COMPANY UPDATE / ESTIMATE CHANGE / PRICE TARGET CHANGE Key Metrics SIX - NYSE (as of 2/20/18) $66.18 Two-year Price Target $77.00 52-Week Range $51.25 - $70.44 Shares Outstanding (mil) (basic) 84.2 Market Cap. ($mil) $5,573 3-Mo. Average Daily Volume 846,760 Institutional Ownership 99% Total Debt ($mil) (12/17) $2,021 Total Stockholders' Equity ($mil) (12/17) ($505) Book Value/Share (12/17) NM Price/Book Value NM Annual Dividend & Yield $3.12 4.7% Adjusted EBITDA Margin (TTM ended 12/17) 38% EPS FY 12/31 (GAAP-based figures) Prior Curr. Prior Curr. 2017 2018E 2018E 2019E 2019E 1Q ($0.63) ($0.75) 2Q $0.59 $0.88 3Q $2.11 $2.25 4Q $1.14 $0.31 Year $3.09 $2.31 $2.95 $3.25 P/E 21.4x 0.0x 20.4x Note: Quarterly EPS figures may not add to annual figure due to rounding and the impact of quarterly results fluctuating between profits and net losses. Revenue ($mil) Prior Curr. Prior Curr. 2017 2018E 2018E 2019E 2019E 1Q $100 $120 2Q $422 $440 3Q $580 $620 4Q $257 $275 Year $1,359 $1,445 $1,455 $1,520 1. Company Description: Six Flags Entertainment Corporation is the world s largest regional amusement park company with 20 amusement parks and water parks across the U.S., Mexico, and Canada. International operations, and related growth initiatives, exist through licensing relationships. The company currently has potential projects in various stages of development in Dubai, China, and Vietnam. Six Flags is headquartered in Grand Prairie, TX. Note Important Disclosures on Pages 7-8. Note Analyst Certification on Page 7. Entertainment & Leisure Analyst: Jeffrey S. Thomison, CFA 502.588.9137 / JThomison@hilliard.com Institutional Sales Desk: George Moorin 502.588.9141 / GMoorin@hilliard.com J.J.B. Hilliard, W.L. Lyons, LLC February 21, 2018 Six Flags Entertainment Corp. SIX NYSE Long-term Buy-3 Higher 4Q Results; Raising Price Target Investment Highlights 4Q results exceeded our expectation. Total revenues rose 7% from the year ago period, led by greater international licensing revenue and higher guest spending per capita. Overall attendance was down, likely impacted by significantly adverse weather in late 3Q and during 4Q. Still, 4Q adjusted EBITDA of $87.3 million rose 15%, exceeding our expectation by several million dollars. We believe fundamentals are solid. We like recent growth in season pass sales, dining plans, and guest satisfaction scores. Overall cash flows are allowing for reinvestment into the parks, dividend payments, and share repurchases. The nascent business of collecting licensing revenue from international partners helped the recent quarter and represents future growth potential despite some unpredictability regarding the pace of planned projects. We consider SIX a well-run operator in the amusement park industry. We like the company s brand equity, portfolio of domestic properties, capital-free international opportunities, and strong focus on shareholder returns. With a 4.7% current yield, SIX shares have a compelling income component. The quarterly dividend rate was raised twice in the past several months. Annual payments are well covered by cash flows, in our view, and we expect future annual increases at high single-digit percentages. Our two-year price target is raised by $5 to $77 per share. This increase is based on our estimate of forward results two years from now, and assumes a valuation below the current level. Annualized total return potential, including dividends, based on the current share price is in the 12%-13% range. Our Suitability rating remains 3, which is mainly based on the company s leveraged balance sheet.
