cities riverboats (Davenport and Bettendorf). The opening of Isle of Capri's riverboat in Waterloo, IA (expected in F1Q08) will offset the disruption from the new competition, in our opinion. The gaming operator completed the relocation of its corporate headquarters to St. Louis during the quarter. While the relocation expense, at just over $5mm, was approximately half our forecast, we believe the move was very disruptive to Isle of Capri. In particular, we believe the vast majority of ISLE's personnel elected to remain in Biloxi, MS, and it has hired new personnel in St. Louis. Over the near term, this employee turnover could create some knowledge holes, but the company has been hiring competent replacement personnel. The 2005 hurricane season has had a lasting impact on the industry, in general, and Isle of Capri, in particular. The company's insurance premiums increased 450% in FY07. Isle renews its insurance annually and should begin negotiating new policies in the February/March time frame for fiscal As 2006 has been a mild hurricane season and the insurance companies should be in better financial position, we anticipate premiums to come down slightly, but certainly still significantly above F2006 levels. FY08 Inflection ISLE of Capri Casinos has a number of initiatives on its plate that should drive growth beginning in the latter half of FY07. In particular, we are modeling the Pompano Park racino to commence operations during the company's F4Q07 (ended April). This will be a 1,500 slot machine facility that will be the closest facility to the affluent Boca Raton and Palm Beach areas. We are conservatively modeling win/day around $350/day. This would imply gross gaming revenue of just under $195mm, albeit at a high tax rate. The budget for this project is $155mm, up from the earlier $140mm projection. Most of the higher budget is due to higher insurance premiums. We remind investors that Isle's current cost basis on Pompano Park is less than $5mm. 2 MORGAN JOSEPH & CO. INC.

3 While the company's properties in Iowa have come under pressure from the three new licenses and from the expanded operations at the state's three racetracks, Isle is continuing to develop its own riverboat for Waterloo, Iowa. This property is slated to open in the May/June 2007 time frame. The project cost is approximately $140mm and the company expects to meet or exceed its 20% hurdle rate. Also in Iowa, Isle is developing a new 250-room hotel at its Bettendorf property for $45mm. Concurrent with this development, the city of Bettendorf is constructing a 50,000 sq. ft. convention center adjacent to the Isle of Capri property. Absent a revision to the Gulf Opportunity Zone Act (GO Zone) to extend the tax incentives to December 2009, we anticipate the company will have to commence construction on its proposed casino in West Harrison County, MS, by no later than June Under GO Zone, companies were incentivized to invest in the hurricane-affected region through multiple tax incentives, including accelerated depreciation. While the GO Zone did not include casinos, the accelerated depreciation would apply to non-gaming amenities. To benefit from the incentives, any new facility would need to commence operations by year-end 2008; however, it has been suggested to extend the provisions of GO Zone until December The early budget for this project is $250mm-$300mm, but could change as management evaluates the scope and potential returns to the project. We should have some additional clarification on two other potential initiatives by the end of the calendar year. Isle of Capri is one of three companies seeking the license to develop a slot machine facility in Pittsburgh and is involved in one of the three consortia seeking to develop a tourist destination on Sentosa Island in Singapore. Given the revisions to the Eighth Wonder proposal (which includes Isle of Capri) to include Melco/PBL Entertainment, we now believe the Eighth Wonder proposal moves to contender from long shot. ISLE continues