19 June 2017 North American Research PRICE TARGETS Raising price target on ERI to $25 (from $23) - Reiterate Buy Raising price target on MCRI to $32 (from $31) - Reiterate Hold KEY TAKEAWAYS Reno local economy continues to boom, supported by large-scale tech development RSCVA under new leadership with increased marketing budget and focus on attracting incremental group business MCRI best way to play Reno revival - raising estimates ERI has more upside in synergies - raising estimates Global Gaming Operators Industry Update Revisiting Reno: Raising Price Targets on ERI and MCRI We recently returned from our trip to Reno where we met with the management of ERI, MCRI, and the Reno-Sparks Convention Visitors Authority (RSCVA). Overall, we came away from our trip incrementally more favorable on the outlook for Reno. The significant investment from tech giants like Tesla, Apple, and Google continue to create thousands of jobs and fuel the local economy -- so much so that we are beginning to see a residential housing crunch. We expect residential development in Reno to accelerate in the coming quarters, further stimulating the local economy. The influx of tech development and jobs has sparked a need for greater airport utilization, which in turn is creating an opportunity for the RSCVA to begin building a more robust group and meeting business that will ultimately support higher hotel occupancy, cash ADRs, and margins for the likes of ERI and MCRI. While the group and meeting business in Reno is relatively small today, we see long-term upside. The RSCVA is under new leadership and now has greater marketing budget (which doubled y/y). Overall, we think the RSCVA is just getting started and any progress on the group/meeting front will directly benefit the casino operators. We are raising our price target on the shares of ERI to $25 (from $23) and reiterating our Buy rating. Our price target increase is based on an 8.5x multiple of our new 2018 Adjusted EBITDA estimate of $433m (up from $429m). Our higher EBITDA estimate is due to our expectation for ERI to outperform management's stated synergy target of $35m. We continue to think valuation is attractive given the FCF profile of the company and see potential upside to earnings estimates with greater operational improvements across the portfolio. We are also raising our price target on the shares of MCRI to $32 (from $31) and reiterating our Hold rating. Our $32 price target is based on a 9.0x multiple of our new 2018 Adjusted EBITDA estimate of $64m (up from $62m). We believe a premium multiple is justified given the company's long-term prospects with its expansion project in Black Hawk. Further, We see no operator better positioned to capitalize on the revival in Reno than MCRI given its exposure to the locals market. With premium service levels, ample parking, and connectivity to the convention center, we view MCRI as the best way to play the Reno market. We are also incrementally more comfortable with construction progress in Black Hawk, with little sign of construction disruption thus far. Overall, we are bullish about MCRI's prospects both in Reno and Black Hawk; however, we think share price appreciation will be more muted in the near-term due to valuation. We see more room with valuation once the new hotel in Black Hawk nears completion (late-2018/19). Analysts John DeCree Tel: 702-691-3213 john.decree@uniongaming.com *Please see analyst certification and required disclosures starting on page 9 of this report. 2017 Union Gaming. All rights reserved. No part of this report may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying or by any information storage and retrieval system, without permission in writing from Union Gaming.