Exhibit 1 Consolidated Statements of Income (figures in millions except percentages and per share data) Quarter Ended Year Ended 12/31/17 12/31/16 % chg. 12/31/17 12/31/16 % chg. Admissions $137.2 $130.1 5.4% $741.3 $715.4 3.6% Food, Merchandise and Other 95.5 93.9 1.8% 524.6 521.2 0.7% Sponsorship, Licensing, and Other 21.3 12.4 71.9% 78.1 66.3 17.7% Accommodations 2.7 2.9 (5.8%) 15.1 16.5 (8.3%) Total Revenues 256.8 239.3 7.3% 1,359.1 1,319.4 3.0% Cost of Products Sold 19.4 19.1 1.1% 110.4 109.6 0.7% Operating Expenses 104.6 102.0 2.5% 509.1 489.4 4.0% SG&A Expenses 45.5 42.6 6.9% 181.2 175.5 3.3% Depreciation & Amortization 29.0 27.5 5.4% 111.7 106.9 4.5% Stock-based Compensation 16.4 20.1 (18.4%) (22.7) 116.3 NMF Loss (Gain) on Disposal of Assets (0.4) 1.1 NMF 4.0 2.0 NMF Operating Income 42.2 26.8 57.3% 465.4 319.8 45.6% Interest Expense, net 25.1 21.1 19.3% 99.0 81.9 20.9% Loss on Early Exting. of Debt 0.0 0.6 37.1 2.9 Other Expenses (Income) 0.2 (0.3) 0.3 1.7 Income Before Taxes 16.9 5.6 203.6% 329.1 233.3 41.1% Provision for Taxes (81.1) 3.7 NMF 16.0 76.5 (79.1%) Net Income, Contin. Oper. 98.0 1.9 NMF 313.0 156.7 99.7% Net Income Attrib. to Noncontrol. Int. 0.0 0.0 (39.2) (38.4) 2.0% N.I. Attrib. to Six Flags, Contin. Oper. $98.0 $1.9 NMF $273.8 $118.3 131.5% N.I. Per Diluted Share, Contin. Oper. $1.14 $0.02 NMF $3.09 $1.25 146.9% Avg. Diluted Shares Outstanding 85.8 93.7 (8.3%) 88.5 94.4 (6.3%) Modified EBITDA ~ $87.3 $75.6 15.5% $558.4 $545.0 2.5% Adjusted EBITDA ~ $87.3 $75.6 15.5% $519.2 $506.6 2.5% As a % of Total Revenues: bp chg. bp chg. Cost of Products Sold 7.54% 8.00% (46) 8.12% 8.31% (18) Operating Expenses 40.73% 42.63% (190) 37.46% 37.09% 37 SG&A Expenses 17.74% 17.80% (6) 13.33% 13.30% 3 Modified EBITDA 34.00% 31.58% 242 41.09% 41.31% (22) Adjusted EBITDA 34.00% 31.58% 242 38.20% 38.40% (19) Depreciation & Amortization 11.30% 11.51% (21) 8.22% 8.10% 12 Adjusted EBITDA, Less: Cash Interest Paid (18.6) (5.4) 243.8% (95.3) (68.8) 38.5% Capital Expenditures (18.1) (28.0) (35.2%) (134.7) (128.9) 4.5% Cash Taxes Paid (3.3) (3.3) 0.8% (14.5) (17.3) (16.2%) Free Cash Flow $47.2 $38.9 21.6% $274.8 $291.6 (5.8%) Dividends Paid $59.0 $58.8 0.3% $227.0 $220.3 3.0% Note: Modified EBITDA includes third party interests in certain operating assets, with contributions typically recorded in the peak 2Q and 3Q periods. Source: Six Flags Entertainment Corporation Note: December fiscal year Hilliard Lyons Equity Research 2 Entertainment & Leisure
Further comments on 4Q results. We were generally pleased with 4Q results, as revenues and EBITDA exceeded year ago figures and our projections. Attendance in the quarter was down 3% from the year ago level. This was due to the collective impact of two recent earthquakes in Mexico, wildfires in California, and extreme cold weather over the Christmas operating season in most of SIX s markets. As a matter of information, we note that overall attendance rose 3% in 3Q and 5% in 2Q of 2017. We do not believe the 4Q attendance decline represents a fundamental shift in the business or industry environment. There was perhaps some disappointment with the state of the international licensing program, as the partner for a park in Dubai is now in arrears on payments due to SIX after recently going through financial and operational restructurings. The park remains under construction, with a hopeful opening in late 2019 or early 2020. Under a typical licensing deal for international parks, SIX contributes no capital to the project and receives certain amounts (fees, royalties, etc.) prior to opening and larger amounts postopening. We consider 2017 a good year for SIX, with encouraging financial results despite numerous weather anomalies. For the year, total revenues rose 3% to $1.359 billion and adjusted EBITDA increased 2.5% to a record $519 million. Overall attendance was improved 1%. Growth in the active pass base (season pass or membership holders) continued to rise, while the high-margin international licensing business grew 18%. Financial condition. SIX operates under a leveraged capital structure. At December 31, 2017, the company had $2.021 billion in total debt, $77 million in cash, and a $505 million deficit in shareholders equity. Shareholders equity was positive throughout 2015 and moved to a deficit in 2016 due in part to rising debt balances