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Contents 1 – Executive Summary ....................................................................................................................................................................4
2 – Introduction ...............................................................................................................................................................................4
3 – Assumptions and Other Information ........................................................................................................................................4
4 – Industry Description ...................................................................................................................................................................5
5 – Industry Analysis .........................................................................................................................................................................5
5.1 – Bargaining Power of Suppliers .............................................................................................................................................5
5.2 – Bargaining Power of Customers ..........................................................................................................................................5
5.3 – Industry Rivalry ....................................................................................................................................................................6
5.4 – Threat of Substitute Products ..............................................................................................................................................6
5.5 – Threat of New Entrants .......................................................................................................................................................6
6 – Industry Business Model .............................................................................................................................................................6
7 – Business and Operational Strategies .........................................................................................................................................7
7.1 – Great Canadian Gaming Corporation ..................................................................................................................................7
7.2 – GameHost ............................................................................................................................................................................8
7.3 – Churchill Downs ...................................................................................................................................................................8
7.4 – Penn .....................................................................................................................................................................................9
8 – Industry Factors and Trends: ......................................................................................................................................................9
9 – Industry Life Cycle: ................................................................................................................................................................... 11
10 – Key Success Factors (KSF) in the Industry .............................................................................................................................. 11
11 – Ratio Analysis ......................................................................................................................................................................... 12
11.1 Standard Ratio 1: Return of Equity (ROE) Using NOPAT ................................................................................................... 12
11.2 Standard Ratio 2: Gross Margins ....................................................................................................................................... 14
11.3 Non-standard ratio 1: Property Concentration Risk .......................................................................................................... 15
11.4 Non-standard ratio 2: Level of Vertical Integration .......................................................................................................... 15
11.5 Non-standard ratio 3: Operating Agreement Power ......................................................................................................... 15
11.6 Non-standard ratio 4: Workforce Engagement ................................................................................................................. 16
11.7 Non-standard ratio 5: Customer Perception ..................................................................................................................... 16
11.8 Ratio Analysis Summary .................................................................................................................................................... 17
12 – Economic and Industry Outlook ............................................................................................................................................ 17
13 – Revenue Forecast .................................................................................................................................................................. 18
13.1 – Top-Down Revenue Forecast .......................................................................................................................................... 18
13.2 – Bottom-Up Revenue Forecast ........................................................................................................................................ 19
13.3 – Consolidated Revenue Forecast ..................................................................................................................................... 22
14 – Pro-forma Financial Statements ............................................................................................................................................ 22
14.1 – Income Statement .......................................................................................................................................................... 22
14.2 – Balance Sheet ................................................................................................................................................................. 23
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14.3 –Cost of Capital .................................................................................................................................................................. 28
14.3.1 -Capital structure ............................................................................................................................................................ 28
14.3.2-Cost of debt .................................................................................................................................................................... 28
14.3.3-Market Value of Debt ..................................................................................................................................................... 29
14.3.4-Cost of Equity – Capital Asset Pricing Model ................................................................................................................. 29
14.3.5-Cost of Equity – Build Up Approach ............................................................................................................................... 29
14.3.6-Market Value of Equity .................................................................................................................................................. 30
14.3.7-Income tax rate .............................................................................................................................................................. 30
14.3.8-Estimated discount rate WACC ...................................................................................................................................... 30
15 – Valuation – Multiples Approach ............................................................................................................................................ 31
15.1 – PE Multiple...................................................................................................................................................................... 31
15.2 – EV/Operating Cash Flow ................................................................................................................................................. 32
15.3 – EV/EBITDA....................................................................................................................................................................... 32
15.5 – Multiples Summary ......................................................................................................................................................... 32
16 – DCF Valuation ........................................................................................................................................................................ 32
16.1 – Sensitivity Analysis .......................................................................................................................................................... 33
17 – Conclusion ............................................................................................................................................................................. 33
Appendix – ROE using NOPAT ................................................................................................................................................... 34
Appendix – Debt to Capital ratio for Competitors .................................................................................................................... 35
Appendix – Historical Debt to Capital ratio for GCGC ............................................................................................................... 35
Appendix – Debt Structure for GCGC ........................................................................................................................................ 35
Appendix – Risk Factors for Build-Up approach ........................................................................................................................ 36
Appendix – Adjusted Income Tax Rate ...................................................................................................................................... 36
Appendix – WACC Calculation ................................................................................................................................................... 37
Appendix – Multiples Approach ................................................................................................................................................ 37
Appendix – Property Concentration Risk .................................................................................................................................. 39
Appendix – Level of Vertical Integration ................................................................................................................................... 39
Appendix – Operating Agreement Power ................................................................................................................................. 40
Appendix – Workforce Engagement Score ................................................................................................................................ 41
Appendix – Customer Perception .............................................................................................................................................. 41
Appendix – Ratio Analysis Summary ......................................................................................................................................... 43
Appendix – Pro-forma Income Statement................................................................................................................................. 44
Appendix – Pro-forma Statement of Financial Position ............................................................................................................ 45
Appendix – Pro-forma Cash Flow Statement ........................................................................................................................... 46
Appendix – PPE .......................................................................................................................................................................... 47
Appendix Top-Down Revenue Forecast .................................................................................................................................... 49
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Appendix - Bottom-Up Revenue Forecast ................................................................................................................................. 51
Appendix – DCF Assumption ..................................................................................................................................................... 52
Appendix – DCF Calculation ....................................................................................................................................................... 53
Appendix – Black-Scholes Option Value .................................................................................................................................... 54
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1 – Executive Summary Great Canadian Gaming Corporation (GCGC) operates primarily in British Columbia, Ontario and Nova Scotia of Canada, with
approximately 5% of revenue from Washington State of the US. It accounts for approximately 2.1% of market share in Canada
and a strong presence in British Columbia. The GCGC competes primarily in the casino gaming industry, but horse track racing
is also a part of its operations albeit consisting of only 3% of its revenue in 2014; hospitality and other forms of entertainments
offered on its casino properties consist of approximately 23% of its revenue in 2014.
The company operates in a highly regulated and mature industry where the barrier to entry is high, thus provides an extra
layer of safety to its business. To stay competitive and to grow however, the company must proactively seek expansion or
acquisition opportunities outside of its existing operating jurisdictions, improve operating efficiency and effectiveness, and
differentiate from competitors by delivering superior customer services. The company is compared to firms such as Penn
National Gaming Inc. and Churchill Downs Incorporated which are both US-focused firms and Gamehost Inc. similar to GCGC
but currently operates only in the province of Alberta, Canadian. The company generates most of the revenue from
operations in the province of British Columbia, it has gaming properties in Nova Scotia and stakes in horse track racing in
Ontario where slot machines and table games are also made available on the horse racing site, but the government of Ontario
is undergoing a review process as an attempt to upgrade its business model, a consequence of its review process is that the
company’s slot machines tables may be made redundant and subject to removal.
Based on NOPAT calculation of ROE and other derived ratios, the company is ranked the highest among the competitors.
However, it is primarily a result of having exceptional ROE using NOPAT and Gross Margin ratios in 2014 that the company has
not demonstrated consistency in. As a matter of fact, prior to 2014, the company has had low ROEs using NOPAT and margins,
furthermore the company experienced a large write-off in 2012, thus the high ROE using NOPAT and Gross Margin in 2014 is
expected but the question we have in mind is that whether the company can consistently demonstrate such strong
performance in the future.
Multiples were calculated using EV/EBITDA, 1-year forward Price/EPS, and EV/OCF. Using these industry multiples resulted in
an average share value of $25.64. Our DCF valuation provides an implied share price of $20.53. We believe DCF value is a
better reflection of the intrinsic value and because the stock was trading at a value of $24.01 on June 30, 2015, we place a
“sell” recommendation on GCGC.
2 – Introduction
The Great Canadian Gaming Corporation is a gaming company that strives to offer entertainment through games of chance,
horse racing, and hospitality venues. The Company’s areas of operation include 17 gaming properties, consisting of 3
community gaming centers, 4 racetracks and 10 casinos, including a Four Diamond resort Hotel “River Rock Casino Resort”
located in British Columbia. The company offers various table games at their various venues including, Blackjack, poker, craps,
Texas Hold’em and others, alongside slot machines and other entertainment sources such as show theaters with over 1,000
seats. The company currently operates in three provinces including Ontario, British Columbia, Nova Scotia and Washington
State in the United States. The Company is regulated heavily in Canada due to their provincial gaming laws, and has high
competition from large Crown Corporations. On the other hand, in the United States, the law towards gaming is much more
lenient, but competition is just as intense.
The purpose of this report id to provide a comprehensive business valuation of The Great Canadian Gaming Corporation
(GCGC). The first section of this valuation will focus on industry and competitors comparisons across financial operation
performance metrics. The second section, will focus on the valuation of the company using the discounted Cash flow (DCF)
approach and comparable multiples approach, which aims to estimate an intrinsic value for The Great Canadian Gaming
Corporation.
3 – Assumptions and Other Information
2 – Introduction
3 – Assumptions and Other Information
1 – Executive Summary
5
Assumptions and Other Information
All figures are stated in millions and are in CAD unless otherwise stated.
4 – Industry Description
This industry provides short-term lodging in hotel facilities that have a casino on the premises. The casino operations
may include table wagering games and other gambling activities, such as slot machines, horse racing and sports betting.
These establishments may offer a range of services and amenities, such as food and beverage, entertainment, valet
parking, swimming pools and conference and convention facilities. For the purpose of this report, we will be focusing
mostly on the wagering games, slot machines, horse racing, and hotel facilities. 1
5 – Industry Analysis
Porter’s Five Forces
The following assumptions are made to analyze the casinos & gaming industry; operators of casinos, gaming machines,
lotteries, and betting (commercial, state-run and charitable operations) are categorized as players. The key buyers will
be taken as individual customers, and companies providing gaming machines, equipment, services and real estate as the
key suppliers.2
5.1 – Bargaining Power of Suppliers The success factor for most casinos comes from the sector where they operate, if they reside in a hospitality sector, their
success highly depends on the quality of service provided, and therefore highly skilled labour is required. Location is very
important for these businesses, which gives some supplier power to companies that own real estate in a popular tourist
area. Gaming machines and related casino equipment services are also a vital part of success. Most of the companies
that supply casino equipment do not have a certain brand that they can leverage, but there are a few companies that
are well placed in the industry, including: International Game Technology (IGT) and WMS Industries, who provide top-of-
the-line machines that are attractive to both customers and casino operator due to their rates of return3. These large
suppliers often specialize in this sector, which means that the gaming industry is required for their survival, in turn
weakening the supplier power. Overall, supplier power is assessed as moderate.
5.2 – Bargaining Power of Customers The number of buyers in Canada is large due to the popularity of the gaming industry. The large amount of potential
buyers lowers the power of customers significantly. The activities within this sector are non-essential leisure activities;
however there is a factor of gambling addiction which severely affects customers. The existence of addictive gambling
behavior indicates that some consumers are not making rational decisions and can become dependent on the gambling
industry, which weakens the power of the customer accordingly4. Given the large concentration of the industry, the
customers will have more bargaining power since they can easily go to a different casino or racetrack that offers either a
better payoff or lower entry game prices. There is no regarded brand for most casinos that do not operate in very
popular tourist areas like Las Vegas, which strengthens the power of the customers. Another thing that makes the
customer’s bargaining power stronger is the lotteries that are very prominent in Canada, they get the same or higher
perceived payoff (amount of money being spent per potential gain) without leaving the comfort of their house or having
1 IBIS World- Gambling in Canada 2014 2 MarketLine- Casinos & Gaming in Canada 2014 3 MarketLine- Casinos & Gaming in Canada 2014 4 MarketLine- Casinos & Gaming in Canada 2014
4 – Industry Description
5 – Industry Analysis
6
to understand any of the table games offered at the casinos. Overall, there is a moderate degree of customer power
within the casino & gaming industry.
5.3 – Industry Rivalry The Canadian Casino and gaming sector is fairly concentrated. Some companies operating in this industry are large and
powerful. For many players, gaming is their principal activity, however some companies have started to deviate and
provide other leisure activities; which somewhat weakens the rivalry between players since they have other sources of
revenue. For example, some casinos have incorporated hotels as part of their general leisure facilities. Many market
players have the ability to differentiate their offerings through additional services, such as entertainment, and other
special activities which will increase rivalry between casinos as they try to capture more of the potential market
participants1. Due to decline in the Canadian casinos and gaming sector in recent years, the industry rivalry is considered
strong.
5.4 – Threat of Substitute Products For the gaming industry as a whole, almost any leisure activity can act as a substitute, which can be taken up with
minimal switching costs and may also be cheaper, less risky and more enjoyable than gambling for customers2. There is
also a negative social aspect associated with the gambling industry, which could act as a deterrent to potential
customers, in light of more socially acceptable leisure activities. For those wishing to engage in an activity that offers the
possibility of winning money, online gambling is an option. The threat is substitutes in this industry are very strong.