Reno Market Update Airlift and Group Business Airport throughput is key. One of the most vital infrastructure requirements for a burgeoning destination is the local airport. In Reno, air passenger volume is on a steady rise. YTD through April, passenger traffic at the Reno-Tahoe International Airport is up 9.9%. This follows 6.4% growth in passenger volume for all of 2016 when the airport handled over 3.65m passengers. For 2017, the airport is on pace to handle over 4m passengers, up 10% from 2016. This is a significant trend to keep an eye on as Reno continues to attract inbound visitation. Reno has seen a steady uptick in corporate travelers given the amount of tech development in the city. Corporate travelers generally pay higher room rates than leisure travelers, which is a plus for the likes of ERI and MCRI. Figure 1. Passenger Volume Reno-Tahoe Y/Y % Chg Figure 2. Passenger Count Reno-Tahoe by Month/Year 16.0% 14.0% 380,000 360,000 340,000 +13.4% 12.0% 10.0% 8.0% 320,000 300,000 280,000 +9.5% +6.1% +10.4% 6.0% 260,000 4.0% 240,000 2.0% 0.0% 220,000 200,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2015 2016 2017 Source: Reno-Tahoe Int l Airport, Union Gaming Securities. Source: Reno-Tahoe Int l Airport, Union Gaming Securities. RSCVA getting traction with group business. Supported by the strong growth in airlift to the city, the RSCVA is tasked with attracting more leisure, FIT, and group meeting business to Reno. While large scale conventions would provide a nice boost, it is more likely the RSCVA will help drive smaller group and meeting business to the area, ultimately helping the hotels and casino operators. There are two primary reasons why we see a brighter future for the RSCVA and group business in Reno. The first is due to recent management changes, including the hiring of a new CEO, Phil DeLone. The second is a significantly increased marketing budget. Significant management changes come with a new goal oriented team. Long-time industry veteran Phil DeLone was hired as President and CEO of the RSCVA in November 2016. Most recently, Mr. DeLone has spent 5 years as the CEO of Safari Club International, a 55k member organization that holds regular conferences. Prior to that, Mr. DeLone spent 20 years working in various executive sales and management roles in the Reno hotel and casino industry. Mr. DeLone has only been at the helm of the RSCVA for a few months and has already started making significant improvements, including hiring a seasoned sales force to help attract group business from key markets along the Pacific coast. Marketing spend set to double. Perhaps one of the more tangible changes at RSCVA thus far is an increase in the marketing budget to roughly $9m, up from less than $4m in prior years. With a little more capital to put to work and a team of experienced sales executives, we suspect the RSCVA will be much more successful attracting new business going forward. Any increase in tourism or group business to Reno will directly benefit the hotel casino operators, including ERI and MCRI. 2
Las Vegas Raiders training camp a possibility. While no official plans have been announced, Raiders officials have met with lawmakers in Reno to look at potential training camp sites. Reno would be the logical choice for Raiders training camp given the more favorable climate for mid-summer training compared with the Las Vegas desert. Reno already receives considerable visitation from the Bay area, so we see the potential for training camp to attract long-time Raiders fans from the Oakland area, creating another draw for the city. Technology boom in Reno land is cheap, for now. Probably one of the better known economic drivers in Reno is the migration of technology companies from the Bay area. Tesla s multi-billion dollar Gigafactory sparked a trend of technology companies seeking expansive space for a lower cost. Construction on the Gigafactory in Reno started in 2014 and the plant is expected to be fully completed by 2018. It is partially operational today with over $1bn of construction costs accumulated. In total, the plant is expected to cost $5bn and support about 10,000 jobs (up from a previous estimate of 6,500). Simply put, building factories and plants of this size are not only cost-prohibitive in the Bay area, but space constrained. Tesla is just the tip of a very large iceberg. Here is a list of some of the other substantial investments in the Reno Tahoe area by tech companies. Switch TAHOE RENO 1: $3bn, 7.2m sqft of data center space located on 2,000 acres at the Tahoe Reno Industrial Center adjacent to the Tesla Gigafactory Rackspace Data