and the effects of share repurchases. The net leverage ratio (net debt divided by trailing adjusted EBITDA) was 3.7x; we are generally comfortable with levels below 4.5x. SIX s financial statements can vary on a quarter-to-quarter basis due to the seasonality of the business. Cash has historically risen in the September quarter of a year, following the peak operating season. Dividend update. We consider SIX s dividend a positive factor. The stock s current yield is 4.7%, well above figures for the overall market and the Consumer Discretionary sector. Dividends were initiated in 2010 shortly after a reorganization and the rate has risen every year since. Recent increases have been above the historical pace. In November 2017, the company announced a 9% increase (which was consistent with the timing of past annual increases), but then followed that two months later with an 11% hike. The first pay date at the current quarterly rate of $0.78 per share is March 5, 2018. Going forward, we believe the quarterly dividend rate is likely to be increased once a year. We believe increases in the upper single-digit percentage range represents the most likely scenario, acknowledging a variety of potential uses for the company s cash flow after debt service, including capital spending and share repurchases. Importantly, we believe dividends are well covered by cash flow. Outlook. The company s Project 600 business plan was implemented several years ago and included a goal of $600 million in modified EBITDA (earnings before interest, taxes, depreciation and amortization). The original goal included a time frame of 2017, yet that year s weather challenges made the goal elusive. Management is now targeting that financial achievement for the current year, which we believe is likely to occur; our estimate is $612 million. Modified EBITDA is similar to adjusted EBITDA but includes third party interest in EBITDA of certain operations. Hilliard Lyons Equity Research 3 Entertainment & Leisure
Management also has a modified EBITDA target of $750 million by 2020; this goal represents compounded annual growth of 7.6% using 2015 as the base year. While we believe this is achievable, our outlook assumes a figure just shy of that target. We believe growth can come from a combination of attendance gains, price increases, season pass and dining plan sales, international licensing, and potential acquisitions (possibly water parks). We feel EBITDA is the most-watched financial metric among investors in this industry, with SIX investors mindful of both adjusted and modified figures. We have fine-tuned our 2018 financial outlook to reflect results and our view of the business environment. For all of 2018, we estimate total revenues at $1.455 billion (up $10 million from our previous view). This would represent a 7% increase from last year, which we believe is reasonable considering more operating days (a California park will add about 90 days by transitioning to a 365-day operation), price increases, and more normal weather. Our adjusted EBITDA estimate is $572 million, down $8 million from our previous figure due to some updates to our various expense projections. This represents a 10% gain from 2017. We have also initiated 2019 estimates, including a 4.5% increase in total revenues to $1.520 billion and an 11% gain in adjusted EBITDA to $635 million. We assume double-digit growth in international licensing revenue, which could help EBITDA dollars and margin. Valuation. Enterprise Value (using estimated year-end net debt figures) divided by our 2018 adjusted EBITDA estimate is 13.2x. The multiple is 11.8x based on our 2019 projections. We estimate a valuation range on forward adjusted EBITDA to be 10x-14x over the past five years. Exhibit 2 Valuation Analysis (figures in millions except ratios, percentages, and per share data) Share Price (close on 2/20/18) $66.18 Diluted Share Count, most recent 85.8 Market Capitalization $5,681.5 2019E 2018E 2017 2016 2015 Total Debt, year end, net of cash $1,825.0 $1,880.0 $1,943.7 $1,516.3 $1,405.8 Enterprise Value (EV) $7,506.5 $7,561.5 $7,625.2 $7,197.7 $7,087.3 Adj. EBITDA (exclud. nonrecurring items) $635.0 $572.0 $519.2 $506.6 $481.4 % chg. 11.0% 10.2% 2.5% 5.2% 9.6% EV / Adj. EBITDA 11.8x 13.2x 14.7x Note: Estimated figures assume declining net debt and stable share base, although