5.5 – Threat of New Entrants The casinos and gaming sector operates differently from province to province, with different regulatory and legislative
barriers, which often reflect the cultural acceptance of gambling in a particular province. A new company trying to enter
the Canadian gaming market would require high amount of capital expenditures to establish the casino, employ staff,
and acquire gaming equipment.3 The biggest barrier to entry into this industry is the regulation by provincial and
territorial governments. Since law differs from province to province, entry into the Canadian market is not as
straightforward as other countries. The decline of the industry in recent years makes entry into the industry very
unappealing. The threat of new entrants to this industry is assessed as low.
6 – Industry Business Model
The gambling industry is highly concentrated, with crown corporations of Canada’s largest provinces holding the
majority share of the industry’s market share. Gambling is an illegal activity in Canada, except where it is made legal
through provisions set out in the Criminal Code of Canada and sanctioned under the authority of each province. Each
province differs in how it legislates and regulates gambling, and gaming organizations carry a range of regulatory forms
and may be commercial, charitable, government owned- and-operated or owned by private companies under contract
to provincial gaming authorities4. As a result of this strict regulation, the number of industry establishments only grows
when province authorities allow it to. The number of industry establishments, which includes casinos, bars and lounges
with electronic gaming machines, horse racing venues and lottery ticket outlets, is expected remain at a minimal growth
rate for the next five years. On the other hand, in the United States gambling provisions are under federal law, but each
province has some discretionary power to prevent certain types of gambling activities. The companies in this industry
derive their revenue from customers playing various games of chance including Blackjack, Poker, Craps, Roulette, other
table games, amenities and Slot games; their main costs arise from capital investments, license fees, and wages to
1 MarketLine- Casinos & Gaming in Canada 2014 2 IBIS World- Gambling in Canada 2014 3 MarketLine- Casinos & Gaming in Canada 2014 4 IBIS World- Gambling in Canada 2014
6 – Industry Business Model
7
employees, tax payments and others.1 Advertisement is the very important to the casino’s success, hence television,
radio commercials and internet deals are crucial for continued rise in patronage.
7 – Business and Operational Strategies
7.1 – Great Canadian Gaming Corporation Business Model:
GCGC operates gaming, entertainment and hospitality facilities in Canada and Washington State. Canadian operations are
primarily focused in British Columbia, followed by Ontario and Nova Scotia. The Company’s 17 gaming properties consist of 3
community gaming centres (CGCs), 4 racetracks, and 10 casinos, including 1 with a Four Diamond resort hotel. The Company
had approximately 3,900 employees in Canada and is headquartered in Richmond, British Columbia.2
Business Strategies:
The company’s vision is to be the leading gaming, entertainment and hospitality in its chosen markets by providing superior
entertainment value and exceptional experiences. To achieve the goal, the following strategies are adopted:
management provided minimal input with regards to business strategy, and therefore our description of its business strategy
is gauged to our best effort based on the fact that GCGC operates in a highly regulated mature industry where offerings from
competition is nearly identical.3
1. Discover new growth opportunities. The company seeks to grow shareholder value either through existing markets
or new jurisdictions.
2. Drive incremental growth at the company’s existing facilities. The company operates in a highly regulated and
mature industry, incremental growth and not decline, is very important for it to stay afloat on stagnant waters.
3. Continually improve guest experience. The company believes guest satisfaction to be the primary driver of patron
loyalty, particularly within mature markets.
4. Continuously improve the company’s operating efficiency and effectiveness. Being able to minimize cost is critical to
a business in a mature industry.
5. Pursue and promote exceptional corporate culture. This is important as it sends positive signal to regulators, in
addition to promoting good corporate governance.
Operations Strategies:
To achieve new growth, the company will consider property expansion, the implementation of new offerings, the
development of new properties or projects, and strategic partnership or acquisitions or both. With regards to driving
incremental growth at the existing facilities, the company seeks to provide its patrons with superior entertainment experience
through reinvestment in properties, provide premium non-gaming entertainment and hospitality at the highest standards. In
combination with staff training, performance recognition and communication, the company aims to continually improve guest
experience. To continuously improve operating efficiency and effectiveness, the company seeks to integrate corporate
structure that centralizes major property functions such as accounting, purchasing and human resources.
Concrete examples include the decision of closing of its operations in the Washington State in 2015, and the subsequent
retirement and settlement of the associated “Term Loan B”, “Subordinated Notes” and derivative liabilities which are
regarded by us as the company’s effort improving cost structure and optimizing business efficiency. Moreover, in addition to
the completion of suite upgrades to its signature “River Rock Casino Resort” in 2012, the company has commenced the
redevelopment of Boulevard Casino that same year which later renamed to “Hard Rock Casino” that includes a hotel,
conference facilities and additional dining options, which in our view is an evidence of its differentiation effort. The company
1 http://marketrealist.com/2014/09/must-know-casino-business-model/ 2 The Great Canadian Gaming Company- Annual Report 2014 3 The Great Canadian Gaming Company- Annual Report 2014
7 – Business and Operational Strategies
8
has also made corporate social responsibility a vocal component of its business as demonstration of its good corporate
citizenship.1
7.2 – GameHost Business Model: Gamehost Inc. is an Alberta based company functioning on hospitality and gaming properties in Alberta and offering hotels and gaming services in Canada. As of 2014, they are operating in the Hotels; Gaming; and Food & Beverage segments. The company’s mission is to lead the entertainment and hospitality industry by offering inviting venues to the community and the tourists with a wide range of entertainment offerings. They even strategized their target markets by including table and slot gaming even for the social occasional gamer2. Business Strategies: The company controls its costs significantly which aids to maximize revenue and gross margins in the industries. The company also maintains a stable, high yield, dividend stream for its shareholders. These factors contributed to an upward trend in the share price of the company. The company plans to grow the business by extending the existing operations and segments. However, the company will be quite careful about planning to expand through potential acquisitions in the future. It will look for projects which deliver fast generating free cash flows alongside an opportunity to enhance organic growth.3 Operation Strategies: The Company is headquartered in Red Deer, Alberta, Canada and has operations including the Deerfoot Inn & Casino (Deerfoot), a joint venture in Calgary, Boomtown Casino in Ft. McMurray, Great Northern Casino in Grande Prairie and Service Plus Inns and Suites, also located in Grande Prairie. Properties include Great Northern Casino which features 15 owned Table games, 392 slot machines, a 3 table poker room, video lottery terminals and lottery ticket outlets, a restaurant and a 145 seat showrooms and lounge featuring live entertainment. Gamehost also gives food, beverages and live entertainment services at the company's casino locations. Moreover, the Company owns a retail complex in Grande Prairie that leases space to a pub, a full service restaurant operation and a liquor store. Its hotel activities consist of full and limited service hotels and banquet and convention services. Gaming activities of the Company are controlled by the Alberta Gaming and Liquor Commission4. The guest experience is further enhanced by providing clean modern facilities in superior locations offering quality live entertainment and gaming, relaxing guest rooms, conference facilities and high quality food & beverage choices all with the utmost attention to customer service5.
7.3 – Churchill Downs Company Introduction: Churchill Downs Incorporated, organized as a Kentucky corporation in 1928, is a diversified provider of pari-mutuel horseracing, casino gaming, entertainment, and is the country’s premier source of online account wagering on horseracing events.
Business Model: The Company has four segments, though only three of them are significant to the operation of the
business. The segments, in order of revenue are Gaming, Racing, Online Business, and Other Investments. “Racing
revenues include commissions on pari-mutuel wagering at racetracks and OTBs, plus simulcast host fees earned from
other wagering sites. In addition, amounts include ancillary revenues generated by the pari-mutuel facilities including
admissions, sponsorships and licensing rights and food and beverage sales. Gaming revenues are primarily generated
from slot machines, video poker, poker card room and table games and ancillary revenues such as hotel and food and
1 The Great Canadian Gaming Company- Annual Report 2014 2 GameHost Inc. – Annual Report 2014 3 GameHost Inc. – Annual Report 2014 4 GameHost Inc. – Annual Report 2014 5 GameHost Inc. – Annual Report 2014
9
beverage sales. Online revenues are generated by ADW business from wagering through the Internet, telephone or
other mobile devices on pari-mutuel events. Finally, other revenues are primarily generated by United Tote and other
minor subsidiaries. The business model of Churchill Downs has been changing from primarily dedicated to racing
segment in 2008 to substantially focusing on Gaming segment and its operating margin for segments prove this decision
to be right. Meanwhile, Online Business is showing an increasing operating margin year by year, indicating a new
revenue source the company may focus on in the next few years as can be seen from revenue proportion generated
from “Big Fish Game” in the first quarter of 2015. 1
Operational strategies2:
The company has reduced risk by diversifying revenues. In the past, revenue mainly came from the racing segment which comprised almost 75% of total revenue. However, currently in 2014, the company has a diversified revenue sources with similar weights in racing, gaming and online business. Acquisitions have allowed expansion into segments with higher operating margins. Churchill has built one of the most diversified gaming platforms in the US through strategic acquisitions. Main acquisitions include Riverwalk, Bluff, Oxford, and Miami Valley Gaming & Racing Joint. The company's growth has been fueled by this aggressive acquisition strategy. The increased debt represents a shift in management strategy on financing. The company is not afraid to use debt to finance acquisitions. The leverage shows up as long term debt, but the company also pays the debt down rapidly.
Churchill Downs possesses significant barriers to entry that slows competitive threats and increases profits. The biggest revenue contributor For CDI was Big Fish, with revenues of $91.9 million.
7.4 – Penn Company Introduction: Penn National Gaming, based in Wyomissing, Pennsylvania, operates 26 facilities across 17
jurisdictions. These facilities provide gaming, hotel, restaurant, and pari-mutuel services to thousands of guests every
day. Pari-mutuel betting is a form of gambling where the backers of the top three contestants, divide the wagers placed
by those backing the losing contestants. The jurisdictions in which the company operates include: Florida, Illinois,
Indiana, Kansas, Maine, Maryland, Massachusetts, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Ohio,
Pennsylvania, Texas, West Virginia, and Ontario.3
Business Model: Penn National Gaming provides a diversified set of gaming offerings to its customers throughout its 6.5
million+ square feet of properties. The company operates over 26,000 gaming machines, 611 gaming tables, and over
2,700 hotel rooms. The company also operates over 1.9 million square feet of racing facilities, including greyhound,
Standardbred, harness, and thoroughbred racing.4
Operating Strategies: In 2013, Penn separated its gaming operating assets from its real property assets by spinning off
its real estate as a real estate investment trust, now known as Gaming and Leisure Properties, Inc (GLPI). Substantially all
of the assets and liabilities associated with the real properties owned by Penn were transferred to GLPI, which afterward
were leased back to Penn in a triple net master lease. As of June 30th, 2015, Penn National Gaming, Inc. had a market
cap of almost $1.5 Billion, with quarterly revenues exceeding $600 Million.5
8 – Industry Factors and Trends:
Consumer Spending – Demand for gambling is dependent of the level of consumer spending, which is influenced by
labour market growth, taxes and interest rates. When there is a decrease in consumer spending, discretionary spending
1 Churchill Downs Inc.- Annual Report 2014 2 Churchill Downs Inc.- Annual Report 2014 3 Penn National Gaming Inc.- Annual Report 2014 4 Penn National Gaming Inc.- Annual Report 2014 5 Penn National Gaming Inc.- Annual Report 2014
8 – Industry Factors and Trends
10
like gambling and travel are the first to decline. Consumer spending is expected to rise for the year 2015, which could
represent a potential growth opportunity for the industry1. This is a very important and prominent factor that has and
will continue to affect the industry’s profitability in the future.
Consumer Confidence Index – Changes in consumer sentiment directly influence individuals’ expenditure on
entertainment and gambling. There is an expected increase in consumer confidence for 2015, however this measure is
very volatile and could revert at any moment2.
Inbound International Travel – There is some income that is derived from international customers, mainly customers
from the US. The industry is sensitive to the number of international visitors to Canada. The number of inbound
international flights is expected to decrease in 20153. There seems to be a drop in the number of inbound flights since
the United States economy has hit some headwinds in the first quarter of 2015, but there are bright future prospects
due to fiscal policy changes and economic factors which will help the United States economy recover and hence more
international inbound travel to occur.
Leisure Time – An increase in available leisure time for costumers will encourage a higher participation in the gambling
industry, and demand for the industry services, since customers will have more time to spend on recreational activities.
Leisure time is expected to slightly decrease in 2015, due to a lower unemployment rate and economic growth.