Center: $422m, 150k sqft data center at Reno Technology Park Apple Data Center: $100m data center, with $1bn expansion expected Amazon Reno Fulfillment Center: 630k sqft facility that processes tens of thousands of items per day Google: In April, news surfaced that Google acquired 1,210 acres in the Tahoe Reno Industrial Center that will eventually be the site of a future data center Nuance Drone & Virtual Reality Lab: Nevada was one of six sites selected by the FAA to be an approved testing site for drones and other unmanned aircraft. The lab is a partnership between NASA and the University of Nevada, Reno and focuses on airspace management research. Housing crunch expected? The significant and rapid development in the Reno Tahoe area comes with major labor demand but housing is lagging. Since 2012, over 30,000 new jobs have been created, with another 30,000 expected before the end of the decade. The beginning of a housing crunch is already underway as Reno is beginning to import labor. Even homebuilders have recently started talking about how strong Reno has become. We expect residential development to pick up the pace in the coming quarters, creating even more economic stimulus for the city as job growth continues to accelerate. 3
Eldorado Resorts (ERI) Buy Rating, Price Target $25 (+$2) We are modestly increasing our 2018 Adjusted EBITDA estimate to $433m (up from $429m) due to our expectation for incremental synergies and margin improvement stemming from the Isle of Capri transaction. Longer-term, we believe there is more upside to numbers, particularly with improving operating efficiencies and property-level EBITDA margins. However, we expect that incremental upside to be realized in 2019 and beyond as analytical, revenue generating, and incremental cost reduction initiatives will take longer to implement. Our 2018 Adjusted EBITDA estimate is based on LTM combined EBITDA, adjusted for the negative weather impact in Reno during 1Q17, plus $35m of stated synergies, $15m of estimated incremental synergies, and 5% organic EBITDA growth y/y. Figure 3. ERI Pro Forma EBITDA Build Up Figure 4. ERI Pro Forma EBITDA Walk Across PRO FORMA EBITDA BUILD UP ISLE, LTM 1Q17 Adjusted EBITDA $193.9 ERI, LTM 1Q17 Adjusted EBITDA 163.4 ERI, 1Q17 Adjusted EBITDA (w eather impact) 5.4 LTM 1Q17 Combined Adjusted EBITDA $362.7 Target Synergies 35.0 Est. Incremental Synergies 15.0 Organic grow th (5%) 20.0 2018E Adjusted EBITDA $432.7 $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $433 $398 $413 $20 $15 $15 $363 $35 $35 $35 $194 $194 $194 $194 $168 $169 $169 $169 $169 $169 $0 ERI LTM (1Q17) ERI + ISLE Target Synergies Synergy Upside Organic Growth Quarterly trends (Reno). Reno GGR was down 4.8% y/y in April, following similar trends in 1Q. April s softness can at least be partially attributable to the first weekend of the month that was impacted by unfavorable weather. In addition to weather, Reno faces a tough comparison in 2Q to the National Bowling Championships last year. With that in mind, we would look to keep expectations in Reno modest for 2Q. We would also note that the Ilani casino in La Center, WA opened on April 24; though it is unlikely the new casino had an impact in Reno given its distance (~600 miles). However, we would keep a closer eye on the new hotel tower at Graton Resort & Casino in Rohnert Park, CA that opened in November, which could be a marginal competitive threat to Reno. Raising Price Target to $25 (+$2). Along with raising our 2018 Adjusted EBITDA estimates, we are raising our price target to $25 and reiterating our Buy rating on the shares of ERI. Our new price target is based in part on our higher Adjusted EBITDA estimate along with an increase in our forward multiple to 8.5x (vs 8.2x previously). This is largely due to the multiple expansion we are seeing broadly across the sector. The prevalence of Casino REITs and ongoing strategic consolidation in the space continues to support multiples. Our 2018 Discretionary Free Cash Flow forecast of $223m implies a yield of 15% on the current share price of ERI and 12% on our $25 price target. We see some upside to our FCF forecast if ERI sells any orphaned assets, particularly the Nemacolin property, which would likely create a >$50m tax benefit for the company. 4