to have an outside shot at being awarded the Pittsburgh license, but we continue to believe the front-runner is the partnership between Harrah's Entertainment [HET--$ NYSE] and Forest City Enterprises. In our view, the awarding of a license in Pittsburgh to Isle of Capri is neither positive nor negative. Isle of Capri's proposal includes a $290mm contribution to build a new arena for the NHL's Pittsburgh Penguins. Of the $1bn price tag, Isle of Capri would be responsible for $740mm. A proposed Pittsburgh facility has the potential to deliver mid-teens returns for the company and would represent a significant increase in company-wide EBITDA and scale, but we also believe share repurchases or debt reduction is just as good a use of capital. Other Thoughts on Isle of Capri The company is consistently reviewing its portfolio for capital needs or potential divestitures. This process led to the sale of the company's Bossier City, LA, and Vicksburg, MS, properties to Legends Gaming. The process involves a basic matrix analysis. To the left of the y-axis are markets that are experiencing growth, while challenged markets would be placed to the right of the y-axis. The x-axis represents the competitiveness of the company's property within that market. We have attempted to analyze the company's portfolio under similar metrics and have identified the Marquette, IA, riverboat as one for possible sale and the Kansas City riverboat as one for future investment. The Lake Charles riverboats represent an interesting situation. The market is growing, but Isle's property is challenged by Pinnacle Entertainment's [PNK-$31.04-NYSE, BUY] L'Auberge du Lac. We do not necessarily believe the company should invest heavily in that property ahead of the opening of Pinnacle's Sugarcane Bay in 2009 and the always present risk of Texas passing gaming legislation. We are constantly reminded by investors that Isle of Capri has never met a deal that it does not like. While this was a fair assessment of the company in the past, as the company closed on the acquisitions of Lady Luck Gaming and its properties in Kansas City, MO, and Davenport, IA, in 2000, its most recent acquisition was of the Colorado casinos sold by IGT [IGT-$ NYSE, BUY]. This transaction closed in April Since that time, Isle of Capri has sat on the sidelines during some recent asset sales and has completed 3 MORGAN JOSEPH & CO. INC.

4 the sale of some of its own properties. In our opinion, the company is not given enough credit for analyzing returns and walking away from certain riverboat assets that have come on the market. Isle is not given enough credit for its diversity. For FY07, we project that no single property is responsible for over 15% of EBITDA, while no individual state accounts for over 30% of EBITDA. We agree with concerns about the company's leverage. This has been the primary concern of ours about Isle of Capri. As we get clarification on the timing or pursuit of some of these other initiatives, such as Pittsburgh, Singapore, and West Harrison County, we believe the company will begin to delever. The company's CFO has indicated that his goal is to reduce the company's leverage to the 4.2x-4.5x range. We caution, however, that given the level of investment in new and current properties, we expect leverage to peak just below 6x. Fine-Tuning Estimates We are fine-tuning our F2Q07 estimates to reflect competition in Mississippi, Colorado, and Iowa. Our F2007 and F2008 estimates have been adjusted to reflect a shift of our anticipated open date for the Waterloo, IA, riverboat. We had previously been modeling this boat to open in April, but now anticipate Waterloo to commence operations in F1Q08. As such, our F2Q07 EBITDA and EPS estimates move to $46.8mm and a loss of $0.02 per share, from $50.1mm and $0.03. For F2007 and F2008, our EBITDA estimates move to $224.4mm and $285.8mm, from $246.8mm and $287.8mm, respectively. Taking into account slightly higher interest and depreciation, our F2007 and F2008 EPS