Canadian-dollar exchange rate – The currency exchange rate has a large impact on the number of US visitors travelling
to Canada to gamble. When the Canadian dollar is strong less US residents will cross the border4. The Canadian dollar
exchange rate is expected to decline in 2015.
External Competition – Alternative forms of entertainment represent a big threat to the industry. Consumers spend
their leisure time watching movies, attending concerts or engaging in other leisure activities, as they drift farther away
from spending time in a racetrack and the gaming industry as a whole. Furthermore, the rising popularity of casinos and
lotteries compared to horse racing gambling has decreased the interest for horse racing even further.
Decreasing horse racing popularity – Concerns about horse abuse have further reduced the appeal of horse racing in
recent years. The industry has been under rising scrutiny over the use of drugs to improve performance and racing
results. Animal rights activists have been pushing for a reforms to prevent drug abuse since there has been a growing
number of horse injuries and deaths. The increase of drug abuse in the horse racing industry is rooted to the price
increase for thoroughbred horses, which has spiked significantly in the last three years. In order to recoup some of the
costs and keep the horse running for as long as possible, the use of painkiller, anabolic steroids, muscle relaxers and
bronchodilators have become common practice5.
Number of Adults aged 50 and older – This age group makes up most of the market for horse racing tracks industry6.
Consumers in this age group tend to have more leisure time and higher disposable incomes than other demographic
groups, and are also more likely to have a preference for this industry than younger individuals.7
Declining number of racetracks– Due to the low number of attendees, the once magnificent and profitable horse
racetracks, have begun to close down all around North America8. This is a trend that has increased rapidly over the past
five years.
1 IBIS World- Gambling in Canada 2014 2 IBIS World- Gambling in Canada 2014 3 IBIS World- Gambling in Canada 2014 4 PWC – Global Gaming Outlook- 2015 5 IBIS World – Horse Racing Tracks in the US – 2014 6 http://www.horsecouncil.org/national-economic-impact-us-horse-industry 7 IBIS World – Horse Racing Tracks in the US – 2014 8 IBIS World – Horse Racing Tracks in the US – 2014
11
Growth of Racetrack/Casinos (Racinos) – In order to remain profitable and support the declining margins, many casinos
and racetracks have merged into a one-stop-shop. This mix is not allowed in most states, the only thing that most states
allow at racetracks is slot machines1. This makes it more troublesome for operators to truly expand their product mix,
since they are limited to electronic game machines which tend to be less profitable than table games.
Changing Landscape – The industry has a potential opportunity to slow down the decline of their business. The potential
for customers to make bets through their cell phones and other mobile devices could potentially increase industry
revenue. Online betting allows their customers to watch and bet from the comfort of their home, moving the operations
online has a potential to improve industry profit margins2.
9 – Industry Life Cycle:
The Gambling industry is currently facing decline. Industry valued added (IVA), which measures an industry’s
contribution to GDP, is expected to decline 2.4% per year on average over the 10 years to 20193. Over the same period,
Canada’s GDP is forecast to grow 2.3% per year on average. The industry as a whole has faced a downturn over the last 5
years due to a reduction in the demand for gambling. The economic downturn has had the largest effect on the industry,
as consumers have been unwilling or unable to vagrantly use their income on discretionary services such as gambling
.This slower demand has been felt in Canada, as well as in the rest of the western world. The minimal increase in per
capital income accompanied with a rise in the price of essential goods has left less spending money in the pockets of
consumers. Furthermore, there has been an increase in competition from new casinos and online gambling
establishments in the United States have hurt the industry. Another important factor that could negatively affect the
industry is the strength of the Canadian dollar, since US residents will be less willing to travel across the border to
gamble. Overall the industry declined 2.1% per year on average over the past five years to 2014; however there is a
forecast of minimal growth for the industry of 0.4% for the next 5 years4. Since the gambling industry in Canada is highly
regulated by the provinces where they operate, the range of permitted “games of chance” could be banned in different
provinces which could result in lack of interest by customers.
10 – Key Success Factors (KSF) in the Industry
Property Concentration Risk – It is important for operators to beware of one casino gaming property becoming
overwhelmingly important in terms of revenue generation. Because there are numerous external factors outside the
control of management that can negatively impact its operations such as surround unemployment rate, crime rate and
general sentiment against casino gaming.
Level of vertical integration – Studies have shown that visitors spend more and revisit a site more if they become
familiar with the site. Thus having hotel rooms, entertainment centres, dining and shopping locations among other
things, will get visitors to spend more time on site, grow familiarity and ultimately spend more money.
Operating Agreement Power – Gaming companies must comply with the province/state and country’s regulations in
order to continue operating and succeeding in the industry. Being able to operate in multiple jurisdictions signals the
company’s strength in dealing with complex regulations that are jurisdiction-specific, and ultimately this means that the
company has the ability to develop or make acquisitions by expanding into new jurisdictions, which is particularly
important for companies in mature industries.
1 IBIS World – Horse Racing Tracks in the US – 2014 2 IBIS World – Horse Racing Tracks in the US – 2014 3 IBIS World- Gambling in Canada 2014 4 IBIS World- Gambling in Canada 2014
9 – Industry Life Cycle
10 – Key Success Factors (KSF) in the Industry
12
Workforce Engagement – One of the few ways the company can differentiate itself from the mature industry that offers
highly similar products is through providing superior customer service, and the basis for delivering superior service is
that the providers of the service, the employees, must be thoroughly engaged and demonstrate a sense of ownership.
This metric is used to gauge the level of employee buy-in.
Customer Perception – It is essentially the ability to attract and retain patronage. Companies must be able to
successfully market their business to the local population as well as the regional population. With a fast technologically
changing world, customers have the ability to obtain peer reviews of places they plan to attend prior to finalizing the
purchase; therefore it is imperative for companies to have a respectable customer rating in order to be able to attract
more patronage.
Ability to manage other risks – Operators must be able to handle and limit the risk associated with the high stakes
gambling market. Large winnings by many clients could have a serious impact on the operators’ financial performance.
Adopting new technology – Operators must be able to offer new and improved games and video gaming machines to
meet customers’ needs and expectations.
Skilled and flexible Workforce – Casinos must have a well-trained and multi-skilled workforce that can operate in
different areas, such as food service, liquor sales and gaming tables.
Ability to align operations with market demand – Horse racing tracks operators must be able to accurately forecast
race attendance and the amount of money being bet in order to maximize margins on race day.
Effective product Promotion – Adequate marketing is crucial to attract a new customer base to attend industry
establishments.
Adjustments to Changing regulations – Gambling is heavily regulated, yet the rules that govern gambling change
periodically. Operators must be able to quickly adopt and navigate around these changes avoiding fees and being able to
maximize the new
11 – Ratio Analysis
11.1 Standard Ratio 1: Return of Equity (ROE) Using NOPAT Description and Rationale:
Return on Equity is the proportion of return that common shareholders in the owner’s equity can account for. It
calculates the rate of profits generated from the shareholder’s equity. It is a profitability ratio for the company which
determines the amount of net income generated from the investments of the common shareholders.
The ROE is calculated using the Net Operating Profit after Tax version as follows.
ROE using NOPAT = Operating ROA + (Spread × Net Financial Leverage)
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑅𝑂𝐴 = 𝑁𝑒𝑡 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑇𝑎𝑥
𝑆𝑎𝑙𝑒𝑠×
𝑆𝑎𝑙𝑒𝑠
𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑁𝑒𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 ;
Operating ROA1 measures the portion of profit generated on the operating assets. We derive the NOPAT margin and
then multiply with the Assets turnover to get the operating ROA. This equation omits the financing costs and financial
assets to give a much more accurate return being generated from the business operations.
𝑆𝑝𝑟𝑒𝑎𝑑 = 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑅𝑂𝐴 − 𝑁𝑒𝑡 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 𝑎𝑓𝑡𝑒𝑟 𝑇𝑎𝑥
𝑁𝑒𝑡 𝐷𝑒𝑏𝑡⁄
1 http://financetrain.com/operating-return-assets-roa/
11 – Ratio Analysis
13
Spread1 calculates the economic benefit generated from leveraged operations of the business. For our company the
operating ROA of 18.3% is higher than the borrowing costs of 6.74%. Thus the Spread is positive at 8.9% for the year
2014. This is the portion of the excess income generated from the excess borrowed amount.
𝑁𝑒𝑡 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 = (𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐵𝑒𝑎𝑟𝑖𝑛𝑔 𝐷𝑒𝑏𝑡 − 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝐶𝑎𝑠ℎ & 𝑆𝑇 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑠)
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐸𝑞𝑢𝑖𝑡𝑦⁄
Net Financial Leverage calculates the portion of debt in the company’s capital structure.
Analysis:
For our company there was a tax benefit as GCGC had a negative EBT in 2012. Thus we have assumed the tax rate to be
25% from the company's note disclosure on tax assets as part of applicable federal and provincial statutory income tax
rate. We constructed the following calculations based on this tax rate. For Penn National Gaming Inc., the federal taxes
of 35% are adjusted with state and local income taxes, permanent differences, foreign and other miscellaneous items.
Operating ROA: GCGC had an increase in their operating ROA from
the previous years. The jump in 2013 of over 14% was due to the
drastic increase in their net income and NOPAT. Observing the
peers, GameHost has the most stable net income as well as an
upward slope in operating ROA and Churchill Downs started having
a downward slope for both the variables. PENN has also started an
upward trend in their operating ROA which states that even if the
gaming industry is declining as a whole, most of these companies are having a steady return on operating assets. All of
the companies are facing a negative operating working capital as the industry does not require adequate current assets
other than cash and equivalents. GCGC is reducing their Property, Plant and Equipment balance by investing
inadequately (Capital Expenditures < Amortization) over the years. This deduction in Property, Plant and Equipment
lowers their operating net assets which aids to the rise in operating ROA. Although GCGC has higher operating ROA than
its peers, we believe it should invest more on its capital and assets from the excess redundant cash to promote
development for the future.
Nopat Margin: the NOPAT of the company divided by the sales is
termed as the NOPAT margin. The NOPAT for GCGC increased more
than the increase in revenue. They come in second place to
GameHost who has the highest margin as well as a stable
percentage. PENN had a drop in their net income in 2014 which
lowered the margin and ChurchillDowns had a high increase in the
net interest expense due to a very high interest expense for 2014.
This let their margin percentage to drop a bit from the prior year.
Spread: GCGC had an excess economic benefit per capital borrowed
because of its higher operating ROA compared to the borrowing costs. The
main driving factor is the increase in net income from negative in 2012 to
positive in the following years. The tax rates and the net interest expense
after tax remained stable for all of the companies which led to the change
in spread resembling most of that in the operating ROA. Gamehost has the
highest spreads as well as stability in the percentages due to their effective
1 http://www.investopedia.com/terms/s/spread.asp
Operating ROA
2014 2013 2012
GCGC 18.29% 14.41% -0.54%
Penn 4.92% 4.32% -2.79%
GameHost 18.22% 17.16% 16.70%
Churchill Downs 5.93% 7.52% 9.47%
NOPAT Margin
2014 2013 2012
GCGC 22.77% 21.19% -0.81%
Penn 2.88% 6.98% -3.63%
GameHost 30.51% 30.85% 32.27%
Churchill Downs 7.25% 7.57% 8.34%
Spread
2014 2013 2012
GCGC 8.92% 7.13% -13.3%
Penn 0.14% 0.96% -5.38%
GameHost 11.03% 9.11% 10.76%
Churchill Downs 1.57% 4.71% 4.84%
14
business model and strategies. Churchill Downs had a significant rise in their interest expense in 2014 which lowered
their economic spread.
Net Financial Leverage: This takes in to account the level of net debt in
the firms’ capital structure. GCGC lowered this ratio from the previous
year primarily through the drastic increase in cash and cash equivalents
which lowered net debt and the increase of the prior year’s retained
earnings which increased the opening equity for the year. Meanwhile,
GameHost is facing a downward sloping ratio during the years due to a
constant reduction in debt and ChurchillDowns follow an increase in the
ratio because of taking more debt over the years. GCGC has a consistent slope with that of Penn National Inc. due to
similar business strategies regarding the management of debt. Overall Penn National Inc. has the highest net debt to
equity ratio as their net equity fell drastically on the year 2014 from $2,250m to $758m.
Conclusion:
The ROE using NOPAT of GCGC is higher than its peers over the last
two years. This is due to the high increase in the revenue and net
income in 2014. The company incurred a net loss in 2012 which led to
a negative ROE. GameHost has been the most stable in the earnings
growth over the amount of equity. ChurchillDowns is having a fall in
the net income over the years. The other two companies fell in the
ROE % as shown in the table. From all of the observations, Penn
National Inc. had the most volatile movements in the percentage changes. For a further breakdown of ROE using
NOPAT, see Appendix – ROE using NOPAT.