Figure 5. Sum-of-the-Parts Valuation 2018 Pro Forma Estimates 2018E TEV/ Sum-of-the-Parts Analysis EBITDA EBITDA TEV Reno Tri-Properties 72.4 9.5x 688.0 Eldorado Shreveport 34.5 8.0x 275.7 Scioto Dow ns 61.6 9.0x 554.2 Mountaineer 18.8 8.0x 150.5 Presque Isle Dow ns 22.1 8.0x 176.6 Lady Luck and Isle of Capri Black Haw k 39.3 8.5x 333.8 Isle Casino Racing Pompano Park 47.5 8.5x 403.8 Isle Casino Hotel Bettendorf 22.7 8.0x 181.7 Isle Casino Hotel Waterloo 29.1 8.0x 232.8 Isle of Capri Casino Hotel Lula 13.2 8.0x 105.8 Lady Luck Casino Vicksburg 8.8 8.0x 70.5 Isle of Capri Casino Hotel Boonville 30.5 8.0x 244.0 Isle Casino Cape Girardeau 17.1 8.0x 137.2 Lady Luck Casino - Caruthersville 9.8 8.0x 78.6 Isle of Capri Casino Kansas City 20.5 8.0x 163.9 Lady Luck Casino Nemacolin 0.4 6.0x 2.2 Corporate (15.6) 8.0x (124.8) Total $432.7 8.5x $3,674.4 (-) net debt (1,735.7) Implied equity value $1,938.7 Diluted shares outstanding 76.2 Target value per share $25.43 Figure 6. REIT Valuation Scenario 2018 Pro Forma Estimates Incremental Valuation Opportunity. Fundamentally, we expect continued synergies and margin improvement to support deleveraging and accelerate FCF generation. As a result, we anticipate ERI s net leverage ratio will be around 4.0x by the end of 2018, leaving plenty of dry powder to put to work. Given how successful management has been thus far on the M&A front, we see plenty of opportunity for incremental acquisitions in the coming 12 months. Beyond additional M&A, long-term valuation for ERI can be supported by the REIT scenario. We estimate a real estate transaction with a REIT would be worth upwards of $29/share based on our 2018 Adjusted EBITDA estimate, a 1.9x rent coverage ratio, an 11.0x rent multiple, and a 7.0x OpCo multiple. A B A+B 2018E Rent Est. Rent PropCo OpCo OpCo OpCo TEV REIT Analysis EBITDAR Coverage Rent Multiple Value EBITDA Multiple Value OpCo + PropCo Reno Tri-Properties 72.4 1.9x 38.1 11.0x 419.3 34.3 7.0x 240.1 659.4 Eldorado Shreveport 34.5 1.9x 18.1 11.0x 199.5 16.3 7.0x 114.3 313.7 Scioto Dow ns 61.6 1.9x 32.4 11.0x 356.5 29.2 7.0x 204.2 560.7 Mountaineer 18.8 1.9x 9.9 11.0x 108.9 8.9 7.0x 62.4 171.3 Presque Isle Dow ns 22.1 1.9x 11.6 11.0x 127.8 10.5 7.0x 73.2 201.0 Lady Luck and Isle of Capri Black Haw k 39.3 1.9x 20.7 11.0x 227.3 18.6 7.0x 130.2 357.5 Isle Casino Racing Pompano Park 47.5 1.9x 25.0 11.0x 275.1 22.5 7.0x 157.5 432.6 Isle Casino Hotel Bettendorf 22.7 1.9x 12.0 11.0x 131.5 10.8 7.0x 75.3 206.8 Isle Casino Hotel Waterloo 29.1 1.9x 15.3 11.0x 168.4 13.8 7.0x 96.5 264.9 Isle of Capri Casino Hotel Lula 13.2 1.9x 7.0 11.0x 76.6 6.3 7.0x 43.8 120.4 Lady Luck Casino Vicksburg 8.8 1.9x 4.6 11.0x 51.0 4.2 7.0x 29.2 80.3 Isle of Capri Casino Hotel Boonville 30.5 1.9x 16.1 11.0x 176.6 14.4 7.0x 101.1 277.7 Isle Casino Cape Girardeau 17.1 1.9x 9.0 11.0x 99.3 8.1 7.0x 56.9 156.1 Lady Luck Casino - Caruthersville 9.8 1.9x 5.2 11.0x 56.9 4.7 7.0x 32.6 89.4 Isle of Capri Casino Kansas City 20.5 1.9x 10.8 11.0x 118.6 9.7 7.0x 67.9 186.5 Lady Luck Casino Nemacolin 0.4 1.9x 0.2 11.0x 2.1 0.2 7.0x 1.2 3.3 Corporate (15.6) 0.0x 0.0 0.0x 0.0 (15.6) 7.0x (109.2) (109.2) Total $432.7 1.8x $235.9 11.0x $2,595.4 $196.7 7.0x $1,377.2 $3,972.6 (-) net debt (1,735.7) Implied equity value $2,236.9 Diluted shares outstanding 76.2 Target value per share $29.34 5
Figure 7. Eldorado Resorts Summary Financial Model $ in millions. FYE December. FY15A 1Q16A 2Q16 3Q16 4Q16 FY16 1Q17 2Q17E 3Q17E 4Q17E 2017E 2018E NET REVENUE Reno Tri-Properties 309.4 72.8 84.2 89.7 75.3 321.9 62.7 83.4 92.3 84.6 323.0 349.9 Eldorado Shreveport 136.3 34.4 32.1 34.0 31.0 131.5 31.9 33.1 34.5 32.2 131.8 136.6 Scioto Dow ns 158.1 39.8 42.2 42.0 38.4 162.4 42.1 42.2 42.3 39.9 166.5 169.7 Mountaineer 155.6 33.4 35.8 36.7 30.8 136.7 32.6 35.6 36.3 31.1 135.6 138.5 Presque Isle Dow ns 142.5 33.2 37.1 39.3 30.9 140.4 31.6 37.4 38.8 33.4 141.2 144.2 Ladu Luck and Isle of Capri Black Hawk - - - - - - - 16.4 34.3 31.4 82.0 132.9 Isle Casino Racing Pompano Park - - - - - - - 21.6 39.5 40.7 101.8 179.0 Isle Casino Hotel Bettendorf - - - - - - - 