16 March 2018 North American Research Rating: Buy Price Target: $40.00 Price $28.72 52wk Range $11.70 - $26.33 Shares Outstanding (MM) 26.4 Market Capitalization (MM) $757.4 Enterprise Value (MM) $1,657.4 30D Avg Volume (000s) 192.7 Short Interest/Float 2.0% Dividend Yield 0.0% YTD % Chg (12.0)% YTD % Chg Relative to Index (14.9)% Total Implied Return to PT 39.3% Pricing Date March 15, 2018 40 35 30 25 20 15 GDEN Golden Entertainment, Inc. 10 03/ 17 06/ 17 09/ 17 12/ 17 03/ 18 Golden Entertainment, Inc. Global Gaming Operators GDEN NASDAQ $28.72 Company Update Stratosphere set to get the Midas Touch - $140m redevelopment program 4Q recap. Adjusted EBITDA of $29m came in ahead of our forecast for $26.5m despite higher-than-expected corporate expense. In general, the casino properties exceeded expectations even with the October 1 headwind in Las Vegas. However, the final $4m of initial cost synergies won't hit the corporate line until later this year. The only other small issue in the quarter was some margin pressure in the Montana distributed gaming segment due to a deep freeze in December and higher costs associated with a new satellite office. We expect the Montana distributed margin to recover to normal levels in 2018 - though this is a relatively small piece of the overall business. FY18 Guidance. Management provided 2018 Adjusted EBITDA guidance of $184m-$190m, which essentially bracketed the Consensus estimate of $187m heading into the print. We updated our 2018 number modestly to $188m (from $191m) due mostly to higher corpex. We provided a detail forecast on page 2 of this report but our estimate is based on $158m of combined company pro forma EBITDA in 2017, plus 5% organic growth, $18m of synergies, $2m of incremental slot tax savings in Maryland, and $2m of EBITDA claw-back from disruption at Stratosphere in 4Q17. Stratosphere redevelopment program. We believe the $140m Stratosphere capital plan is well balance and strategically focused on high-roi projects like renovating hotel rooms, adding meeting space, and upgrading F&B options. The program will be phased over the next three years to limit disruption at the property. We think the overall capital spend is very palatable and should generated a mid-teens return. GDEN expects to finance the capital plan with cash from operations. If anything, we think the potential for outsized returns on the initial hotel room renovations could entice management to accelerate the redevelopment program a little bit. Dry powder available for M&A. Our model forecasts the company's net leverage to decrease to 4.5x by the end of 2018. Assuming an 8.5x purchase price multiple on new assets, we estimate GDEN could acquire up to $30m of incremental EBITDA without pushing net leverage past 5.0x (pre-synergy). A deal this size would still be meaningful for GDEN, growing 2018 EBITDA by over 15%. Barring a potential M&A opportunity, we expect GDEN will address its second lien debt when the call premium steps down later this year with potential annual interest savings somewhere in the $10m neighborhood. Maintain Buy - $40 Price Target. We like both the value and growth opportunity in the shares of GDEN and we continue to see even incremental upside from potential M&A, the refinancing opportunity with the 2nd lien debt later this year, a potential REIT partner/transaction, and upside from the Stratosphere redevelopment program. Analysts John DeCree Tel: 702-691-3213 john.decree@uniongaming.com Year to Dec Net Revenue Adjusted EBITDA Net Debt/EBITDA EV/EBITDA 2018E 881 188 4.5x 8.8x Prior 899 191 4.2x 9.0x 2019E 908 203 3.9x 8.2x Prior 922 -- 3.5x 8.5x *Please see analyst certification and required disclosures starting on page 6 of this report. 2018 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.