11.2 Standard Ratio 2: Gross Margins Description and Rationale:
The gross margins for a company measure the portion of revenue after
the cost of sales are deducted. Companies would try to increase their
gross margins to elevate their gross return portion over each dollar of
revenue.
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 =(𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑎𝑙𝑒𝑠)
𝑅𝑒𝑣𝑒𝑛𝑢𝑒⁄
When we define revenue we are taking the net revenue for each
company which omits any allowances and discounts involved from the
sales amount.
Analysis:
The cost of sales is the direct and relevant costs which the company requires to operate the business. According to our
analysis, we broke down the direct costs to be Human Resources, Property, Marketing and Administration, Share-based
Compensation and Restructuring & other. The other companies did give breakdowns of their gross operating profit from
where we derived the margins. GCGC increased their gross margins by increasing the revenue by 10% in 2014 and
maintaining their cost of sales. From the table we can observe that all the four companies are increasing their gross
margins throughout the period. This states that the companies are performing well and also having a rise in the stock
price even though the gaming and entertainment industry is declining as a whole in Canada. For a further breakdown
see the Appendix – ROE using NOPAT
Net Financial Leverage
2014 2013 2012
GCGC 80.78% 113.74% 45.17%
Penn 99.92% 109.74% 91.53%
GameHost 19.42% 27.75% 57.72%
Churchill Downs 41.06% 21.78% 10.47%
ROE using NOPAT
2014 2013 2012
GCGC 25.50% 22.51% -6.53%
Penn 5.06% 5.37% -7.72%
GameHost 20.36% 19.69% 22.91%
Churchill Downs 6.58% 8.54% 9.98%
Gross Margins
2014 2013 2012
GCGC 39.08% 34.10% 33.99%
Penn 26.07% 24.96% 23.48%
GameHost 49.82% 49.23% 49.48%
Churchill Downs 30.70% 30.14% 29.93%
15
11.3 Non-standard ratio 1: Property Concentration Risk Description and Rationale: With this metric, we would like to assess how much revenue came from the top one gaming
property for each company. In our opinion, the higher the revenue came from one property, the higher the risk it is for
the company because the company would be relying heavily on one revenue source where many external factors such
as nearby unemployment rate, crime rate and sentiments against gaming would carry disproportionate impact to the
company.
Calculation: The metric is calculated by summing up all revenues which include gaming, hotel, food and beverage from
the casino or racetrack property that produces the most revenues, and then divide the revenues of this particular
property by the revenues generated by all properties including this very property. Information was relatively easy to
locate with the exception of GameHost Inc., where no breakdown of revenue contributable to individual property was
provided. Therefore, we have assumed that revenues were generated proportionately by the number of tables, slot
machines and other equipment, and multiplied the total revenue to the percentage of tables, slot machines and other
equipment owned by the largest property to derive this metric for GameHost Inc. Please see
Appendix – Property Concentration Risk.
Analysis: The results show that concentration risk differs vastly between companies. GCGC generate 48% of total
revenue from its top property “River Rock Casino” and the only peer that’s in the same ball park is GameHost who is
even more concentrated at 59%. The other two peer companies Penn and Churchill Downs are far below at 11% and
10%, respectively. The reason for high concentration of GCGC and GameHost is largely due to their relatively high level
of vertical integration at their gaming properties which include not only gaming, but also hotel, dining, conference
centres and other forms of entertainments. On the contrary, Penn and Churchill Downs both have a diversified source of
revenues. Horse track racing is a significant portion of both companies which are situated at different properties from
their casinos; Penn further diversifies through online gaming. Evidently, GCGC is highly exposed to casino concentration
risk.
11.4 Non-standard ratio 2: Level of Vertical Integration
Description of rationale: Casino is the main source of revenue for the gaming industry. But besides casino revenue from
slot machines and table games, other businesses such as hotel operations, dining options, and racetracks operated in
the casinos can also bring revenue and extend the time customers would like to stay in casinos, thus attracting more
customers to gamble in the casinos. Furthermore, a higher level of integration can reduce costs and increase efficiency
because the more different businesses operated together, the more economy of scale it will bring and thus save costs
for the companies.
Calculation: Among all the other businesses run in casinos, hotel and dining businesses are the two most important ones
that can attract customers. So we measure number of casinos, hotels, and dining rooms and the higher level of integrity,
the higher raw scores the company will have. Based on this, GCGC has a raw score of 35; ranked second among all
competitors and Penn National gaming has the highest raw score with 105. Then we normalize the raw scores based on
proportion over total scores and it turns out that GCGC has a score of 0.19, Gamehost 0.11, Churchill Downs 0.12, and
Penn National Gaming corporation 0.58, which is the highest among the four. Please see the Appendix – Level of Vertical
Integration
Analysis: This ratio shows that GCGC is rated second among the four companies, above average of its competitors. The
company is doing well on running multiple businesses and saving costs for economy of scale. The reason Penn National
is much higher than GCGC is that it operates in US in far more states than GCGC operates in Canada and has a much
larger market cap and net revenue than GCGC.
16
11.5 Non-standard ratio 3: Operating Agreement Power Description and rationale: Gaming companies must comply with the province/state and country’s regulations in order
to continue operating and succeeding in the industry. Being able to operate in multiple jurisdictions signals the
company’s strength in dealing with complex regulations that are jurisdiction-specific, and ultimately this means that the
company has the ability to develop or make acquisitions by expanding into new jurisdictions, which is particularly
important for companies in mature industries.
Calculation: In order to measure the operating agreement strength, four variables were measured: The number of areas
where the companies operate, the average number of casinos per operating area, the regulatory environment the
companies currently face and their global breadth, which was found using websites and their respective financial
reports. The factors were not given equal weighting, as we felt there were a few more vital factors. Please see the
Appendix – Operating Agreement Power.
Analysis: Penn National Gaming has the largest amount of operating locations across the United States, having
operating agreements in 18 states. Penn enjoys only intermediate regulation strength, due to its current management of
a Canadian casino, and also has a very low casino to operating area concentration. Among the four companies
compared, The Great Canadian Gaming Corp. had the third largest amount of operational agreements and GameHost
has the lowest amount. We conclude that Penn National Gaming has the highest operational agreement power, due
their high number of agreements, low concentration, low regulatory power in country of operation and some regional
expansion. Churchill Downs and GCGC are in the middle of the pack and do enjoy some operational agreement power
due to some operational diversity. GameHost as the one with the lowest number of agreements, high regulatory
environment, and no national expansion will not enjoy much operating agreement power.
11.6 Non-standard ratio 4: Workforce Engagement Description and Rationale: One of the few ways the company can differentiate itself from the mature industry that
offers highly similar products is through providing superior customer service, and the basis for delivering superior
service is that the providers of the service, the employees, must be thoroughly engaged and demonstrate a sense of
ownership. This metric is used to gauge the level of employee buy-in.
Calculation: Due to the qualitative nature of this metric and the lack of relevant information available from
management, we have chosen to use the most popular employer review website Glassdoor. This metric is calculated is
by taking the average of overall company review score and the friend recommendation score; the higher the score the
better workforce engagement that we are gauging. Please see the Appendix – Workforce Engagement Score.
Analysis: The overall score across companies are roughly in-line with one another with the highest being Churchill
Downs and the lowest Gamehost; our company GCGC is ranked third out of the four. In our view, this appears to be
reasonable as the gaming industry is mature and the nature of work from company to company should not vary greatly,
thus the metric should be fairly consistent with minor discrepancies that reflect nuances such as perks, culture and etc.
11.7 Non-standard ratio 5: Customer Perception Attract and support Patronage – Perception of the company, marketing material etc.
Description and Rationale: Companies must be able to successfully market their business to the local population as well
as the regional population. With a fast technologically changing world, customers have the ability to obtain peer reviews
of places they plan to attend prior to finalizing the purchase; therefore it is imperative for companies to have a
respectable customer rating in order to be able to attract more patronage. In order for companies to retain customers
who attend their casinos for the longest amount of time possible, they must offer them complimentary food, beverages,
general merchandise and/or hotel rooms.
Calculation: In order to measure the strength to attract and retain patronage, two variables were measured: The
customer ratings that the individual casinos had in the website “Trip Advisor”, and the amount each firm spent on
17
Promotional allowances as a percentage of revenues. The factors were given a weight of 60% and 40% respectively,
giving more importance to the average casino rating since it reflects the general perception that potential customers
have. Please see the Appendix – Customer Perception
Analysis: The top three companies compared for this ratio are very competitive for both variables measured. Penn
National gaming has the highest score when it comes to this ratio, they have the highest amount of Promotional
allowances expenditures as a percentage of revenue, which means that they are committed to providing an enhanced
conductive gambling environment for their patrons, but they have the third highest amount of average customer
satisfaction which could be due to the fact that they also have to serve the largest amounts of locations. Churchill Downs
comes in third place, even though they have the highest rating for customer satisfaction, they have the third lowest
rating for the amount of promotional allowances which differs a lot from the top two companies. The calculation shows
that The Great Canadian Gaming Corp. has the second highest rating for customer satisfaction, and the second highest
amount of promotional allowance expenditure, which puts them in second place. GameHost is placed last, due to their
low customer satisfaction and minimal amount of promotional allowances.
11.8 Ratio Analysis Summary Please see the Appendix – Ratio Analysis Summary ROE using NOPAT was given the highest weight (30%) as the return on the equity invested by common shareholders is the most important criteria for measuring the competitiveness of a corporation. The second standard ratio was given the second highest weight (20%) because it shows how much the company retains on each dollar of sales to service its other costs and obligations. It can also shed some light into the value the company creates, the price it can command for its products and its operational efficiency. The 5 nonstandard ratios were given equal weight (10%) since each ratio is very judgemental and each ratio is unconventional. In conclusion, upon evaluating GCGC and its peers using standard and non-standard ratios, a little surprisingly, our company GCGC ended up with the highest normalized score of 28.67%. Although GCGC had only 1 ratio being the first in its category, which is the ROE using NOPAT, it was ranked second on Gross Margin, and despite of not having a single unconventional ratio ranked first but neither was ranked last. Being in the middle of the pack throughout the unconventional ratio comparisons, the GCGC ended up with the highest sum of normalized ratios; this is also partly contributed by its overwhelmingly high score in the ROE using NOPAT ratio which carries the highest weighting at 30%, as well as being the second highest in Gross Margin which has a 20% weighting. Penn National Gaming came second place despite it had 3 of the 5 unconventional ratios ranked first place, but its poor relative performance in ROE using NOPAT and Gross Margin which carry 50% of the weighting together have dragged its overall total considerably. It may be interesting to explore further whether Penn had consistent low ROE using NOPAT and Gross Margin, because throughout our research process, Penn has shown its ability to generate high revenue from its diversified gaming strategy which includes not only casino gaming but also horse track race and online gaming. GameHost Inc. came third luckily due to its high score (second) in ROE using NOPAT and first place in Gross Margin, because all of its 5 unconventional ratios were ranked last place. Churchill Downs is ranked last place largely due to its low ROE using NOPAT and Gross Margin, but similar to Penn National Gaming, Churchill Downs have shown good operating capability and healthy gaming diversification and would be interesting to explore further on whether it consistently has low ROE using NOPAT and Gross Margin. 12 – Economic and Industry Outlook The U.S. and Canadian capital markets have continuously followed a positive trend for the last 5 years from 2011 to
2014. Even though in the last few years there has been a decline in economic growth, rising European monetary
concerns, an unprecedented oil crisis and high future uncertainty, the equity markets have performed exceptionally
well. The S&P 500 has returned around 100% of capital invested, from January 2011 to June 20151. The high returns in
the equity markets could be explained by the fact that interest rates have been kept at historical lows throughout this
period. In the beginning of the first quarter 2015, there was a contraction of both the Canadian and American GDP of
1 https://ca.finance.yahoo.com/
18
0.1% and 0.2%, compared to the previous period growth of about 0.6% and 2.2% respectively1. This has been the first
contraction of Canadian GDP since early 2011. The economy is expected to recover immensely in the following 2 years,
with domestic demand supported by lower oil prices, more moderate fiscal adjustments, and continued support from an
accommodative monetary policy stance, despite the projected gradual rise in interest rates2. Furthermore, the U.S dollar
has appreciated around 6 percent in real effective terms relative to the values used in October 2014. In contrast the
Euro, the yen and the currency of commodity exporters has weakened during the same time period.
Future Outlook for Industry
The Gambling industry in Canada will continue to have difficulties over the next five years from the fierce increase in
competition and decreased market share. The Canadian economy is expected to recover as GDP rises, unemployment
falls and hence consumer discretionary income rises. However, the younger customers are expected to move away from
gambling towards other forms of interactive entertainment, which will prove costly for casino operators in the future.