8.9 22.3 19.0 50.1 78.5 Isle Casino Hotel Waterloo - - - - - - - 11.3 21.8 20.7 53.8 89.7 Isle of Capri Casino Hotel Lula - - - - - - - 6.2 11.4 12.0 29.6 50.2 Lady Luck Casino Vicksburg - - - - - - - 4.1 7.6 8.0 19.7 33.5 Isle of Capri Casino Hotel Boonville - - - - - - - 10.0 20.6 18.5 49.1 80.6 Isle Casino Cape Girardeau - - - - - - - 7.9 16.6 15.2 39.7 65.0 Lady Luck Casino - Caruthersville - - - - - - - 4.4 8.8 8.3 21.5 35.7 Isle of Capri Casino Kansas City - - - - - - - 9.3 17.5 17.3 44.0 73.9 Lady Luck Casino Nemacolin - - - - - - - 4.7 9.7 7.8 22.3 36.2 Isle of Capri Lake Charles - - - - - - - - - - - - Lady Luck Casino Marquette - - - - - - - - - - - - NET REVENUE $901.9 $213.6 $231.3 $241.6 $206.5 $892.9 $200.9 $336.4 $454.2 $420.2 $1,411.8 $1,794.3 year-over-year % change 26.4% 0.8% (0.4%) (0.8%) (3.7%) (1.0%) (5.9%) 45.4% 88.0% 103.5% 58.1% 27.1% ADJUSTED EBITDA Reno Tri-Properties 50.0 11.0 18.9 20.6 11.8 62.3 6.3 19.4 21.9 13.9 61.5 72.4 Eldorado Shreveport 29.0 8.4 7.5 8.7 6.6 31.2 7.9 8.0 9.1 7.1 32.1 34.5 Scioto Dow ns 54.0 14.6 14.6 14.7 13.0 56.9 15.7 15.0 15.0 13.8 59.5 61.6 Mountaineer 21.3 3.5 3.7 4.0 2.4 13.6 4.2 4.4 4.6 3.1 16.4 18.8 Presque Isle Dow ns 20.3 4.8 5.8 5.5 3.3 19.4 4.2 6.0 5.8 4.4 20.4 22.1 Lady Luck and Isle of Capri Black Hawk - - - - - - - 4.7 9.6 9.3 23.5 39.3 Isle Casino Racing Pompano Park - - - - - - - 4.7 9.1 9.6 23.4 47.5 Isle Casino Hotel Bettendorf - - - - - - - 2.5 6.3 5.4 14.2 22.7 Isle Casino Hotel Waterloo - - - - - - - 3.5 6.7 6.6 16.9 29.1 Isle of Capri Casino Hotel Lula - - - - - - - 1.2 2.5 2.9 6.6 13.2 Lady Luck Casino Vicksburg - - - - - - - 0.8 1.7 2.0 4.4 8.8 Isle of Capri Casino Hotel Boonville - - - - - - - 3.7 7.5 6.8 18.0 30.5 Isle Casino Cape Girardeau - - - - - - - 1.9 4.2 4.0 10.1 17.1 Lady Luck Casino - Caruthersville - - - - - - - 1.2 2.4 2.2 5.7 9.8 Isle of Capri Casino Kansas City - - - - - - - 2.5 4.7 4.5 11.7 20.5 Lady Luck Casino Nemacolin - - - - - - - 0.0 (0.1) (0.1) (0.1) 0.4 Isle of Capri Lake Charles - - - - - - - - - - - - Lady Luck Casino Marquette - - - - - - - - - - - - Adjusted Property EBITDA $174.6 $42.3 $50.4 $53.4 $37.2 $183.4 $38.3 $79.4 $111.0 $95.5 $324.2 $448.3 Corporate (14.3) (4.1) (3.8) (3.7) (3.6) (15.1) (4.9) (4.5) (4.5) (4.0) (17.9) (15.6) ADJUSTED EBITDA $160.3 $38.3 $46.7 $49.7 $33.6 $168.2 $33.4 $74.9 $106.5 $91.5 $306.3 $432.7 Adjusted Property EBITDA Margin 19.4% 19.8% 21.8% 22.1% 18.0% 20.5% 19.0% 23.6% 24.4% 22.7% 23.0% 25.0% Adjusted EBITDA Margin 17.8% 17.9% 20.2% 20.6% 16.3% 18.8% 16.6% 22.3% 23.5% 21.8% 21.7% 24.1% Adjusted Property EBITDA y /y % chg 33.0% 16.9% 2.1% 0.9% 3.2% 5.0% (9.7%) 57.5% 107.8% 156.8% 76.8% 38.3% Adjusted EBITDA y /y % chg 34.4% 17.1% 2.1% 0.0% 4.2% 4.9% (12.7%) 60.6% 114.3% 172.5% 82.1% 41.2% Income Statemnent Operating income 72.5 18.3 29.7 28.1 13.1 89.1 14.1 27.9 59.5 42.5 144.1 253.7 Interest (expense) (61.6) (13.0) (12.8) (12.6) (12.5) (50.9) (12.7) (25.8) (24.5) (24.5) (87.4) (97.0) Other (expense) income 33.6 (0.1) (0.1) - - (0.2) - (11.0) - - (11.0) - Pre-tax income $44.6 $5.2 $16.8 $15.5 $0.5 $38.0 $1.5 ($8.9) $35.0 $18.0 $45.7 $156.7 Tax (expense) benefit 69.6 (1.84) (5.98) (5.84) 0.41 (13.2) (0.46) 1.78 (6.31) (3.24) (8.2) (31.3) Net inome (loss) $114.2 $3.4 $10.8 $9.7 $1.0 $24.8 $1.0 ($7.1) $28.7 $14.8 $37.4 $125.3 Diluted shared outstanding 46.8 47.5 47.7 47.8 47.8 47.7 48.1 76.2 76.2 76.2 69.2 76.2 Diluted EPS (GAAP) $2.44 $0.07 $0.23 $0.20 $0.02 $0.52 $0.02 ($0.09) $0.38 $0.19 $0.54 $1.64 Free Cash Flow Adjusted EBITDA 160.3 38.3 46.7 49.7 33.6 168.2 33.4 74.9 106.5 91.5 306.3 432.7 (-) Cash interest expense (62.8) (11.7) (11.3) (11.2) (11.3) (45.5) (11.2) (24.5) (23.5) (23.5) (82.7) (93.0) (-) Cash taxes 69.6 (1.8) (6.0) (5.8) 0.4 (13.2) (0.5) 1.8 (6.3) (3.2) (8.2) (31.3) (-) Maintenance capex (27.1) (6.4) (6.9) (7.2) (6.2) (26.8) (6.0) (10.1) (15.9) (14.7) (46.7) (71.8) (-) Mandatory debt repayments (4.4) (1.1) (1.1) (1.1) (1.1) (4.4) (1.1) (1.1) (1.1) (3.5) (6.8) (14.0) DISCRETIONARY FREE CASH FLOW $135.7 $17.3 $21.4 $24.3 $15.4 $78.3 $14.6 $41.0 $59.7 $46.6 $161.9 $222.6 Net borrow ing (repayments) 117.8 (34.5) (37.0) (3.6) 10.6 (64.6) 1.1 1,515.5 (132.4) (1.5) 1,382.7 (26.0) Project capex (9.7) (4.2) (2.8) (5.4) (8.2) (20.6) (9.0) (4.9) (9.1) (10.3) (33.3) (28.2) Asset sales (acquisitions) (124.9) 0.1 1.0 0.0 0.3 1.4 - (1,425.0) 130.0 - (1,295.0) - Dividends and share repurchase (2.1) - 1.0 - (0.6) 0.4 - - - - - - FREE CASH FLOW $116.7 ($21.4) ($16.5) $15.3 $17.4 ($5.2) $6.7 $126.6 $48.2 $34.8 $216.3 $168.3 Discretionary FCF / Share $2.90 $0.36 $0.45 $0.51 $0.32 $1.64 $0.30 $0.54 $0.78 $0.61 $2.34 $2.92 Discretionary FCF / Share (LTM) $2.90 $3.15 $3.24 $3.16 $1.64 $1.64 $1.58 $1.67 $1.95 $2.24 $2.34 $2.92 Discretionary FCF Yield (Current Price) 14.5% 15.8% 16.2% 15.8% 8.2% 8.2% 7.9% 8.4% 9.7% 11.2% 11.7% 14.6% Discretionary FCF Yield (Price Target) 11.6% 12.6% 13.0% 12.6% 6.6% 6.6% 6.3% 6.7% 7.8% 8.9% 9.4% 11.7% Balance Sheet Total long-term debt 861.7 826.8 789.4 786.1 795.9 795.9 785.8 2,325.8 2,192.3 2,187.3 2,187.3 2,147.3 Cash 78.3 44.1 37.1 44.6 61.0 61.0 44.6 193.3 232.5 258.3 258.3 411.6 Lont-term debt, net 783.4 782.7 752.3 741.5 734.9 734.9 741.2 2,132.5 1,959.8 1,929.0 1,929.0 1,735.7 Adjusted EBITDA (LTM) 160.3 165.9 166.9 166.9 168.2 168.2 163.4 191.6 248.4 306.3 306.3 432.7 Total leverage 5.4x 5.0x 4.7x 4.7x 4.7x 4.7x 4.8x 12.1x 8.8x 7.1x 7.1x 5.0x Net lev erage 4.9x 4.7x 4.5x 4.4x 4.4x 4.4x 4.5x 11.1x 7.9x 6.3x 6.3x 4.0x 6
Figure 8. Monarch Casino & Resort Valuation Analysis Monarch Casino & Resort (MCRI) Hold, Price Target $32 (+$1) We are raising our 2017 and 2018 Adjusted EBITDA estimates slightly. Our 2017 Adjusted EBTIDA estimate goes to $60.2m (up from $59.4m) and our 2018 Adjusted EBITDA estimate goes to $64m (up from $62.3m). Our higher estimates are largely attributable to our incrementally more optimistic outlook at Atlantis in Reno, NV. We are also more comfortable about the impact from construction in Black Hawk, which appears to be limited so far. For Reno specifically, the market has one of the most favorable macroeconomic backdrops of any US regional gaming market. The growing migration of tech companies and Bay area residents to Reno, NV continues to support the local economy, with record low unemployment rates, rising wages, increasing population, and a diversifying economy. We see no operator better positioned to capitalize on the Reno boom than MCRI with its market leading Atlantis property. MCRI garners about 50%-60% of its business from local customers, setting it up nicely to benefit from the city s revival. Given the property s highquality product and premium service levels, we expect Atlantis to continue gaining market share of a growing market in Reno. The property is strategically located in the more affluent part of town with convenient access and ample surface parking, which is crucial for the local customer. Further, MCRI is less exposed to the drive-in customer from California and will experience less seasonality and volatility from disruptions like unfavorable weather. We see some incremental upside at Atlantis as the Reno-Sparks Convention and Visitors Authority (RSCVA) continues to up its game. The local convention center (which is connected directly to Atlantis) is beginning to show signs of life under new management. Atlantis is the only hotel connected directly to the convention center and benefits any time the facility is active or in use. We are raising our price target to $32 (from $31) and reiterating our Hold rating. Our new price target represents a 9.0x multiple of our 2018 Adjusted EBITDA estimate of $64m. Our multiple is slightly above the regional gaming average of 8.0x-8.5x but is supported by the company s expansion project in Black Hawk. We ascribe a 7.0x forward multiple to ~$28m of incremental EBITDA estimated from the Black Hawk Hotel/Casino expansion when fully open in 2019-20. We recommend shares of MCRI to long-term investors as we are firm believers in the Reno story and the Black Hawk expansion. However, in the nearterm, we believe upside in the shares will be limited by valuation (~9.0x 2018 EBITDA) until the Black Hawk expansion nears completion. Valuation 2016A 2017E 2018E Adjusted EBITDA $55.7 $60.2 $64.0 TEV/EBITDA 8.5x 8.5x 8.5x TEV $473.8 $511.5 $543.7 $230 Black Haw k Hotel/Casino expansion cost (-) Current net debt $0.2 $0.2 $0.2 12% Target ROI Equity value $474.0 $511.6 $543.8 $27.6 Incremental EBITDA Diluted shares outstanding 17.3 17.5 17.5 7.0x TEV/EBITDA Multiple Implied value per share from current ops $27.39 $29.28 $31.12 $193 TEV of expansion project (170) Project financing (credit facility) Black Hawk Hotel & Casino expansion $23.2 $23 Project value Diluted shares outstanding 17.5 Implied value per share from project $1.33 Target share price $32.44 7