Guidance and Forward Outlook Management provided 2018 Adjusted EBITDA guidance of $184m-190m. Heading into the print, we were modeling $191m of Adjusted EBITDA for 2018 while Consensus was around the midpoint of management s guidance range. We are revising our number modestly lower to $187.7m, mostly due to higher corporate expense than we initially anticipated. Our 2018 Adjusted EBITDA estimate bridge is depicted in the chart below, starting with $157.8m pro forma EBITDA for the combined company in 2017. We are modeling 5% organic EBITDA growth, plus $18m of run rate synergies, $2m of incremental run rate slot tax savings in Maryland to be realized in 1H18 along with $2m of EBITDA impact at Stratosphere in 4Q17 following the October 1 tragedy. Ultimately, we feel pretty good about management s guidance and our 2018 forecast. The company also noted that the remaining $4m of corporate expense synergies likely won t be fully realized until later in the year. Looking into 2019, we are modeling another 5% organic EBITDA growth, plus $4m of incremental corporate cost synergies, which gets us to a $203m Adjusted EBITDA forecast in 2019. We would look for incremental upside in 2019 and 2020 as the company begins to reap the benefits from the redevelopment program at the Stratosphere beginning in 2Q18, which we discuss in more detail later in this report. Figure 1. 2018 Adjusted EBITDA Bridge $200.0 $180.0 $160.0 $140.0 $157.8 $7.9 $18.0 $2.0 $2.0 $187.7 $120.0 $100.0 $80.0 $60.0 $40.0 $20.0 $0.0 2017 Pro Forma 5% SS Organic Growth $18m Cost Synergies MD Slot Tax Savings 4Q17 Vegas Disruption 2018E Source: Company documents, Union Gaming Securities. 2
Stratosphere Redevelopment Management is planning to spend $140m on the Stratosphere redevelopment over the next three years. One of the most exciting pieces of information this quarter is GDEN s capital plan to redevelop the Stratosphere. The company is spending an estimated $140m over the next three years, with $32m budgeted for 2018. Overall, we believe the level of investment spending is prudent and focused on high-roi projects. At the top of the list is a complete renovation of about 1,133 rooms (representing almost half of the overall room supply at Stratosphere). This is one of the most tangible opportunities for ROI and EBITDA growth at the Stratosphere given the gap between the property s current ADR and the overall ADR on the Las Vegas Strip. We don t expect the Stratosphere to close the ADR gap entirely, but we think a $30 cash ADR premium for the renovated rooms is reasonable, which would bring the overall property average up by about $15, or 23%. The renovated rooms will be completed in stages over the next three years. Given the property is running at near max occupancy, it would be hard to accelerate the renovation timeline without disrupting business too much. However, we suspect the initial returns on the first block of room renovations could be enticing enough to encourage management to try and pull forward the timeline a little bit, particularly with the lucrative CONEXPO back in town in 2020. In the table below, we estimate an incremental $10.3m of EBITDA just from the renovated hotel