The current lower Canadian dollar could help increase revenues in the short-run while the same exchange rate remains
or lowers further3. The lottery segment is expected to grow moderately, driven by greater adoption of mobile platforms
for gambling, which could potentially threaten some of the casino’s profitability in the future. The Horse Racing industry
is facing the same problems as the gambling industry, but with some enhanced threats. Due to the increasing number of
entertainment alternatives for the current cohort of potential customers, the horse racing industry will suffer greatly
due to its constantly decreasing popularity.
There is an interesting fact observed from the equity capital markets. Even though the Canadian and U.S. gaming
industry has been relatively stagnant for the last five years, The Great Canadian Gaming Corporation has gained a total
of around 250% capital appreciation in the equity markets, compared to the S&P that has only grown by 100%4. There is
a clear disconnection between the industry trends and the financial performance of individual companies within that
industry.
13 – Revenue Forecast
13.1 – Top-Down Revenue Forecast Forecast of Market Size and Estimate of GCGC’s Market Share:
The Canada Gambling Industry5 consists of casinos, gaming machines, lotteries and so on according to the IBIS World Canada
report. This industry has hotel facilities with a casino along with it. The industry is moved by the level of consumer demand,
confidence index, international travel and tourism, currency exchange rate fluctuation, and leisure time from the consumers.
We are taking the revenue figures from 2012 and the forecasted figures from 2015E to 2020E according to IBIS World. The
company disclosed that the facility development commission revenues are calculated as a fixed percentage of gross gaming
revenues generated by the properties. The industry actually incurs a downfall in revenue during the actual periods which then
is forecasted to have a slight upward linear slope for the horizon. The growth percentages had started with 0.8% which fell
over the next two years.
The industry is set to stabilize on the long run growth with only 0.5%. We have placed the GCGC’s gaming revenues and the
facility development commission revenue and the portion of promotional allowances. We are considering the net change in
(Gaming revenue + FDC revenue – Promotional Allowance) and taking the market size percentage based on this net figure.
Our market size came up to be almost 2% in 2012 which we increased and stabilized to 2.1% by 2020. We believe the market
size of GCGC will keep on upgrading steadily in relation to this industry. The forecasted gaming figures are derived by taking
the industry’s future growth with the estimated market share of the company. The FDC revenues were slightly increased over
1 http://www.tradingeconomics.com/canada/gdp-growth 2 http://www.imf.org/external/pubs/ft/weo/2015/update/01/ 3 IBIS World- Gambling in Canada 2014 4 https://ca.finance.yahoo.com/ 5 http://clients1.ibisworld.com/reports/ca/industry/default.aspx?entid=1662
13 – Revenue Forecast
19
the years to match the growth of the revenue and the promotional allowances are increased too with a percentage to support
the upward trend of the business in the future. The three figures are related and dependent on each other so we kept the
slope similar between them. The gaming revenue will rise from $308m to $329m while the FDC is at $38m.
The horse racing tracks in the US1 are taken as another industry even though the gaming industry report covered this aspect.
The horse racing industry of the US better resembles the company’s race track revenue portion at the present and forecasted
horizon. The industry is dependent upon the per capita disposable income and the number of retirees available, the extent of
the ageing population, and the time spent on leisure and sports. This industry is under threat from other forms of
entertainment and is going downhill which is aligned with our industry analysis that the new generation does not prefer horse
racing to the alternative entertainments available. It starts off with $3.9 B in 2012 which is forecasted to drop all the way to
just over $3.5bn by the year 2020. We are reducing the market size of the horse racing division as we believe the company will
slowly take off its operations and business in the future due to the lack of demand for this form of entertainment.
In 2012 the market size started off with 0.4% which is estimated to reduce gradually to 0.19% by 2020. As the racetrack
industry is already falling in growth, the company will halt businesses and lower their market size in the future before they
plan to completely get off the business. The racetrack revenues for 2012 was almost $16m for GCGC which was lowered by
both the fall in the industry’s growth rate and the fall in the company’s diminishing market share related to the industry. The
figure lowered from $14m in 2014 to $7m by 2020 and then stabilized over the long run at this rate.
The hotels and motels industry2 in Canada is rising up with the IBISWorld report at an average growth rate of over 1% until
2020. This industry delivers hospitality services in the hotels with food and beverage services and recreational services. The
industry is driven mostly by the tax rate and disposable income, consumer confidence index, international travel and tourism,
and corporate earnings to develop the business. We have placed the hospitality revenues of GCGC in this area as we expect it
to increase over the forecasting horizon and have assumptions similar to that needed in the forecasting of this industry. The
company’s market size for this area is half percent of the industry and we have raised the rate to 0.73% and then stabilized it
over the long run. We believe they will keep up with the upward trend in this market so we kept the rate and growth aligned
with the industry. Overall the industry has a gradual rising slope in the future and the company has a stabilizing revenue
estimation that reaches close to $117m by the terminal period. The company will not grow at the same percentage as the
industry due to some shortfalls discussed in the industry analysis that hinders their future potential to rise at the industry
level. The company had $108m in 2014 which was raised to $118m in 2020.
Overall the top down revenue is derived from the sum of all the five factors taken from the three industries mentioned above.
The gaming revenue holds account of 70% and the FDC revenue accounts for 8% on average. Promotional allowance holds 5%
to reduce the revenue figure and the racetrack revenue is lowering down over the period with an average of 2%. The
remaining portion of 24% is provided on the increasing hospitality division revenue forecasted over the years. Adding all of the
factors will lead to the top down revenue forecasting for the company based on industry market share.
13.2 – Bottom-Up Revenue Forecast Because forecasting company revenues can be a difficult and imprecise task, especially for large and complicated
companies like GCGC, we have divided our projections into smaller, more manageable businesses and segments. We
have also made some simplifying segment assumptions which we believe are also consistent with historical
observations. First, we divide the revenues into three segments: gaming revenues, facility development commission,
and hospitality, lease, & other revenues.
Then we break down our revenue projections by asset, consisting of the following: River Rock Casino Resort, Hard Rock
Casino Vancouver, Vancouver Island Casinos, Other BC Casinos, Nova Scotia Casinos, Great American Casinos, BC
Racinos, and Ontario Racetracks.
Some assets produce revenues that can be labelled in more than one segment. For example, BC Racinos produce
hospitality, lease, and other revenues, as well as Racetrack revenues, FDC revenue, and gaming revenue. Nova Scotia
1 http://clients1.ibisworld.com/reports/us/industry/default.aspx?entid=4372 2 http://clients1.ibisworld.com/reports/ca/industry/default.aspx?entid=1661
20
Casinos produce gaming revenue and also
hospitality, lease, and other revenue. The
breakdown of these combinations of
revenue and segment can be seen in the
the table to the right.
Because there is no way to properly
forecast Facility Development
Commission, we make some assumptions.
In the most recent year, FDC revenue
equalled just over 12% of gaming
revenue; however, in the annual report
GCGC mentions the fact that FDC
revenues should equal about 3% of
gaming revenues. We assume that this
ratio gradually decreases until FDC
revenue equals 3% in the terminal year.
We also thought it would be inappropriate to forecast hospitality, lease, and other revenues at a different rate than
gaming revenues. Because these two segments are inextricably linked, we will assume that these two segments grow at
the same rate.
The Process
We calculate a baseline growth target by first looking at the population growth in each geography which the business
operates. We add or subtract to this estimate based on any recent our planned asset specific renovations. Finally, we
make an opinion adjustment for each asset in each segment based on our research.
Population Growth
Because GCGC’s revenue is generated in concentrated geographic locations at its casinos and hotels, much of our
revenue assumptions are based on geographic data. For example, we assume that the revenues of each casino and hotel
grow as the populations in each geography expand. We have incorporated this assumption into our revenue projections.
Our analysis assumes that assets located in regions with faster population growth have higher revenue growth
prospects, reflected in the Appendix - Bottom-Up Revenue Forecast. In fact, we take regional population growth as the
baseline revenue growth estimate.
Industry Growth As explained in section 12 – Economic and Industry Outlook, the gaming industry is considered mature, with a large portion of revenues derived from retired individuals. Preferences are shifting in the gaming industry, especially when it comes to horse racing, and we have made additional adjustments to expected growth because of these changing preferences. Overall, we believe the industry will face slow or negative growth. Asset Specific Renovations Certain assets have been recently repositioned to take advantage of idiosyncratic opportunities for the company. When these assets undergo significant change, we assume that the revenue generated from these assets will grow at a faster pace than other assets in GCGC’s portfolio. For example, the Hard Rock Casino Vancouver (as explained below) has managed to increase revenues at a much faster pace than most other GCGC assets. Below we have highlighted our revenue outlook and growth projection for each of GCGC’s properties.
Asset and Segment Breakdown
Gam
ing
Rev
enu
es
Faci
lity
Dev
elo
pm
ent
Co
mm
isss
ion
Ho
spit
alit
y,
Leas
e, a
nd
Oth
er R
even
ues
Rac
etra
ck
Rev
enu
es
River Rock Casino Resort
Hard Rock Casino Vancouver
Vancouver Island Casinos
Other BC Casinos
Nova Scotia Casinos
Great American Casinos
BC Racinos
Ontario Racetracks
Segment
Ass
et
21
Opinion Adjustment After undertaking substantial research on the gaming industry and GCGC, we have formed opinions about the general direction of the industry and about the trajectory of GCGC. Furthermore, some members of our group have first-hand knowledge of the markets and cities in which GCGC operates and can offer further insight into the growth prospects of those properties. Because of these factors, we have made further adjustment to the segment and property revenue growth for GCGC based on our best judgement. Hard Rock Casino Vancouver Hard Rock Casino Vancouver has exhibited significant revenue growth over the last year due to recent re-branding in
2013, whereby Great Canadian Gaming Corp licensed the Hard Rock naming rights for its “Boulevard Casino” located in
Coquitlam, BC. Although YoY quarterly revenue has increased by 6% and EBITDA has increased by 41% YoY, performance
has lagged pro forma projections. A second phase was originally planned, but because internal targets have not been
reached the timing of that second phase is now uncertain. Nevertheless, the Hard Rock brand appears to have increased
growth prospects, and we expect revenues to continue to expand over the short term. Furthermore, Coquitlam is the 5th
fastest growing municipality in the province1. For these reasons we believe this location is poised for sustained and
above average growth.
As shown in the Appendix - Bottom-Up Revenue Forecast, we think Hard Rock Casino Revenues will grow at a rate of 6% per
year for the next five years
River Rock Casino and Resort The River Rock Casino recently added a new VIP gaming area and increased the high end table count. We believe the revenues derived from this asset will grow at an annual rate of 4% over the next five years. Vancouver Island Casinos We believe Vancouver Island Casinos, with properties in Nanaimo and Victoria, BC, face no extraordinary prospects or hurdles. We project revenues will grow at the same rate as population growth – 1%. Other BC Casinos We expect Other BC Casinos, comprised of properties in Maple Ridge, Dawson Creek, and Chilliwack, BC, to enjoy above average population and economic growth over the next five years. Even though these properties have not undergone significant recent renovations, we have increased our projected revenue growth for these properties to 3.43% Nova Scotia Casinos While population growth is already low in Sydney and Halifax, changing consumer preferences place downward pressure on revenue forecasts for these properties. We have made opinion adjustments of -2%, and believe overall revenues will decline by 0.75% per annum for the next five years. Great American Casinos The Kent, WA casino recently closed in March of 2015. This location was responsible for contributing over 12% of revenues for this American franchise. The remaining properties are located in Lakewood, Everett, and Tukwila, WA. We project an immediate decline of 12%, combined with an annual growth rate of 0.63% for the remaining properties. BC Racinos While horse racing revenues are in a general decline across the nation, GCGC has repositioned the BC Racinos and included more slot gaming and tables at these properties. This has had the effect of reducing reliance on horse racing revenues and bolstered gaming revenue. For the Hospitality, Leases and Other Revenue portion as well as the Gaming
1 http://www.coquitlam.ca/planning-and-development/resources/community-profiles-demographics/census.aspx
22
Revenue segments, we project revenue growth of 6%. Revenues derived from Horse Racing we expect to decline at an annual rate of -3%. Ontario Racetracks These properties have faced uncertainty over the last few years. The Ontario Gaming Authority has undergone repositioning which has put into question the going concern of the GCGC operations in Ontario. Although new licenses have recently been signed with GCGC, the general decline of this industry paints a bleak picture for racetrack based revenue generation in Ontario. We believe that Hospitality, Leases, and Other Revenues will decline by 1% per annum over the next five years from these properties and that racetrack revenues will decline by 3% per annum over the next five years. For a detailed breakdown of revenue growth projections the Appendix - Bottom-Up Revenue Forecast.