estimates move to $0.50 and $1.10, from $0.87 and $1.12, respectively. Please see table 1 for additional detail on our estimate revisions. Table 1: Adjustments to Isle of Capri Estimates Old Region Line Item F1Q07A F2Q07E F3Q07E F4Q07E F2007E F2008E F1Q07A F2Q07E F3Q07E F4Q07E F2007E F2008E Mississippi Revenue % change 0.0% -2.3% -2.2% 0.4% -0.9% 0.6% EBITDA % change 0.0% -6.7% -4.8% -1.9% -2.7% 0.6% Louisiana Revenue % change 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% EBITDA % change 0.0% -1.2% -15.0% -1.0% -5.1% -5.3% Colorado Revenue % change 0.0% -1.2% 0.0% 0.0% -0.3% -0.3% EBITDA % change 0.0% -1.3% 0.0% 0.0% -0.4% -0.3% Iowa Revenue % change 0.0% -2.6% -2.5% -28.1% -10.1% -0.6% EBITDA % change 0.0% -5.7% -4.1% -20.9% -8.9% -0.6% Missouri Revenue % change 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% EBITDA % change 0.0% 0.0% 0.0% 0.0% 0.0% 0.5% International Revenue % change 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% EBITDA (3.1) (1.5) (0.8) (3.1) (1.5) (0.8) % change 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Pompano Park Revenue % change 0.0% 0.0% -74.2% 0.0% -17.8% 4.4% EBITDA (1.3) (0.6) (1.3) (0.6) (0.6) % change 0.0% 0.0% % -27.1% -56.8% 4.4% Isle of Capri Revenue , , , ,288.1 % change 0.0% -1.3% -6.6% -5.9% -3.6% 0.7% EBITDA % change 0.0% -6.6% -16.6% -11.8% -9.1% -0.7% Depreciation % change 0.0% 0.0% 1.0% 1.0% 0.5% 1.0% Interest % change 0.0% -0.3% -0.8% 0.3% -0.2% -1.8% EPS $0.21 $0.03 $0.20 $0.43 $0.87 $1.12 $0.21 ($0.02) $0.03 $0.28 $0.50 $1.10 % change 0.0% % -85.0% -34.9% -42.5% -1.8% Source: Company reports and Morgan Joseph and Co. inc. estimates New 4 MORGAN JOSEPH & CO. INC.

5 5 MORGAN JOSEPH & CO. INC.

6 Table 2: Isle of Capri Income Statement FY05-FY08E ($ in millions, except per share data) FY05A Jul-05A Oct-05A Jan-06A Apr-06A FY06A Jul-06A Oct-06E Jan-07E Apr-07E FY07E FY08E Revenue Mississippi operations Louisiana operations Colorado operations Iowa operations Missouri operations International operations Pompano Park Corporate and Other (0.0) (0.0) Total Revenue 1, , , ,288.1 Y/Y % Change 0.4% 0.2% -8.1% 1.1% 2.3% -1.0% -2.7% 0.1% -9.4% 0.9% -2.7% 19.7% EBITDA Mississippi operations Louisiana operations Colorado operations Iowa operations Missouri operations International operations (2.1) 1.1 (0.9) (0.0) (3.1) (1.5) (0.8) Pompano Park (0.7) (0.3) (1.1) (0.8) 0.1 (2.1) (1.3) (0.6) (0.6) Corporate and Other (35.9) (12.0) (14.3) (10.5) (10.7) (47.5) (11.6) (11.7) (11.7) (11.8) (46.8) (43.5) EBITDA Y/Y % Change -10.5% -11.6% -15.1% 16.8% 37.7% 8.0% 10.3% 12.6% -18.3% -21.1% -7.7% 27.4% Preopening expenses/other (2.1) (0.0) (1.4) (3.8) (21.3) (26.5) (2.3) (3.0) (5.3) 0.0 Share-based compensation (2.0) (2.0) (2.0) (2.0) (7.9) (8.0) Depreciation & Amortization (97.7) (25.3) (25.4) (25.4) (22.3) (98.4) (23.5) (23.6) (24.7) (26.4) (98.2) (106.8) EBIT Y/Y % Change -21.4% -23.4% -35.3% 17.9% 12.8% -5.5% 10.7% 22.9% -27.0% -6.8% -4.5% 51.5% Interest expense, net (73.5) (19.1) (20.3) (21.0) (19.4) (79.8) (19.1) (20.8) (20.4) (20.2) (80.5) (99.5) Minority interest (5.5) (2.1) (1.9) (0.4) (2.1) (6.5) (1.1) (1.9) (1.5) (2.0) (6.4) (7.2) Equity in unconsol. partnership's loss Other (5.3) (2.1) 0.0 (2.1) Interest & Other, net (84.2) (21.2) (22.2) (23.5) (21.5) (88.4) (20.2) (5.7) (22.0) (22.2) (70.0) (106.6) Pre-tax income (loss) (7.4) Income taxes (19.3) (3.0) 3.1 (5.2) (12.8) (17.8) (5.7) (6.0) (1.0) (8.3) (21.0) (29.0) Tax rate 47.2% 42.6% 42.6% 55.6% 61.2% 59.7% 52.0% 48.0% 48.0% 48.0% 49.0% 45.0% Extraordinary item/discont. Ops (3.6) (0.1) GAAP net income (loss) (4.2) GAAP EPS $0.58 $0.13 ($0.14) $0.13 $0.48 $0.61 $0.29 $0.21 $0.03 $0.28 $0.82 $1.10 RECONCILIATION TO OPERATING EPS: Extraordinary items (7.0) (4.4) (3.9) (3.9) 0.0 Pre-opening/other (7.3) (6.1) 0.0 Adjusted Net income (loss) (0.9) (0.7) Operating EPS $0.84 $0.13 ($0.03) $0.23 $0.68 $1.02 $0.21 ($0.02) $0.03 $0.28 $0.50 $1.10 Shares Outstanding Source: Morgan Joseph & Co. Inc. estimates and company reports 6 MORGAN JOSEPH & CO. INC.