a portion of future free cash flow could be applied toward share repurchases. Source: Six Flags Entertainment Corporation and Hilliard Lyons estimates Note: December fiscal year Opinion. We believe SIX shares continue to have attractive total return potential. Equity investors with a focus on income may find the shares compelling given the current 4.7% yield. We consider dividends well covered by cash flows, which we believe are on an upward trend due to the growth strategy in place. Moreover, we expect the announcement of a dividend raise in November. We like Six Flags operating history, property portfolio, management team, and financial outlook. We feel positive attributes include potential for margin improvement, substantial cash flows, strong brand equity, expanding international opportunities, and a generous dividend with annual growth potential. A strong capital expenditure program can lead to higher attendance figures and improved in-park spending for years to come, in our view. Meanwhile, high margin licensing revenues could increase each year due to planned projects by third party investors/operators in numerous international markets. Hilliard Lyons Equity Research 4 Entertainment & Leisure
Our rating on SIX is Long-term Buy and our two-year target price is $77 per share, an increase of $5 per share from our previous figure. Our new target represents an Enterprise Value/adjusted EBITDA valuation of 11.8x based on our estimate of forward EBITDA two years from now. This valuation compares to the current forward multiple of 13.2x and an estimated range of 10x-14x over the past five years. We note that when we upgraded SIX to Buy from Neutral in August 2017 and with our change to Long-term Buy in October 2017, in both situations we assumed an EV/adjusted EBITDA multiple of 12.0x, similar to our current view. We believe an Enterprise Value/adjusted EBITDA multiple of roughly 12x is reasonable for SIX, given all factors, including the attractive dividend. In fact, the median figure for this valuation over the past ten years is 11.9x. With projected dividends, total return potential based on the current price is in the 12%-13% range. Suitability. Our Suitability rating of 3 (see definitions in the Important Disclosures section of this report) is primarily based on a leveraged balance sheet, with other factors being market capitalization, the company s financial history, the discretionary nature of the business, the early stages of international business pursuits, and our perception of the overall risk profile. Risks. Risk factors that could impact Six Flags results and therefore our profit projections include general economic conditions, overall levels of leisure spending, pricing power, the competitive landscape, weather conditions, pace of new project construction, potential asset sales, prevailing interest rates, geopolitical risks that could affect international expansion plans, guest safety, and other factors. Also, we believe swings in gasoline prices can affect attendance levels to some degree but this factor has historically had more of an impact on in-park spending. Finally, cash flow utilization (capital spending, debt reduction, share buybacks, and cash distributions) may be subject to investor scrutiny. Hilliard Lyons Equity Research 5 Entertainment & Leisure
Exhibit 3 Consolidated Statements of Income (figures in millions except percentages and per share data) 2019E 2018E 2017 2016 2015 Admissions $825.0 $790.0 $741.3 $715.4 $687.8 Food, Merchandise and Other 583.0 562.0 524.6 521.2 500.2 Sponsorship, Licensing, and Other 96.0 87.0 78.1 66.3 59.1 Accommodations 16.0 16.0 15.1 16.5 16.8 Total Revenues 1,520.0 1,455.0 1,359.1 1,319.4 1,263.9 % change 4.5% 7.1% 3.0% 4.4% 7.5% Cost of Products Sold 120.0 118.0 110.4 109.6 100.7 Operating Expenses 562.0 538.0 509.1 489.4 465.2 SG&A Expenses 194.0 190.0 181.2 175.5 178.6 Depreciation & Amortization 120.0 117.8 111.7 106.9 107.4 Stock-based Compensation 30.0 20.0 (22.7) 116.3 56.2 Loss on Disposal of Assets 0.0 0.0 4.0 2.0 9.9 Gain on Sale of Investee 0.0 0.0 0.0 0.0 0.0 Operating Income 494.0 471.2 465.4 319.8 345.9 Interest Expense, net 96.0 97.0 99.0 81.9 75.9 Loss on Early Exting. of Debt 0.0 0.0 37.1 2.9 6.6 Other Expenses (Income) 1.0 1.0 0.3 1.7 0.2 Income Before Taxes 397.0 373.2 329.0 233.3 263.2 Provision for