On Monday, Penn Leisure (NASDAQ:PENN) introduced $850 million in new expenditures. However at the least one analyst says the spending creates dangers and may very well be poorly timed.
Penn Leisure’s Hollywood On line casino in Columbus, Ohio. It’s one of many venues the operator is spending cash on in a brand new spherical of enhancements. (Picture: AP Picture)
In a observe to purchasers, Roth Capital analyst Edward Engel mentioned the present market setting is proving traders have a desire for decrease leverage gaming corporations. Previous to the Monday announcement, Penn’s leverage was on the increased finish of the group.
Previous to at present’s announcement, Penn’s leverage was on the higher-end of friends; nonetheless, its free money circulation (FCF) profile was robust given few progress CapEx initiatives,” wrote Engel. “Whereas we imagine Penn’s $500M annual FCF and ~10% FCF yield had created a valuation flooring for the inventory, we worry this flooring is now in danger as traders minimize 2024 FCF forecasts.”
He charges Penn inventory “impartial,” with a 12-month worth goal of $32. That means upside of 10.3% from present ranges.
Penn’s Massive Spend
In Illinois, the place it’s the dominant on line casino operator, Penn is spending $360 million to deliver its Hollywood riverboat on line casino in Aurora ashore. One other $185 million is allotted to deliver a riverboat gaming vessel ashore in Joliet.
The operator additionally advised traders it’s going to spend $206 million to double the scale of the M Resort in Henderson, Nevada. Following the not too long ago accomplished sale of the Tropicana on the Strip, the M is Penn’s lone venue of observe within the Las Vegas Valley. Penn can also be directing about $100 million so as to add a 180-room lodge on the Hollywood Columbus in Ohio.
Gaming and Leisure Properties (NASDAQ:GLPI) — Penn’s main landlord — is overlaying $575 million of the aforementioned prices. However that additionally means Penn’s long-term hire obligations on the 4 properties are transferring increased. Roth’s Engel notes Penn’s announcement indicators the operator’s confidence in underlying demand tendencies, however the spending is much less justifiable if a recession arrives.
“Whereas at present’s announcement affirms Penn’s confidence in underlying circumstances, these initiatives additionally put Penn in a much less defensible place if gaming demand does weaken materially,” added the analyst.
Penn Must Handle Debt
Gaming corporations with decrease debt burdens are outperforming this yr, and a few with hefty obligation are transferring to scale back these liabilities. These are indicators that the funding neighborhood will doubtless hold a watchful eye on Penn’s leverage because it strikes ahead with the aforementioned initiatives.
For its half, Penn — the most important regional on line casino operator — can management its FCF-generating efforts. However it may possibly’t management the broader economic system.
“Assuming the economic system and gaming demand holds regular, we mannequin ~$500M FCF in 2023. As such, when combining Aurora/GLPI’s $50M/$225M financing, Penn ought to construct sufficient incremental money by YE2023 to fund all the $850M finances, notably with CapEx not ramping till 2024-2025,” concludes Engel. “Nevertheless, this additionally assumes a gradual macro setting, the place traders are already pricing in a recession by 2H23.”