7 Table 3: Isle of Capri Balance Sheet and Cash Flow Metrics FY05-FY08E ($ in millions) FY05A Jul-05A Oct-05A Jan-06A Apr-06A FY06A Jul-06A Oct-06E Jan-07E Apr-07E FY07E FY08E Balance Sheet and Cash Flow Items Cash Other Current Assets Current Assets Property, Plant & equip, net 1, , , , , , , , ,182.8 Total Assets 1, , , , , , , , , , , ,050.2 Current Maturities Other Current Liabilities Current Liabilities Long-Term Debt, net 1, , , , , , , , , , , ,371.9 Shareholders' equity Cash Flow from Operations Cash Used by Investing (213.7) (74.9) (49.8) (52.4) (11.9) (188.9) (85.1) (96.6) (113.9) (86.5) (382.1) (71.9) Debt Financing (10.1) (63.6) Equity Financing (11.4) (0.7) (6.9) (1.0) Cash Flow from Financing (5.8) (63.6) Net change in cash 11.6 (29.7) 9.1 (17.6) 13.2 (25.0) (23.0) Ratios Current Ratio Fixed Asset Turnover Total Asset Turnover Debt Ratio Equity Multiplier 6.4x 6.6x 7.1x 7.0x 6.5x 6.5x 6.4x 6.3x 6.6x 6.6x 6.6x 5.9x Interest coverage 3.1x 2.9x 2.8x 2.8x 3.0x 3.0x 3.1x 3.2x 3.0x 2.8x 2.8x 2.9x Total Debt/EBITDA 5.1x 5.3x 5.8x 5.6x 5.0x 5.0x 5.1x 5.2x 5.9x 6.4x 6.4x 4.8x Total Debt/Total Capital 81.6% 81.6% 82.9% 82.6% 81.2% 81.2% 81.1% 81.5% 82.4% 82.3% 82.3% 79.9% BV/Share $8.45 $8.34 $8.33 $8.37 $8.97 $9.12 $9.39 $9.55 $9.54 $9.78 $9.85 $10.76 ROIC 17.1% 15.8% 15.1% 15.4% 16.6% 17.2% 16.6% 16.4% 15.1% 13.8% 14.3% 16.8% ROE 10.7% 7.7% 7.2% 8.0% 11.7% 12.3% 12.3% 12.4% 10.1% 5.3% 5.6% 11.2% Source: Company reports and Morgan Joseph & Co. estimates 7 MORGAN JOSEPH & CO. INC.