rooms, worth $3.58 per share based on 9.5x EV/EBITDA multiple. We realize the rest of the renovation program will also help drive up the ADR, particularly the meeting space, new restaurant concepts, and dedicated casino area near the Tower rides. Ultimately, we think a mid-teens EBITDA return on the entire $140m capital program is very attainable. Figure 2. Stratosphere Room Renovation Forecast Room renovation schedule 2018E 2019E 2020E 2021E Total # of rooms 317 452 364 1133 ADR increase on renovated rooms $35 $30 $25 $30 Occupancy 93% 93% 93% 93% Incremental revenue $3.77 $4.60 $3.09 $11.46 Flow through 90% 90% 90% Incremental EBITDA $3.39 $4.14 $2.78 $10.31 EV/EBITDA Multiple 9.5x Value created $98.0 Shares O/S 27.4 Value / share $3.58 3
Valuation and Financial Model We are maintaining our Buy rating on the shares of GDEN and reiterating our $40 price target, which represents a ~9.4x multiple on our unchanged 2019 Adjusted EBITDA estimate of $203m. Our valuation of GDEN is relatively in line with the regional gaming group average, but still a discount to operators with significant Las Vegas and Southern Nevada exposure. We like both the value and growth opportunity in the shares of GDEN and we continue to see even incremental upside from potential M&A, the refinancing opportunity with the 2 nd lien debt later this year, a potential REIT partner/transaction, and upside from the Stratosphere redevelopment program. Figure 3. Valuation Summary SUM-OF-THE-PARTS Source: Company documents, Union Gaming Securities. 2019E EBITDA Multiple Value Distributed gaming 52.1 8.0x 416.9 Casino operations 185.1 9.5x 1,758.1 Corporate expense (34.2) 8.0x (273.6) Total $203.0 9.4x $1,901.4 Less net debt (792.8) Implied equity value $1,108.6 Total shares outstanding 27.4 Implied equity value per share $40.46 4
Figure 4. Summary Financial Model Period Ending 2016A 1Q17A 2Q17A 3Q17A 4Q17A 2017A 1Q18E 2Q18E 3Q18E 4Q18E 2018E 2019E Date Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Dec-18 Dec-19 Days 366 90 91 92 92 365 90 91 92 92 365 365 NET REVENUE Distributed gaming 305.8 82.3 84.2 80.7 82.9 330.1 84.7 86.5 83.2 85.5 339.9 343.8 Casinos 97.1 24.3 26.2 27.5 101.2 179.2 138.1 148.8 128.4 125.5 540.8 563.7 Corporate and other 0.2 0.1 0.1 0.1 0.3 0.6 0.2 0.2 0.2 0.2 0.8 0.8 Net revenue $403.1 $106.6 $110.5 $108.3 $184.3 $509.8 $223.0 $235.4 $211.8 $211.3 $881.5 $908.4 Growth y/y % Distributed gaming 22.7% 19.9% 8.3% 3.2% 2.1% 7.9% 3.0% 2.7% 3.0% 3.2% 3.0% 1.2% Casinos 1.4% 8.5% 6.1% 6.1% 319.8% 84.5% 468.0% 467.6% 367.3% 24.1% 201.8% 4.2% Corporate and other (39.9%) 113.5% 14.3% 1337.5% 232.6% 162.1% 153.2% 108.3% 117.4% (36.7%) 37.2% 0.0% Net Revenue 16.7% 17.1% 7.7% 4.0% 74.9% 26.5% 109.1% 113.1% 95.5% 14.6% 72.9% 3.0% ADJUSTED EBITDA Distributed gaming 43.6 13.1 13.5 11.2 11.1 48.9 13.6 13.8 11.8 12.0 51.2 52.1 Casinos 23.6 6.3 6.9 8.9 28.8 51.0 43.3 48.1 42.8 40.8 175.0 185.1 Property EBITDA $67.1 $19.4 $20.4 $20.1 $40.0 $99.9 $56.9 $62.0 $54.6 $52.8 $226.2 $237.2 Corporate expense (18.6) (5.5) (5.4) (5.0) (10.9) (26.9) (11.0) (10.5) (9.0) (8.0) (38.5) (34.2) Adjusted EBITDA $48.6 $13.9 $15.0 $15.1 $29.0 $73.0 $45.9 $51.5 $45.6 $44.8 $187.7 $203.0 Margins % Distributed gaming 14.2% 15.9% 16.0% 13.8% 13.4% 14.8% 16.0% 16.0% 14.2% 14.0% 15.1% 15.2% Casinos 24.3% 25.9% 26.5% 32.5% 28.5% 28.5% 31.4% 32.4% 33.3% 32.5% 32.4% 32.8% Property EBITDA 16.7% 18.2% 18.5% 18.6% 21.7% 19.6% 25.5% 26.3% 25.8% 25.0% 25.7% 26.1% Adjusted EBITDA 12.0% 13.0% 13.6% 13.9% 15.7% 14.3% 20.6% 21.9% 21.5% 21.2% 21.3% 22.3% NET INCOME Adjusted EBITDA 48.6 13.9 15.0 15.1 29.0 73.0 45.9 51.5 45.6 44.8 187.7 203.0 Depreciation and amortization (27.5) (6.6) (7.4) (7.5) (19.3) (40.8) (19.0) (18.6) (18.6) (18.5) (74.7) (74.0) Pre-opening and transaction related (6.8) 0.0 0.0 0.0 0.0 0.0 (0.4) (0.4) (0.4) (0.4) (1.6) (1.6) Other operating expense (1.0) (1.7) (5.0) (5.1) (4.6) (16.5) (3.0) (3.0) (2.0) (2.0) (10.0) (12.0) Operating Income 13.2 5.7 2.6 2.4 5.1 15.7 23.5 29.5 24.6 23.9 101.4 115.4 Interest expense, net (6.5) (1.7) (2.0) (1.9) (14.0) (19.6) (13.2) (13.2) (13.6) (13.6) (53.6) (47.2) Other non-operating 5.1 0.0 0.0 0.0 (1.5) (1.5) (1.5) (1.2) (1.5) (1.0) (5.2) (3.0) Tax benefit (expense) 4.4 1.7 1.1 8.1 (3.0) 7.9 (1.8) (3.0) (1.9) (1.9) (8.5) (13.0) Net income (loss) $16.2 $5.7 $1.7 $8.6 ($13.4) $2.6 $7.0 $12.1 $7.6 $7.4 $34.1 $52.2 Diluted shares outstanding 22.1 22.2 22.3 22.3 25.6 23.1 27.4 27.4 27.4 27.4 27.4 27.4 Diluted EPS (Quarterly) $0.72 $0.25 $0.07 $0.36 ($0.52) $0.16 $0.26 $0.44 $0.28 $0.27 $1.24 $1.90 Diluted EPS (LTM) $0.72 $0.86 $0.81 $1.11 $0.16 $0.16 $0.16 $0.53 $0.45 $1.24 $1.24 $1.90 FREE CASH FLOW Adjusted EBITDA 48.6 13.9 15.0 15.1 29.0 73.0 45.9 51.5 45.6 44.8 187.7 203.0 (-) Cash interest expense (6.0) (1.5) (1.4) (1.4) (11.8) (16.2) (13.2) (13.2) (13.6) (13.6) (53.6) (47.2) (-) Cash taxes 4.4 1.7 1.1 8.1 (3.0) 7.9 (1.8) (3.0) (1.9) (1.9) (8.5) (13.0) (-) Maintenance capital expenditures (30.6) (4.0) (4.0) (4.0) (5.0) (17.0) (5.0) (5.0) (5.0) (5.0) (20.0) (20.0) Free Cash Flow before growth capex $16.3 $10.2 $10.7 $17.7 $9.2 $47.8 $25.9 $30.3 $25.1 $24.3 $105.6 $122.8 Growth capex 0.0 0.0 0.0 0.0 0.0 0.0 (7.0) (12.0) (23.0) (17.5) (59.5) (64.0) Acquisitons (41.3) (5.0) 0.0 (5.0) (781.0) (791.0) 0.0 0.0 0.0 0.0 0.0 0.0 Divestitures 2.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net borrowing 34.4 (1.0) (1.0) (1.0) 808.0 805.0 (4.0) (4.0) (4.0) (4.0) (16.0) (16.0) Free Cash Flow Equity $2.7 $2.2 $4.1 $18.1 $27.9 $52.4 $10.4 $10.1 ($5.4) ($0.2) $14.9 $27.8 FCF / Share (LTM) $0.74 $1.17 $1.56 $2.15 $1.87 $1.87 $2.32 $3.03 $3.30 $3.85 $3.85 $4.48 BALANCE SHEET AND CREDIT STATISTICS Adjusted EBITDA (LTM) 48.6 51.9 53.6 56.1 73.0 73.0 105.0 141.5 172.0 187.7 187.7 203.0 Total debt 183.4 178.8 176.8 172.8 973.0 973.0 974.7 972.7 970.7 968.7 968.7 952.7 Cash, ending 46.9 45.2 49.8 42.9 90.6 90.6 127.6 137.7 132.2 132.1 132.1 159.8 Net debt 136.5 133.6 127.0 129.9 882.4 882.4 847.1 835.0 838.4 836.6 836.6 792.8 Total leverage 3.8x 3.4x 3.3x 3.1x 13.3x 13.3x 9.3x 6.9x 5.6x 5.2x 5.2x 4.7x Net leverage 2.8x 2.6x 2.4x 2.3x 12.1x 12.1x 8.1x 5.9x 4.9x 4.5x 4.5x 3.9x Source: Company documents, Union Gaming Securities. 5