13.3 – Consolidated Revenue Forecast We take the lower of the top-down and bottom-up revenue projections. From
2015 to 2017, top down revenue forecasts exceed those of the bottom up revenue
forecasts. From 2018 to 2020, this trend reverses. From 2015 to 2020, we forecast
revenues to increase from $449 to $469 MM.
14 – Pro-forma Financial Statements
14.1 – Income Statement
Human Resource and Property, Marketing and Administration: The cost of sales will be a percentage of revenue forecast. We have reduced both
the human resource cost and property marketing and admin cost by 2% and 1% respectively, as a percent of revenue. We
lowered these costs because the company has been undergoing efforts to more efficiently manage them. By the terminal
year, human resource cost and property marketing and admin cost represent 34% and 20% of revenue respectively ($161M
and $93M).
Share-Based Compensation: This item is divided into equity based and cash based compensation expense (cash-based including the RSU incentive
program) and a one-time special share-based award of $4.8m in 2013. Going forward, we assume the same equity and cash
based payments of $2.4m and $1.5m to be constant. The expenses are forecasted at an average of the historical periods and
the RSU incentive program ends with payments of $1.3m on March 2016 and 2017. The breakdown of the RSU incentive
program is given below; the amounts are included in cash-settled share-based compensation in the income statement and in
deferred credits, provisions, and other liabilities in the balance sheet.
Litigation Settlement, Impairment of Goodwill, Restructuring Costs, Impairment of Long-Lived Assets and Foreign exchange gain and Other For simplification, we assumed litigation expenses and impairments have values of zero over the forecast period. The
company had a one-time litigation payment of $11m in 2012 and one-time impairment of goodwill from acquisitions of $3.2M
in 2012. From the notes of subsequent events (Note 27) the company has decided to close of the Great American Casino, Kent
Employee RSU Incentive Program (Effective Jan 1, 2014)
Expected Payments
Expected Date
Months to Maturity
Effective months
2014
Pmt * (12 months / Total period)
Effective months
2015
Pmt * (12 months / Total period)
Effective months
2016
Pmt * (12 months / Total period)
Effective months
2017
Pmt * (12 months / Total period)
1 $ 1.30 Mar-16 27 12 $ 0.5 12 $ 0.5 3 $ 0.1 0 $ -
2 $ 1.30 Mar-17 39 12 $ 0.4 12 $ 0.4 12 $ 0.4 3 $ 0.1
$ 0.9 $ 0.9 $ 0.5 $ 0.1
Amount that increased share-based compensation expense & RSU Liabilities
Forecasted Revenue
Bottom
Up
Top
Down Min
2015 449.1 466.9 449.1
2016 458.4 477.2 458.4
2017 467.8 473.1 467.8
2018 477.4 469.8 469.8
2019 487.3 468.4 468.4
2020 483.7 468.5 468.5
23
lcation, from which it incurred $0.8m in 2014. We estimate forecasting costs over each of the forecasted years to be an
average of the last three years. Although the company operates in the US and is exposed to foreign currency risk, we cannot
predict the future CAD/USD rate so we are assuming the foreign exchange gain/loss to be nil over the period.
Interest and financing costs, net The breakdown consists of Short Term Interest Expense, the Standup Fee on Revolving Credit Facility, Long Term Loan Coupon
Interest Expense, less Interest Income, and Bank Charges and Other. The short term interest expense is estimated to be zero
over the forecasting period due to the absence of short term debt. The interest rate is generated from prior years from the
Short Term interest divided by Short Term Debt. The interest rate was 2.06% which, we raise to 2.66% by the terminal period.
Short term interest expense
Opening balance of Short Term Debt
2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
$0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
Interest rate 2.06% 2.06% 2.06% 2.16% 2.26% 2.36% 2.46% 2.56% 2.66%
Interest expense $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
The Revolving Credit Facility will also not be utilized over the forecasting period, but we still incur a standby fee. A breakdown
of this fee can be found in the Long Term Debt section. The coupon interest expense for each year is derived by multiplying
the average value of the debt balance times the coupon rate of 6.625%. The annual interest income earned is calculated as
the interest rate earned on cash balances multiplied by the opening cash balance. This depends on the final plug item, i.e. the
cash in banks and cash equivalents. The interest rate is calculated by looking to previous years interest income divided by cash
balances, and is forecasted forward in the table below. The interest rate increases from 1.37% to 2.09% in the terminal year.
Interest Income
Opening balance of cash in banks and equivalents
2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
$0.0 $110.9 $182.5 $314.3 $367.0 $432.2 $494.9 $549.9 $602.7
Interest rate 1.37% 1.37% 1.37% 1.40% 1.45% 1.50% 1.65% 1.75% 1.75%
Interest income $1.3 $1.7 $2.5 $4.0 $5.0 $6.0 $8.0 $10.0 $11.0
Income taxes (benefit) The tax rate is calculated as the income tax expense divided by the pre-tax income. The 2014 tax rate of 25.3% is derived and
is assumed to be constant over the forecasting period. This rate was analyzed from the note disclosures related to the income
tax statutory rate. The tax expense was $26m in 2014 and it increased along with revenue to $31m in 2020.
14.2 – Balance Sheet
Cash and Cash Equivalents This is the plug to make our balance sheets balance. Throughout the forecast period the assets are lower than the sum of
liabilities and equity so the difference is represented on the cash balance. We kept cash floats at $10m (2014 figure) and
plugged the values of cash in banks and cash equivalents. The cash balance in the terminal year is $672m.
Accounts Receivable The forecast of this variable depends on the Days of Sales Outstanding formula. According to our revenue forecasting analysis,
the company will grow for a few years and then stabilize to perpetuity. Thus we have adjusted the yearly DSO by taking the
moving average of the prior 3 years over the forecasting period. This gives a suitable indication about our views towards the
future outlook. With a moderate degree of customer power, there will be a fall in DSO which shows that the increase in
revenue will be higher than the increase in accounts receivable as there is a large number of future buyers reducing the power
of customers. The value stabilized in $8m in terminal period and we lowered DSO from 7 days to less than 6 because of better
credit policy towards customers.
Income Tax Receivables and Income Tax Payables Income Taxes Receivable is assumed to be nil in the future years as this is not a real asset of the company. However, Income
Taxes Payable is calculated to be 30.1% of prior year’s earnings taxes in 2014. This percentage is taken to forecast the future
24
periods by multiplying with the prior year’s income tax expenses on the income statement. The payable was $7.2 in 2014 and
went towards $9m by 2020.
Prepaids, deposits and other assets This line item is not backed up by any note disclosures. We are assuming a fixed portion of sales (1.66% as of 2014) to be
constant over the future period. This percentage of prepaids and deposits is aligned with our revenue forecast as we forecast
into the future. We keep the amount to be close to $8m by the terminal period.
Property, Plant and Equipment and Intangible Assets We have forecasted a complete breakdown of Capital Expenditures and Amortization schedules over the next five years. Many
of our adjustments were made in order to align depreciation and capex in the terminal years. See Appendix – Pro-forma
Income Statement and Appendix – Pro-forma Statement of Financial Position for greater detail.
Capital Expenditures The capital investments for the company are provided as additions and reclassifications in the PPE breakdown. Only $11m of
additions were made to PPE in 2014, which is not a suitable value. We believe GCGC needs to invest about $50M per year in
order to maintain its business, so we have increased the CAPEX gradually until the terminal year. This estimate relies on the
industry analysis, the future outlook, the state of the company in relation to its competitors which is observed on the ratio
analysis, and the forecasted revenue growth derived from the top down and bottom up approach. We have assumed the
capital expenditures invested in one year is needed to support our revenue growth assumptions in the following year. Thus
after we knew the revenue growth in the following year, we also knew how much PPE we needed to add to the balance sheet.
We also needed to invest because of the excess amounts of cash available. We assume that in the terminal year and going in
to perpetuity, the capital expenditures are equal to amortization so the company maintains equilibrium.
The estimation for each of the assets’ capital expenditures is listed below:
Capital investment required (Addition & Reclassifications)
2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Land $0.1 $0.1 ($0.2) $0.1 $0.1 $0.1 $0.2 $0.2 $0.2
Buildings and Improvements $8.5 $22.6 $1.1 $12.0 $13.6 $15.7 $18.6 $21.2 $21.4
Leasehold Improvements $5.2 $1.0 $1.1 $2.7 $3.1 $3.6 $4.2 $4.8 $4.8
Equipment $7.2 $8.5 $4.3 $8.8 $9.9 $11.5 $13.6 $15.5 $15.6
Properties Under Development
$3.4 ($4.0) $4.8 $5.4 $6.1 $7.0 $8.3 $9.5 $9.6
$ 24.4
$ 28.2 $ 11.1 $ 29.0 $ 33.0 $ 38.0 $ 45.0 $ 51.0 $ 52.0
Amortization The company mostly follows a straight line method to determine amortization. We created an amortization schedule of each
of the items and got the number of years for the prior three years. This was derived by taking the cost amount divided by the
yearly amortization amount. We took the average value and then calculated the straight line amortization percentage based
on this number. The average useful life was acceptable for all items except Equipment.
Straight Line Amortization Percentage Estimation Breakdown
Non-Current Assets Range Cost No. of Years = (Cost /
Amortization)
Straight Line (1/Avg. n)
2012 2013 2014 2012 2013 2014 Avg.
Buildings and Improvements
Less of useful life or 40 yrs 681.4 673.2 675.3 24.69 26.61 27.68 26.32 3.80%
Leasehold Improvements
Less of useful life or lease term
81.4 82.6 84.1 28.07 23.60 30.04 27.23 3.67%
Equipment 1 to 5 years 109.2 117.8 122.2 15.38 17.07 15.47 15.97 6.26%
Intangible Assets 3 to 20 years 224.5 224.5 224.5 16.04 17.54 22.01 18.53 5.40%
25
The percentages derived were placed on the amortization table and were multiplied with the opening net book value and
one-half of the annual capital investments for that asset. We are assuming that the capital expenditures took place
throughout the year so we are amortizing the average of the new investments each year to get an approximate value of the
amortization. For the last two years we stabilized the amortization expense and had our capital investments equal to the
amortization as the company goes to perpetuity. The ending amounts are transferred to the financial statements on the same
structure that the company followed from prior years. Amortization increased from 2014 of $45m to reach $52m by year end.
In the table below highlights the comparison between capex and depreciation. You can see that as our forecast extends into
the future, more of our assets are being replenished at a satisfactory rate compared to depreciation.
Capital Expenditures vs Amortization Table
Under =
Under Investment
Safe =
CapEx. > Depreciation
2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Buildings and Improvements Under Under Under Under Under Under Under Under Under
Leasehold Improvements Safe Under Under Under Under Safe Safe Safe Safe
Equipment Safe Safe Under Safe Safe Safe Safe Safe Safe
Goodwill This asset only takes place during an acquisition by the company. We are unable to find enough evidence to justify any future
acquisitions from our observation and analysis. Moreover the derivation of the goodwill value depends on a lot of other
subjective and non-monetary factors which is difficult to estimate. Thus we are keeping the goodwill constant at the 2014 year
end amount of $21.1m.
Deferred Tax Assets (DTA) and Deferred Tax Liabilities (DTL) DTA is not considered as a real asset for the company and we do not know what factors are driving this asset. Both deferred
tax assets and liabilities depend on the portion of tax deduction and accounting deduction over the years. Moreover, the
difference between the amount of tax expense and taxes payable has to come to the derivation of these items. It is difficult to
forecast these line items so we are keeping the average amount between 2012 - 2014 constant over the future periods. DTA is
stabilized at $8.9m and DTL is taken to be $66m from the average of the 3 prior years.
Accounts Payable and Accrued Liabilities The gaming industry has moderate supplier power as there are a few large suppliers who are concentrated in this sector. This
means the company has a lower probability to increase the Days of Payables Outstanding drastically over the forecasting
period. From the previous years, GCGC has a DPO of over 40 days which was increased to 45 by the terminal period. The
company has low supplier power and is dependent on only a few large suppliers so we can expect a slight increase in DPO
over the years.
Amortization
2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Buildings and Improvements $ (27.6) $ (25.3) $ (24.4) $(25.9) $(26.4) $(26.9) $(27.6) $(28.3) $(29.1)
Leasehold Improvements $ (2.9) $ (3.5) $ (2.8) $ (3.1) $ (3.2) $ (3.4) $ (3.5) $ (3.7) $ (3.9)
Equipment $ (7.1) $ (6.9) $ (7.9) $ (7.9) $ (8.5) $ (9.2) $(10.0) $(10.9) $(10.7)
Intangible Assets $ (14.0) $ (12.8) $ (10.2) $(12.1) $(10.9) $ (9.8) $ (8.8) $ (7.9) $ (7.9)
$ (51.6) $ (48.5) $ (45.3) $(49.0) $(49.0) $(49.0) $(50.0) $(51.0) $(52.0)
26
For the DPO calculation the cost of sales is assumed to be the expenses of human resource and property, marketing and
administration. Thus the formula is the ending accounts payable divided by the sum of human resource and property,
marketing and administration expenses.