8 Table 4: Isle of Capri Margin Analysis FY05-FY08E FY05A Jul-05A Oct-05A Jan-06A Apr-06A FY06A Jul-06 Oct-06E Jan-07E Apr-07E FY07E FY08E Biloxi 19.7% 16.5% 21.4% 54.0% 47.7% 38.6% 42.7% 26.5% 34.5% 27.0% 35.0% 26.3% Natchez 25.4% 24.5% 32.3% 38.5% 43.0% 35.6% 29.4% 31.0% 33.5% 28.5% 30.6% 30.0% Vicksburg 21.5% 26.5% 28.0% 37.0% NA 30.9% NA NA NA NA NA NA Lula 24.6% 23.1% 18.5% 26.4% 31.2% 25.2% 26.8% 18.0% 26.0% 30.0% 25.2% 24.7% Bossier City 21.3% 16.5% 21.7% 19.7% NA 19.2% NA NA NA NA NA NA Lake Charles 23.5% 20.1% 16.6% 28.9% 27.6% 24.2% 22.5% 21.0% 25.5% 26.0% 23.8% 25.2% Black Hawk 35.5% 33.9% 33.5% 31.9% 33.8% 33.3% 30.9% 33.5% 31.5% 34.0% 32.6% 32.6% Colorado Central Station 8.5% 24.3% 26.9% 18.0% NA 23.0% 20.9% 25.0% 23.8% 24.0% 23.4% 24.5% Bettendorf 34.2% 32.4% 28.2% 30.4% 34.8% 31.5% 28.7% 27.5% 30.0% 34.5% 30.1% 30.8% Davenport 25.5% 27.4% 23.0% 22.8% 31.1% 26.3% 30.3% 22.0% 22.7% 26.0% 25.3% 26.4% Marquette 25.5% 31.0% 25.2% 19.1% 21.3% 24.5% 22.8% 24.5% 19.5% 25.5% 23.3% 24.8% Waterloo NA NA NA NA NA NA NA NA NA NA NA 19.3% Kansas City 19.3% 17.6% 16.9% 18.5% 22.5% 19.0% 13.1% 17.0% 18.0% 19.0% 16.8% 17.3% Boonville 29.0% 29.1% 29.2% 27.6% 29.8% 29.0% 26.6% 29.5% 27.5% 30.0% 28.4% 28.6% Blue Chip (UK) -19.0% -11.2% -31.4% -15.8% -11.4% -16.8% -9.6% -23.3% -15.5% -13.8% -15.2% -17.7% Our Lucaya (Bahamas) -2.5% 18.9% -6.8% 4.5% 16.6% 9.9% -57.7% 8.4% 8.7% 20.7% -1.0% 17.8% Corporate and Other -3.2% -4.3% -5.8% -3.9% -3.5% -4.3% -4.2% -4.7% -4.8% -3.8% -4.4% -3.4% EBITDA 20.1% 19.0% 16.8% 23.0% 28.0% 22.0% 21.6% 18.9% 20.7% 21.9% 20.9% 22.2% Depreciation & Amortization 8.7% 9.0% 10.2% 9.4% 7.3% 8.9% 8.6% 9.5% 10.1% 8.5% 9.1% 8.3% EBIT 11.2% 10.0% 6.0% 12.2% 13.8% 10.7% 11.4% 7.3% 9.8% 12.8% 10.5% 13.3% Interest expense, net 6.6% 6.8% 8.2% 7.8% 6.3% 7.2% 7.0% 8.4% 8.4% 6.5% 7.5% 7.7% Minority interest -0.5% -0.7% -0.8% -0.2% -0.7% -0.6% -0.4% -0.7% -0.6% -0.6% -0.6% -0.6% Interest & Other, net -7.5% -7.5% -9.0% -8.7% -7.0% -8.0% -7.4% -2.3% -9.0% -7.2% -6.5% -8.3% Pre-tax income (loss) 3.7% 2.5% -3.0% 3.5% 6.8% 2.7% 4.0% 5.1% 0.8% 5.6% 4.0% 5.0% GAAP net income (loss) 1.6% 1.4% -1.7% 1.5% 4.9% 1.7% 3.4% 2.6% 0.4% 2.9% 2.4% 2.8% Adjusted Net income (loss) 2.3% 1.4% -0.3% 2.6% 7.0% 2.9% 2.4% -0.3% 0.4% 2.9% 1.5% 2.8% Source: Company reports and Morgan Joseph & Co. estimates 8 MORGAN JOSEPH & CO. INC.