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 acted as a manager or co-manager of a public offering of securities by this subject company Golden Entertainment, Inc. in the last 12 months. Union Gaming or an affiliate has a client relationship with or received compensation from this subject company Golden Entertainment, Inc. for non-securities services in the last 12 months. Union Gaming or an affiliate expects to receive or intends to seek compensation for investment banking services from this subject company Golden Entertainment, Inc. within the next three months. The following company is a client of Union Gaming and the firm has received or is entitled to receive compensation for investment banking services involving their securities within the last 12 months: GDEN 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 Valuation Enterprise Value-to-EBITDA, Sum-of-the-Parts Analysis, Price-to-Earnings Ratio, Discounted Cash Flow Analysis, Price-to-AFFO, Net Asset Value. Risks Investment Risks: Union Gaming Securities equity research team covers the casino, gambling, gaming, lottery and related sectors. The companies operating within these sectors generally have a global presence or significant exposure to China and Las Vegas, among other markets. In addition, the markets that companies in these sectors operate are highly regulated by local and federal governments. Risks across or specific to one or more of these sectors include regulatory or legislative impacts related to licensing, tourism or the competitive landscape. Licenses to operate gaming facilities or supply gaming equipment or lottery services are often governed by regulatory authorities. Additional Risks for investing in these sectors include volatility in consumer discretionary spending and consumer confidence, currency, interest rates, unemployment rates, access to capital, the cost of capital, commodity costs, geopolitical uncertainty, and unfavorable government regulations. Companies operating within our covered sectors rely in part on tourism, and business trends could be impacted by changes or influences to tourism in a given market or markets, including visa policy, transit policies and security, transportation infrastructure, weather and natural disasters. Golden Entertainment is heavily exposed to the Las Vegas Locals market, any disruption in the economic condition of Las Vegas would adversely impact its business. In addition, Golden Entertainment has a small market cap and limited trading liquidity. Further, our investment thesis is based on the company's ability to grow via M&A which will require access to capital markets. The company's inability to access the debt or equity markets could impact growth. Ratings Distribution (as of 03/16/2018) Coverage Universe Investment Banking Services / Past 12 Months Ratings Count Pct. Rating Count Pct. BUY 15 60% BUY 7 47% HOLD 10 40% HOLD 1 10% SELL 0 0% SELL 0 0% 6
I:B:$15.00 04/ 22/ 16 45 40 35 30 25 20 15 10 B:$16.00 08/ 03/ 16 B:$15.00 11/ 04/ 16 B:$18.00 05/ 10/ 17 Golden Entertainment, Inc. Rating History as of 03/ 14/ 2018 B:$24.00 07/ 18/ 17 B:$27.00 08/ 07/ 17 B:$30.00 10/ 10/ 17 powered by: BlueMatrix B:$36.00 11/ 09/ 17 B:$40.00 02/ 02/ 18 5 Apr 2015 Jul 2015 Oct 2015 Jan 2016 Apr 2016 Jul 2016 Oct 2016 Jan 2017 Apr 2017 Jul 2017 Oct 2017 Jan 2018 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. 7