The breakdown of Accounts Payable and Accrued Liabilities is necessary for further analysis. We will assume that the amount
is equal between the two items (half of the amount in each item). The increase in DPO will affect the accounts payable and
the accrued liabilities will be constant over the years. The rise in DPO is reflected on Accounts Payable by having $32 annually
over the forecasting period.
Short Term Debt This is a plug for the liabilities side in case the assets are higher than liabilities and equity. For this assignment it was never the
case. The short term interest expense is dependent on this item. The value is nil for the entire period so we did not incur any
short term interest expense from debt.
Other Liabilities This depends on the current amount of provisions, the current portion of deferred credits which is the annual amortization
value of $0.678m ($21.7m by 32 years) of the agreement with TransLink and CanadaLine, and other current liabilities. The
current portion of deferred credits can only be estimated over the future period. Thus we are assuming the amount of $2.6m
to be increasing with $0.7 per year going forward.
Long Term Debt The previous debt of $403.4m was repaid in 2012 and a new senior unsecured note of $450m was issued with a maturity of 10
years due in July 25, 2022. As the maturity year is after our forecasting horizon, we decided to roll over the loan in 2022 and
let it have no impact during our forecasting. The balance sheet value of Long Term Debt is the addition of net proceeds of
$439.5m and the yearly portion of transaction costs of $ 1.05m (Total Cost / Maturity in years = $10.5m / 10 years).
The company is following a balloon payment structure
with the intention to pay off the entire loan in 2022.
Thus there is no current portion of the loan being paid
out every year. We assumed that the company would
issue a new loan to refinance the old one. So there is no
adjustment for the payment during the forecasting
period.
Breakdown of Senior Unsecured Notes Face Value $ 450.0 Transaction Costs $ (10.5) Repayment of Term Loan B $ (161.1) Repurchase of Subordinated Notes $ (170.0) For Settlement of derivative liab. & general purpose $ 108.4
Face Value 450 Start 24-Jul-12 Coupon Rate 6.625% End 25-Jul-22 Period 2 Years 10
PMTs/period =PMT(CR/2,n*2,-PV,FV,0) $14.91
Annual Coupon payment on IS $29.81
Breakdown of Long Term Debt
2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Opening Balance $439.5 $440.6 $441.6 $442.7 $443.7 $444.8 $445.8 $446.9
New Debt $439.5 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
Current Portion of LT Debt $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
Portion of Transaction Costs
$0.0 $1.1 $1.1 $1.1 $1.1 $1.1 $1.1 $1.1 $1.1
Balance Sheet Balance $ 439.5 $ 440.6 $ 441.6 $ 442.7 $ 443.7 $ 444.8 $ 445.8 $ 446.9 $ 447.9
Interest on long term debt 6.76% 6.76% 6.76% 6.77% 6.78% 6.78% 6.79% 6.79% 6.79%
LT Interest Expense $29.71 $29.74 $29.81 $29.93 $30.03 $30.14 $30.23 $30.32 $30.39
(Coupon Rate * Avg Bal.)
27
The interest payment of $14.9m per period is derived from the Coupon rate of 6.625%,
the maturity of 10 years and the face value of $450m. We have used the Excel PMT
function and then adjusted for the semi-annual compounding. Our annual interest
expense is calculated by the long term interest rate times the average balance of LT Debt.
The interest on long term debt is calculated from the previous years and then forecasted
based on the term structure of interest rates.
Revolving Credit Facility The Senior Secured Revolving Credit Facility has a limit of $350m for the company to
issue a loan on. This revolver is available to the company for any time the company requires. Going forward, we are assuming
that the company will not draw down its revolving credit facility. However, the company has to incur the costs of having such
a privilege. This cost can be calculated on a standby fee % which is depended on the quarterly Total Debt to Adjusted EBITDA
ratio calculated for the most recent trailing twelve months. The table shows the ratio and the standby associated with it. For
the forecasting period we have derived the interest expense from this facility and then placed it on income statements.
Breakdown of Interest Expense (Standby Fee) related to Revolving Credit Facility
Face Value = $ 350m 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Total Debt to Adjusted EBITDA 7.28 2.48 2.37 2.37 2.23 2.13 2.09 2.12 2.12
Standby Fee 0.62% 0.34% 0.34% 0.34% 0.34% 0.34% 0.34% 0.34% 0.34%
Interest Expense $2.17 $1.19 $1.19 $1.19 $1.19 $1.19 $1.19 $1.19 $1.19
Deferred credits, provisions and other liabilities The non-current deferred credits is based on an agreement made in 2008 with TransLink and Canada Line for building and
maintaining a 1,200 stall multi-level parking garage at Bridgeport Station. The fair value of the agreement was provided from
TransLink in the form of $4.5m in cash and $17.2m in land. This is amortized over the next 32 years at the straight line method
with an annual amount of $0.678m. For the forecasting period, we will continue to go over this process by reducing the
annual amortization from the previous net book value. For provisions and other liabilities, we are assuming a constant rate
equal to the amount derived in 2014. On forecasting, the amortized amount will be included each year in the other current
liabilities.
Breakdown of Deferred Credits Fair Value
Land $ 17.20 Dr. Deferred Credits $ 21.70 Cr. Cash $ 4.50 Dr. Years 32
Amortization $ 0.678
Carrying Amount 2008 2009 2010 2011 2012 2013 2014
$ 21.7 $ 21.0 $ 20.3 $ 19.7 $ 19.0 $ 18.3 $ 17.6
NBV t= NBV t-1-Amortization 2015E 2016E 2017E 2018E 2019E 2020E
$ 17.0 $ 16.3 $ 15.6 $ 14.9 $ 14.2 $ 13.6
Derivative Liabilities We need more information on the company’s hedging policy as well as the amounts and types of risks involved that the
company is trying to mitigate. The fair value amount of derivative securities depends on the number of forward and future
contracts along with the swaps and options that the company holds and will plan to hold over the future. Thus one-time item
is assumed to be nil over the forecasting period.
Total Debt / Adjusted EBITDA
Standby Fee
2.00 0.34%
2.50 0.39%
3.00 0.42%
3.50 0.48%
4.00 0.56%
4.50 0.62%
10.00 0.68%
28
Share capital and contributed surplus We will be assuming that any amount of finance needed by the company in the future will be handled in the form of short
term debt. The company will not be issuing any new equity during the valuation period. This is because this will complicate the
model as there are a lot of other factors to be considered if the company issues new equity. Thus we are keeping the share
equity to be constant at the 2014 year figure. However there is an issue with the common shares repurchased as the company
only repurchased 800 shares in 2014 (800 shares * 14.02 weighted avg price = $11,216) compared to 4.5 million common
shares in 2013 (4.5m shares * 10.32 weighted avg price = $17.7m). The company may plan to repurchase common shares
again in the future as the company discussed about starting another normal course issuer bid for up to 5.03 million common
shares starting on Feb 26th, 2015. This may impact the future share capital balance but we chose to avoid it as the weighted
average price and some other factors cannot be derived with the given information. The share capital is kept constant at
$319m to avoid complications in the valuation.
Accumulated Other Comprehensive Income This amount depends on the unrealized effect of foreign currency translation of the company’s foreign operations. We cannot
predict the future foreign exchange rates so it is safe to keep the value constant at the 2014 year value of $1m.
Retained Earnings and Dividends The retained earnings are calculated with the opening balance adjusting for net earnings, the repurchase of common shares,
and dividends paid. We are estimating that the company will start paying dividends from the year 2015. The dividend payout
ratio is kept at a constant 50% of Net Earnings over the forecasting period. For the repurchase of common shares, we are not
estimating any future repurchase as this will affect the number of shares outstanding and our valuation. Overall this rise in
dividends reduces our forecasted annual net income by half for every year going forward. We increased the retained earnings
steadily from $80m in 2014 to $374m by 2020.
Change in Retained Earnings 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Opening Retained Earnings $72.4 ($32.2) $2.0 $80 $121 $166 $216 $268 $321 Net Earnings ($27.6) $63.1 $78.4 $81 $90 $100 $104 $106 $106 Repurchase of Common Shares ($77.0) ($28.9) $0.0 $0 $0 $0 $0 $0 $0 Dividends (50% of Net Earnings) $0.0 $0.0 $0.0 ($40) ($45) ($50) ($52) ($53) ($53) Closing Retained Earnings (32.2) 2.0 80.4 120.5 166.3 215.9 267.6 321.1 374.1
14.3 –Cost of Capital
14.3.1 -Capital structure
Great Canadian Gaming Corporation has a capital structure similar to its major competitors with a debt to capital ratio at 0.605, slightly higher than the average. Other competitors such as PENN, Churchilldowns, and GameHost have debt to capital ratio at 0.55, 0.7, and 0.33
respectively. SeeAppendix – Debt to Capital ratio for Competitors
The company recently initiated a consent solicitation with respect to the 6.625% senior unsecured notes to allow increased financial flexibility in its capital structure. With high cash balances and 8 years until debt payments are due, the company has a strong position and flexibility to alter its capital structure. From historical data, the company is also improving its capital structure by reducing leverage, from 0.66 in 2013 to 0.605 in 2014 and finally to 0.58 in the first
quarter of 2015. Because of these factors we believe GCGC has a reasonable capital structure currently. See Appendix – Historical Debt to Capital ratio for GCGC
There are no material factors that will change the company’s contractual obligations as of 2015. Based on MD&A, the management forecasts that current operational requirements and major development plans can be funded from existing cash and cash equivalents, cash generated from operations, and existing capacity on our Revolving Credit Facility so that leverage will not increase in near future.
29
14.3.2-Cost of debt
In its annual report, GCGC provides a fair market value for its senior notes in Note 26, which is $470.3. The maturity date is on July 25, 2022, interest is 6.625% compounded semiannually, and principal is $450. Based on these numbers, a yield for the long term debt can be computed. To further illustrate the method, we first get the derivation as below:
Fair Market Value =C1
(1 +y2)t
+C2
(1 +y2)1+t
+ ⋯ +C16 + principal
(1 +y2)15+t
= 470.3,
where principal is $450, and c1=c2=...=c16=principal*interest rate=$14.9. Number of days between June 30 and July 25, 2015 is 25, and number of coupon days is 180. So, t=25/180=0.1389. Therefore, with the solver, y which is the cost of debt, is computed as 6.34%. Using this methodology, the cost of debt is 6.34% for the 6.625% senior unsecured note. For forecasting purposes the most recent posted market rates have been utilized. The interest rate of the company is shown as 6.625%. This rate is computed based on book value of debt but market value of debt should serve as an indicator here. So, the market yield 6.34% is chosen as the cost of debt.
Revolving credit facility is not considered for WACC calculation because we assume it will not be used. Capital lease and other debt are relatively immaterial and the market value of these cannot be calculated.
14.3.3-Market Value of Debt As of June 30, 2015, market value of the 6.625% senior unsecured note can be computed by discounting its interest payment and principal at calculated cost of debt of 6.34%. The market value as of June 30 is $469.9.
Fair Market Value =C1
(1+y
2)t
+C2
(1+y
2)1+t
+ ⋯ +C16+principal
(1+y
2)15+t
, where y is 6.34%, c is $14.9, and principal is $450.
See Appendix – Debt Structure for GCGC.
14.3.4-Cost of Equity – Capital Asset Pricing Model Risk Free Rate
Since the time horizon of the forecast is greater than 10 years, the 10-year Canadian federal government bond will be used as the risk free rate benchmark. The yield on this bond as of June, 30 in 2015 is 1.77% with monthly data.1 Market Risk Premium
The assumed long run market risk premium for Canadian equity is 5%.
Beta
The monthly calculated Beta is 0.442 as per Bloomberg on June 30, 2015. The cost of equity based on the CAPM model is 3.98% (1.77% + 0.442*5%). This is significantly under the market cost of debt, and therefore does not appear to be a reasonable value for the cost of equity.2
14.3.5-Cost of Equity – Build Up Approach To verify the cost of equity, a build-up approach to the cost of equity is also employed. The standard market risk premium was adjusted based on the following parameters: External Factors:
1 http://www.bankofcanada.ca/ -Bank of Canada 10 year government bond 2 Bloomberg
Settlement
Date
Maturity
Date
Book
Value
Market Value
end of Dec. 31
Coupon payment
semi-annually
Market
Yield
Long-term Debt
Instrument 31-Dec-14 25-Jul-22 442 470.3 14.90625 6.34%
30
Industry analysis and competition: The whole industry is in decline due to reduction in consumer demand and as a result,
GCGC is heavily impacted by industry performance. There has also been an increase in competition from new casinos
and online gambling which has intensified competition of gambling business. Based on these facts, a 1.5% adjustment
should be added to the risk.