Figure 9. Monarch Casino & Resort Summary Financial Model Period 2015 1Q16 2Q16 3Q16 4Q16 2016 1Q17 2Q17E 3Q17E 4Q17E 2017E 2018E Period Ending 12/31/2015 3/31/2016 6/30/2016 9/30/2016 12/31/2016 12/31/2016 3/31/2017 6/30/2017 9/30/2017 12/31/2017 12/31/2017 12/31/2018 Days 365 91 91 92 92 366 90 91 92 92 365 365 NET REVENUE $202.2 $49.7 $54.6 $57.1 $55.6 $217.0 $53.4 $57.6 $60.5 $58.4 $229.9 $240.6 y /y % Δ 7.7% 5.5% 9.1% 6.6% 8.0% 7.3% 7.4% 5.5% 6.0% 5.0% 5.9% 4.6% ADJUSTED EBITDA $50.0 $11.0 $13.8 $16.3 $14.6 $55.7 $12.1 $14.8 $17.6 $15.7 $60.2 $64.0 % margin 24.7% 22.2% 25.2% 28.6% 26.3% 25.7% 22.7% 25.7% 29.0% 26.9% 26.2% 26.6% y /y % Δ 15.1% 1.5% 10.3% 14.3% 17.8% 11.4% 9.7% 7.5% 7.5% 7.6% 7.9% 6.3% NET INCOME Adjusted EBITDA 50.0 11.0 13.8 16.3 14.6 55.7 12.1 14.8 17.6 15.7 60.2 64.0 Stock based compensation (1.5) (0.1) (0.4) (0.4) (0.7) (1.7) (0.5) (0.4) (0.4) (0.7) (2.0) (1.8) Depreciation and amortization (15.9) (3.7) (3.8) (3.6) (3.7) (14.8) (3.9) (3.9) (4.0) (4.0) (15.8) (16.1) Interest expense, net of capitalized (0.7) (0.1) (0.1) (0.1) (0.3) (0.6) (0.3) (0.2) (0.2) (0.2) (0.8) (2.8) Gain (loss) on disposition of assets (0.0) (0.1) (0.6) (0.0) (0.0) (0.7) (0.0) - - - (0.0) - Other - - - - - - - - - - - - Pre-tax income $31.9 $7.1 $8.9 $12.1 $9.9 $37.9 $7.5 $10.3 $13.0 $10.8 $41.6 $43.2 Provision for income tax (11.2) (2.5) (3.2) (4.3) (3.4) (13.4) (2.6) (3.6) (4.6) (3.8) (14.6) (15.6) Net Income $20.7 $4.6 $5.7 $7.8 $6.5 $24.6 $4.9 $6.7 $8.4 $7.0 $27.0 $27.7 (+) interest expense, net 0.7 0.1 0.1 0.1 0.3 0.6 0.3 0.2 0.2 0.2 0.8 2.8 (+) provision for income tax 11.2 2.5 3.2 4.3 3.4 13.4 2.6 3.6 4.6 3.8 14.6 15.6 Operating income $32.6 $7.2 $8.9 $12.3 $10.2 $38.5 $7.7 $10.5 $13.2 $11.0 $42.4 $46.1 Diluted EPS $1.20 $0.27 $0.33 $0.45 $0.37 $1.42 $0.28 $0.38 $0.48 $0.40 $1.54 $1.58 y /y % Δ 44.6% 13.1% 12.0% 22.6% 23.8% 18.4% 4.9% 16.2% 6.3% 8.2% 8.8% 2.5% FREE CASH FLOW Adjusted EBITDA 50.0 11.0 13.8 16.3 14.6 55.7 12.1 14.8 17.6 15.7 60.2 64.0 (-) Cash interest (0.4) (0.0) 0.0 - (0.2) (0.2) (0.3) (0.2) (0.2) (0.2) (0.8) (2.8) (-) Cash taxes (10.9) - (6.7) (2.8) (2.9) (12.4) (2.6) (3.6) (4.6) (3.8) (14.6) (15.6) (-) Maintenance Capex (6.1) (1.5) (1.6) (1.7) (1.7) (6.5) (1.6) (1.7) (1.8) (1.8) (6.9) (7.2) (-) Mandatory debt repayments 0 0 0 0 0 0 0 0 0 0 0 0 Disretionary Free Cash Flow $32.7 $9.5 $5.5 $11.8 $9.8 $36.6 $7.7 $9.3 $11.0 $10.0 $37.9 $38.4 Net borrow ing (5.4) (5.5) (0.4) (5.1) (3.7) (14.7) (8.6) (2.5) 3.7 9.0 1.6 113.8 Project capex (31.6) (7.4) (4.3) (3.1) (4.8) (19.6) (3.4) (6.8) (14.7) (18.7) (43.6) (151.8) Free Cash Flow ($4.3) ($3.4) $0.8 $3.6 $1.3 $2.3 ($4.3) $0.0 $0.0 $0.2 ($4.1) $0.4 Discretionary Free Cash Flow (LTM) 32.7 32.9 33.0 34.7 36.6 36.6 34.8 38.6 37.7 37.9 37.9 38.4 Discretionary Free Cash Flow / Share (LTM) $1.90 $1.91 $1.91 $2.00 $2.10 $2.12 $1.99 $2.21 $2.16 $2.17 $2.17 $2.19 BALANCE SHEET Long-term debt - - 35.0 29.9 26.2 26.2 26.2 18.8 22.5 31.5 31.5 145.3 Cash 21.2 18.4 19.3 19.5 26.4 26.4 24.5 22.0 22.0 22.0 22.0 22.0 Net debt (21.2) (18.4) 15.7 10.4 (0.2) (0.2) 1.7 (3.2) 0.5 9.5 9.5 123.3 LTM EBITDA 50.0 50.2 51.5 53.5 55.7 55.7 56.8 57.8 59.1 60.2 60.2 64.0 Gross leverage 0.0x 0.0x 0.7x 0.6x 0.5x 0.5x 0.5x 0.3x 0.4x 0.5x 0.5x 2.3x Net leverage -0.4x -0.4x 0.3x 0.2x 0.0x 0.0x 0.0x -0.1x 0.0x 0.2x 0.2x 1.9x 8