9 Table 5: Isle of Capri Valuation Analysis ($ in mms, except per share data) Enterprise Value Fair Multiple EBITDA Low High Low High Existing Properties Low High CY05A CY06E CY07E 2006E 2006E 2007E 2007E Biloxi 7.0x 7.5x Natchez 6.0x 6.5x Vicksburg 0.0x 0.0x Lula 6.0x 6.5x Bossier City 0.0x 0.0x Lake Charles 6.5x 7.0x Black Hawk/CO Central Station 7.5x 8.0x Bettendorf 6.5x 7.0x Davenport 6.5x 7.0x Marquette 6.5x 7.0x Waterloo 0.0x 0.0x Kansas City 6.5x 7.0x Boonville 7.0x 7.5x Blue Chip (UK) 5.5x 6.0x (1.6) (1.2) (1.5) (6.8) (7.4) (8.4) (9.2) Our Lucaya (Bahamas) 1.0x 1.0x 5.1 (0.7) 2.5 (0.7) (0.7) Pompano Park 7.5x 8.0x (2.0) (2.5) 49.0 (18.5) (19.7) Corporate and Other 5.5x 6.0x (49.0) (45.7) (44.3) (251.2) (274.0) (243.9) (266.1) Total , , , ,990.0 Long-term debt, gross 1, , ,407.0 Less: Cash Less: Construction in Process Net Debt 1, , , ,037.2 Equity Value , Shares Out Current Price $23.91 Existing Operations $28 $28 $32 $26 $30 Waterloo Price Target $29 $29 $33 $27 $31 % Potential 21.3% 21.2% 37.3% 11.6% 28.7% Current EV/EBITDA multiple 8.0x 6.5x 6.6x Current P/E 36.6x 26.6x 24.4x Current P/FCF 39.9x 2.8x 7.6x Target EV/EBITDA multiple 8.7x 7.1x 7.2x Target P/E 44.4x 32.2x 29.6x Target P/FCF 48.4x 3.4x 9.2x Cash from operations Maintenance capex Free Cash Flow Free Cash Flow/Share $0.60 $8.62 $3.16 Source: Morgan Joseph & Co. Inc. estimates and company reports. 9 MORGAN JOSEPH & CO. INC.

10 Gaming Company Comparative Valuation Analysis Estimated (1) Estimated (1) Estimated (1) Price (as of) FD Mkt EPS P/E Free Cash Flow (FCF) P/FCF EBITDA EV/EBITDA Company Tkr Rtg 10/10/06 Shares Cap 2005A 2006E 2007E 2005A 2006E 2007E 2005A 2006E 2007E 2005A 2006E 2007E 2005A 2006E 2007E 2005A 2006E 2007E Casino Operators Ameristar Casinos ASCA Buy $ ,436.8 $1.18 $1.26 $ x 20.0x 19.2x $2.12 $0.69 $ x 36.4x 15.2x x 8.4x 7.7x Aztar Corp. AZR Hold $ ,986.9 $1.52 $1.56 $ x 34.2x 29.0x $2.22 ($1.50) $ x NA 17.6x x 11.6x 10.6x Boyd Gaming BYD Buy $ ,827.2 $2.52 $2.40 $ x 17.5x 16.6x $3.31 $3.70 $ x 11.4x 12.2x x 7.9x 7.5x Isle of Capri ISLE Buy $ $0.65 $0.90 $ x 26.5x 24.4x $0.60 $8.62 $ x 2.8x 7.5x x 6.5x 6.6x Monarch Casino MCRI Hold $ $1.11 $1.17 $ x 18.3x 17.3x $1.27 $1.13 $ x 18.9x 15.0x x 8.5x 7.6x Pinnacle Ent. PNK Buy $ ,349.8 $0.46 $1.30 $ x 23.9x 21.7x $0.82 $5.80 $ x 5.3x 5.6x x 7.3x 7.1x Riviera Holdings RIV Hold $ ($0.17) $0.02 $0.24 NA NA 83.0x $0.32 $0.79 $ x 25.3x 30.3x x 10.9x 10.3x Trump Ent. TRMP Buy $ ($2.76) ($0.23) $0.66 NA NA 28.5x ($2.96) $0.98 $1.77 NA 19.1x 10.6x x 10.3x 8.3x Arithmetic avg 31.6x 22.8x 28.6x 33.8x 18.7x 15.7x 10.9x 8.9x 8.2x Mkt wtd avg 27.0x 20.8x 21.4x 31.3x 16.6x 16.4x 11.4x 8.8x 8.1x Casino Technology FortuNet, Inc. FNET Buy $ $0.27 $0.06 $ x 178.2x 7.5x $0.25 $0.05 $ x 194.8x 6.5x x 25.7x 3.0x International Game Tech. IGT Buy $ ,500.2 $1.26 $1.35 $ x 31.7x 27.5x $2.72 $2.95 $ x 14.5x 14.0x , , x 14.9x 13.0x Shuffle Master Inc. SHFL Buy $ ,017.2 $0.85 $0.88 $ x 32.2x 23.6x $0.69 $1.50 $ x 19.0x 15.5x x 16.2x 