Taxes 89.3 84.0 16.0 76.5 70.4 Net Income, Contin. Oper. $307.7 $289.2 $313.0 $156.7 $192.8 Net Income Attrib. to Noncontrol. Int. (41.0) (40.0) (39.2) (38.4) (38.2) N.I. Attrib. to Six Flags, Contin. Oper. $266.7 $249.2 $273.8 $118.3 $154.7 N.I. Per Diluted Share, Contin. Oper. $3.25 $2.95 $3.09 $1.25 $1.58 Avg. Diluted Shares Outstanding 82.0 84.5 88.5 94.4 98.0 As a % of Total Revenues: Cost of Products Sold 7.89% 8.11% 8.12% 8.31% 7.97% Operating Expenses 36.97% 36.98% 37.46% 37.09% 36.81% SG&A Expenses 12.76% 13.06% 13.33% 13.30% 14.13% Operating Income 32.50% 32.38% 34.24% 24.24% 27.37% Modified EBITDA 44.41% 42.06% 41.09% 41.31% 41.11% Adjusted EBITDA 41.78% 39.31% 38.20% 38.40% 38.09% Depreciation & Amortization 7.89% 8.10% 8.22% 8.10% 8.50% Modified EBITDA $675.0 $612.0 $558.4 $545.0 $519.6 % change 10.3% 9.6% 2.5% 4.9% 8.9% Adjusted EBITDA $635.0 $572.0 $519.2 $506.6 $481.4 % change 11.0% 10.2% 2.5% 5.2% 9.6% Less: Cash Interest Paid (91.0) (93.0) (95.3) (68.8) (70.5) Capital Expenditures (145.0) (142.0) (134.7) (128.9) (114.2) Cash Taxes Paid (25.0) (20.0) (14.5) (17.3) (15.0) Free Cash Flow $374.0 $317.0 $274.7 $291.6 $281.7 Dividends Paid $276.0 $258.0 $227.0 $220.3 $201.0 % change 7.0% 13.7% 3.0% 9.6% 9.0% Source: Six Flags Entertainment Corporation and Hilliard Lyons estimates Note: December fiscal year Hilliard Lyons Equity Research 6 Entertainment & Leisure
Additional information is available upon request. Analyst Certification I, Jeffrey S. Thomison, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject company(ies) and its (their) securities. I also certify that I have not been, am not, and will not be receiving direct or indirect compensation in exchange for expressing the specific recommendation(s) in this report. Important Disclosures Hilliard Lyons' analysts receive bonus compensation based on Hilliard Lyons profitability. They do not receive direct payments from investment banking activity. Investment Ratings Buy - We believe the stock has significant total return potential in the coming 12 months. Long-term Buy - We believe the stock is an above average holding in its sector, and expect solid returns to be realized over a longer time frame than our Buy rated issues, typically 2-3 years. Neutral - We believe the stock is an average holding in its sector, is currently fully valued, and may be used as a source of funds if better opportunities arise. Underperform - We believe the stock is vulnerable to a price set back in the next 12 months. Suitability Ratings 1 - A large cap, core holding with a solid history 2 - A historically secure company which could be cyclical, has a shorter history than a "1" or is subject to event driven setbacks 3 - An above average risk/reward ratio could be due to small size, lack of product diversity, sporadic earnings or high leverage 4 - Speculative, due to small size, inconsistent profitability, erratic revenue, volatility, low trading volume or a narrow customer or product base Hilliard Lyons Investment Banking Recommended Issues Provided in Past 12 Mo. # of % of Rating Stocks Covered Stocks Covered Banking No Banking Buy 31 28% 10% 90% Hold/Neutral 74 66% 9% 91% Sell 7 6% 0% 100% As of 7 February 2018 Hilliard Lyons Equity Research 7 Entertainment & Leisure
Note: Price targets accompanying Buy ratings reflect a one year time period while price targets accompanying Long-term Buy ratings reflect a two to three year time period. Other Disclosures Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of J.J.B. Hilliard, W.L. Lyons, LLC or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed here. J.J.B. Hilliard, W.L. Lyons, LLC is a multi-disciplined financial services firm that regularly seeks investment banking assignments and compensation from issuers for services including, but not limited to, acting as an underwriter in an offering or financial advisor in a merger or acquisition, or serving as placement agent in private transactions. The information herein has been obtained from sources we believe to be reliable but is not guaranteed and does not purport to be a complete statement of all material factors. This is for informational purposes and is not a solicitation of orders to purchase or sell securities. Reproduction is forbidden unless authorized. All rights reserved. Hilliard Lyons Equity Research 8 Entertainment & Leisure