Important Disclosure Analyst Certification The analyst, John DeCree, primarily responsible for the preparation of this research report attests to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers; and (2) that no part of the research analyst s compensation was, is, or will be directly related to the specific recommendations or views in this research report. Company Specific Disclosures Union Gaming or an affiliate has a client relationship with or received compensation from this subject company Eldorado Resorts Inc for non-securities services in the last 12 months. Ratings Definitions Current Ratings Definition Union Gaming Securities LLC and Union Gaming Securities Asia Limited use a traditional ratings construct (Buy, Hold, and Sell) that is underscored by percentage upside/downside from current trading levels along with dividend yields for total return. We exclude special dividends and contemplate regular dividends only in our total return forecasts. These are absolute ratings, not relative or forced ratings. We define a Buy rating as a company whose shares exhibit total return (appreciation and dividends) potential of at least 15% within the next 12 months, and conversely a Sell rating as a company whose shares exhibit downside potential of at least 15% within the next 12 months. A Hold rating is reserved for companies whose shares exhibit total return potential between those parameters. Buy the total forecasted return is expected to be greater than 15% within the next 12 months Hold the total forecasted return is expected to be greater than or equal to 0% and less than or equal to 15% Sell whose shares exhibit downside potential of at least 15% within the next 12 months Suspended the company rating, target price and earnings estimates have been temporarily suspended. Valuation and Risks Ratings Distribution (as of 06/19/2017) Coverage Universe Investment Banking Services / Past 12 Months Ratings Count Pct. Rating Count Pct. BUY 20 87% BUY 4 20% HOLD 3 13% HOLD 0 0% SELL 0 0% SELL 0 0% B:$23.00 03/15/17 25 Eldorado Resorts Inc Rating History as of 06/15/2017 powered by: BlueMatrix 20 15 10 5 0 Jul 2014 Oct 2014 Jan 2015 Apr 2015 Jul 2015 Oct 2015 Jan 2016 Apr 2016 Jul 2016 Oct 2016 Jan 2017 Apr 2017 Closing Price Target Price 9
H:$31.00 03/31/17 35 Monarch Casino & Resort, Inc. Rating History as of 06/15/2017 powered by: BlueMatrix 30 25 20 15 10 Jul 2014 Oct 2014 Jan 2015 Apr 2015 Jul 2015 Oct 2015 Jan 2016 Apr 2016 Jul 2016 Oct 2016 Jan 2017 Apr 2017 Closing Price Target Price General Disclosures Additional information is available upon request. This report was prepared by Union Gaming Securities LLC. Union Gaming Securities LLC is a FINRA member firm and wholly owned subsidiary of Union Gaming Group LLC. Union Gaming Group LLC also owns Union Gaming Securities Asia Ltd., a licensed corporation with the Securities and Futures Commission (SFC) in Hong Kong and Union Gaming Analytics, LLC. All questions or comments concerning this research report should be addressed to Union Gaming Securities LLC at (702) 866-0743. Neither Union Gaming Securities LLC("UGS") nor its affiliates, analysts or employees own any securities of companies analyzed in the research reports it distributes. Neither Union Gaming Securities LLC nor its affiliates or analysts serve as an officer, director or advisory board member of any Subject Company. UGS, its affiliates, analysts and employees may have received investment banking, non-investment banking securities and non-securities service, related compensation from the subject company in the past 12 months. It further intends to seek compensation for investment banking, non-investment banking securities and non-securities service, related activities in the next three months. Accordingly, investors should be aware that the firm and its affiliates may have a conflict of interest that could affect the objectivity of the reports it distributes. UGS is not now nor has ever been a market maker. All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Bloomberg and Factset. Data is sourced from Union Gaming Securities LLC, Union Gaming Securities Asia Limited, and subject companies. Union Gaming Securities LLC and Union Gaming Securities Asia Limited are not responsible for errors in prices provided by independent sources. Data, analyses, and reports necessarily contain time-sensitive information, and no subscriber or client should rely on dated reports or conclusions. Investor clients and financial advisers should consider any report from Union Gaming as only a single factor in making any investment decision. 10