12.8x WMS Industries WMS Buy $ ,187.9 $0.89 $1.06 $ x 29.7x 20.9x ($0.87) $1.29 $1.78 NA 24.5x 17.8x x 9.4x 6.9x Arithmetic avg 35.6x 68.0x 19.9x 33.5x 63.2x 13.4x 16.7x 16.5x 8.9x Mkt wtd avg 34.1x 32.5x 26.7x 16.3x 16.6x 14.3x 17.1x 14.7x 12.5x (1) Estimates reflect our calendar year end estimates and have been adjusted for companies with non-december fiscal year ends: ISLE (April FYE); IGT (September FYE); SHFL (October FYE); and WMS (June FYE) For further information regarding our valuation methodologies, go to Source: Morgan Joseph & Co. estimates and company reports. 10 MORGAN JOSEPH & CO. INC.

11 Required Disclosures 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:$36 08/25/06 Buy:$ Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q Price Target Our price target is $29. Created by BlueMatrix Valuation Methodology We reiterate our Buy rating on shares of ISLE. Our $29 price target includes $28 per share in value from current operations, implying a multiple of 7.0x and 7.1x our calendar 2006E and 2007E EBITDA, and also assigns an additional $1 per share in value for the Waterloo, IA, casino. Risk Factors The ultimate achievement of our price target and fundamental strength of operations is dependent upon a number of factors: 1) Casinos market their products and services to the consumer; thus, any macro or regional economic issue such as unemployment, consumer confidence and disposable income, among others, would negatively impact Isle's customer base; 2) The company's results could also be impacted by severe weather. Hurricanes, severe snowstorms, flooding, or icing also present a hazard, potentially impacting the decision of the consumer to visit a casino; 3) Isle of Capri has an extensive pipeline of new projects, including rebuilding its Biloxi property and the development of its Waterloo, IA, riverboat. However, construction projects involve several risks, including delays and cost overruns. Also, as a medium-sized company, we would be concerned about Isle's ability to manage multiple ongoing projects at the same time; and 4) The gaming industry is highly regulated and Isle of Capri, like all operators in the gaming industry, is exposed to regulatory or legislative risks, including new restrictions on operations and advertising, as well as increased taxes. 11 MORGAN JOSEPH & CO. INC.

12 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:$37 04/24/06 Hold:NA 05/19/06 Buy:$ Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q Created by BlueMatrix Rating and Price Target History for: International Game Technology (IGT) as of /19/06 I:Buy:$45 07/20/06 Buy:$ Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q Created by BlueMatrix I, Adam Steinberg, CFA, 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. I, Patricia Oey, 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. 12 MORGAN JOSEPH & CO. INC.

13 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 2006 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.