Economic and political environment: Economic downturn is negatively affecting consumer demand for gambling.
Gambling is in good regulation but rules that govern gambling change periodically and will cause additional fees and
even management strategies changes for the company. Besides, the heavy regulation for the industry is causing negative
impact on gambling sector because the stricter the rules, the fewer “games of chance” will exist for consumers to
gamble, causing a decline in customer interests. Therefore, a 1% adjustment of risk is added.
Barrier of entry: Gambling industry has a high entry barrier so that the threat of new entrants to the industry has been low. Main reasons include a requirement of heavy capital expenditures in gaming machines, strict regulation requirements to meet, difficulty to differentiate among others and already competitive landscape. Therefore, we will consider such factor and adjust by deducting 0.5% for risk.
Market psychology: The rise in the price of essential goods far outweighs the increase in per capital income causing less
spending money in the pockets of consumers. Therefore, the gambling industry is less popular than before and an
increase of 1% in risk should be added.
Internal Factors Products: River Rock casino is one of the flagship locations for the company and it has the most modern, quality gambling products such as slot machines, card games, and food. Especially since 2009, the completion of various upgrades of the facility has led to extensive enhancements, generating significant improvements in customer visitation. So overall, GCGC has an above industry average product offering and quality services which can distinguish it from competitors and an adjustment of -0.5% will be given.
Impact of long term obligation: The Company has a long term debt obligation. In 2015, consent solicitation with respect to the 6.625% senior unsecured notes to allow increased flexibility in payment is posing positive influence to the company. An adjustment of -0.5% is given.
Customer and business dependence: GCGC has a diversified customer base and 17 different entertainment destinations. Dependency on specific customers or businesses is low. Therefore, customer independence and business diversity reduce risk by 0.5%. See Appendix – Risk Factors for Build-Up approach
The unlevered built-up cost of equity using this approach for GCGC is 8.27%. The unlevered cost of equity has a premium of 8.27%-6.34% = 1.93%, which is not reasonable. The company is in debt, so this produces a built-up levered cost of equity, which is 12.54%.
14.3.6-Market Value of Equity
Market value of common shares is price multiplied by number of shares outstanding as of June 30, 2015 and this can give a value of 1590 M. Incremental market value of equity from share option plan is 53. So, the total market value of equity is 1595.3 M.
14.3.7-Income tax rate
Canadian statutory income tax rate is at 26%. However, this is not directly applicable because unique features of GCGC should be considered.
Unlevered cost of equity 8.27%
Debt to equity ratio 0.30
Cost of debt 6.34%
tax rate 25%
Levered cost of equity 12.54%
risk premium over debt 6.19%
31
The adjusted income tax rate is 25% after considering the effects of non-deductible share-based compensation, different statutory tax rates on earnings of subsidiaries, changes in tax rates, revaluation of income tax liabilities from prior year
taxes, and others. See Appendix – Adjusted Income Tax Rate.
14.3.8-Estimated discount rate WACC
The calculated rates for the cost of equity are 3.98% using the CAPM approach, and 12.54% using the build-up approach. The calculated cost of debt is 6.34%. Since it is not realistic for the cost of equity to be lower than the cost of debt, the CAPM approach is not used for modeling purposes, and the built up cost of equity with its implied 6.11% risk premium over the cost of debt (12.54% - 6.34%) is utilized. Using the built up cost of equity, GCGC’s WACC is calculated to be 6.73%. See Appendix – WACC Calculation. 15 – Valuation – Multiples Approach We chose to use the following multiples when calculating a value of GCGC:
Price/Forward Earnings ratio
EV/Forward EBITDA ratio
EV/Forward Operating Cash Flow
We believe that these metrics provide opportunities to examine the value of GCGC from different vantage points.
Because cash flows are so important in the gaming industry, we thought it was important to include a multiple that uses
this metric. EBITDA provides a good measure of unlevered earnings before taxes and depreciation & amortization, which
is important for companies who are so capital intensive. Although the capital structures of these companies are very
different, we thought the PE ratio would provide insight into how these companies are perceived by the market.
We found it difficult to find a company exactly like GCGC. Because of this, we had to choose companies that had enough
in common that we could draw reliable conclusions. We believe the three companies chosen as comparables represent
an appropriate subset of gaming organizations to base our estimate of value for GCGC. While Penn National Gaming
Corp is much larger and more diversified and in a different geography, it also had a similar product mix of slots, table
games, hotels, and restaurants. GameHost is much smaller, but also operates in Canada. Churchill Downs is one of the
few publicly listed companies with a specialty in horse racing, which is also a major component of GCGC’s revenues.
While we chose these companies based on their product mix and industry, there are significant differences as well. For
example, Penn is significantly more levered than GCGC or any other of these companies which might influence some of
our ratios.
How we Calculated Enterprise Value
We calculated enterprise value for our comparables as: 𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 + 𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐷𝑒𝑏𝑡
Normally we would also adjust for preferred shares and excess cash; however, in our case preferred shares were non-
existent according to the most recent balance sheets and the calculation of excess cash is beyond the scope of this
report. Market value of debt was taken from the Q1 2015 balance sheets of each company, and market value of equity
was calculated as the share price multiplied by the number of shares outstanding as of June 30, 2015. We did not make
adjustments for operating leases.
15.1 – PE Multiple This is a convenient method to compare the value of companies, because it is easy to understand and straightforward to
apply. Essentially we are embedding many assumptions into just a couple of numbers to arrive at an estimate of the
value of GCGC. The PE multiple for each company was obtained by taking the share price as of June 30, 2015 and
comparing these prices to the 2015 forward EPS. The 2015 forward EPS was obtained using Mergent.
Based on our analysis we get a range of 15.93X – 39.89X earnings as an equity multiple for GCGC. The 39.89X multiple is
obtained from Penn, who’s forward estimates of earnings happen to be quite low for 2015. In the most recent year
(2014) Penn also experienced a significant loss due to a $316M impairment charge to goodwill and operating licences.
32
However, we will include this value because the next highest multiple (Churchill Downs) is still quite high at 31.82X. The
lowest multiple (GameHost) is 15.93X, and we believe this this low value reflects the fact that GameHost operates on a
small, regional scale and also carries little debt. This capital structure decision would increase the implied discount rate
for GameHost
15.2 – EV/Operating Cash Flow Operating cash flow is an important measure, especially as it relates to liquidity. If we were to take the operating cash
flow and compare it to current liabilities, we would get the operating cash flow ratio. The strength of the operating cash
flow is an especially important metric for firms with high debt levels, as debt payments are included in current liabilities.
Because OCF is so important, we included it in our multiples. We attempted to find estimates of for 2015E OCF, but
because we could not find these estimates we used values from the 2014 reported financial statements.
We get an EV/OCF multiple range of 11.4X (GameHost) – 20.39X (Churchill Downs). Once again, it makes sense that
GameHost has a lower multiple due to its capital structure decisions and smaller regional footprint.
15.3 – EV/EBITDA EBITDA is relevant in our case because it strips out the effect of capital structure choices on firm performance. Because the capital structures of the chosen comparables are substantially different, it is important that we explicitly account for this. In our calculations we use the median forward EBITDA estimate from a group of analysts, as reported by Mergent. As shown in the Appendix – Multiples Approach, the EV/EBITDA multiples ranged from 8.75X (GameHost) – 9.95X
(Churchill). This is an encouraging result, because this gives us a narrow range of multiples to use in our valuation of
GCGC. It also makes sense because EBITDA is a measure that is agnostic when it comes to capital structure, so the
Debt/Equity differences between these companies loses importance when we use EBITDA in our multiple.
15.5 – Multiples Summary We have made many adjustments to the multiples based on the relative performance of GCGC with respect to the following
ratios: ROE using NOPAT, Gross Margin, Customer Perception, Operating Agreement Power, Vertical Integration, Casino
Concentration, and Workforce Engagement. These ratios are
explained in more detail in Appendix – Ratio Analysis Summary.
The adjustment to the multiples can be seen in the Appendix –
Multiples Approach
Based on these estimations, we arrive at the results in the table
to the right. We estimate a share price for GCGC between 16.92
and 38.67. We believe that, for reasons discussed in previous
section, the PE multiple calculates an inflated value for our
share price. A more realistic estimation would be between the
EV/EBITDA(16.92) and the EV/OCF(21.63) estimation of value.
Alternatively we could take an average of the three estimates
which gives us a value of $25.64. An estimate of the option value was calculated using Black-Scholes, and the calculation can
be found in the Appendix – Black-Scholes Option Value.
16 – DCF Valuation We calculated free cash flows (FCF) at the end of each year from 2015 to 2020, as well as a terminal value in 2020. We used a WACC estimate of 6.73%, as discussed in 14.3.8-Estimated discount rate WACC, to discount each value. Because this valuation was completed as of June 30, 2015, the cash flows were discounted at irregular intervals: 0.5 years, 1.5 years,…, 4.5 years. We used a terminal growth rate of 0.5% and the WACC estimate to calculate a terminal value of $1,909 (discounted = $1,334) After discounting each cash flow we arrive at a total enterprise value of $1,954. The terminal value comprises about 68% of the enterprise value. We then adjust for the market value of debt, valued at $569, to arrive at an equity value of $1,484. After subtracting and outstanding option value of $53, we get a value for common shareholder equity of $1,429.
EV/EBITDA
Price/EPS
2015E EV/OCF
Adjusted Median Multiple 8.93 X 31.82 X 12.45 X
EBITDA 2015E 190.50
Earnings 2015E 84.70
OCF 2014 163.10
Enterprise Value 1,702.04 2,030.17
Market Value of Debt 469.91 469.91
Equity Value 1,232.13 2,695.10 1,560.27
Shares Outstanding 69.70 69.70 69.70
Option Value 53.00 53.00 53.00
Common Shareholder Equity 1,179.13 2,642.10 1,507.27
Calculated Share Price 16.92 38.67 21.63
33
The number of common shares currently outstanding equal 69.7 MM, which implies a share price of $20.50. A detailed breakdown can be found in the Appendix – DCF Calculation.
16.1 – Sensitivity Analysis If we make minor adjustments to WACC and terminal growth rate assumptions, the implied share price fluctuates according to the following table. The values highlighted in blue represent the most likely intrinsic value per share as of June 30, 2015. The actual share price as of June 30, 2014 was $24.01.
17 – Conclusion We prefer the DCF method to value GCGC because many important assumptions can be explicitly stated and sensitized. If we were to rely on the multiples approach, all assumptions are embedded in one number. Furthermore, there are theoretical issues with the multiples approach. The multiples approach assumes the comparable companies are “properly” valued by the market, while GCGC is “improperly” valued by the market. We have no reason to believe this is the case. Furthermore, no two companies are exactly the same and discovering all the diverse ways in which the companies are different is too onerous a task. However, the multiples approach does provide a safety check to make sure our DCF is reasonable. Our DCF valuation provides an implied share price of $20.50. Because the stock was trading at a value of $24.01 on June 30, 2015, we place a “sell” recommendation on GCGC.
Share Price Sensitivity Analysis
WACC
20.52684672 6.25% 6.50% 6.75% 7.00% 7.25%
0.0% 20.96 19.91 18.94 18.04 17.20
0.3% 21.82 20.70 19.66 18.70 17.81
0.5% 22.76 21.55 20.44 19.42 18.47
0.8% 23.78 22.48 21.29 20.19 19.17
1.0% 24.90 23.49 22.20 21.02 19.94
Gro
wth
Rat
e
34
Appendix – ROE using NOPAT
(in millions of $)
Opening Year 2014 2013 2012 2014 2013 2012 2014 2013 2012 2014 2013 2012
Operating Working Capital
Opening Current Assets
Trade and Accounts Receivable $7.2 $7.7 $8.9 $2.3 $2.0 $1.7 $59.0 $50.1 $53.5 $52.5 $53.7 $55.5
Inventories $0.0 $0.0 $0.0 $0.6 $0.6 $0.5 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
Prepaid Expenses $8.0 $6.1 $6.6 $0.5 $0.4 $0.3 $0.0 $0.0 $0.0 $62.7 $94.6 $39.8
Deferred income taxes $3.7 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $71.1 $39.8 $32.3
Other Current Assets $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $21.0 $21.6 $19.1 $29.5 $38.5 $49.8
$18.9 $13.8 $15.5 $3.4 $3.0 $2.6 $79.9 $71.7 $72.6 $215.9 $226.7 $177.3
Opening Current Liabilities
Accounts payable $67.9 $60.4 $59.0 $4.7 $4.1 $4.3 $43.1 $62.3 $56.5 $22.6 $38.3 $39.6
Accrued expenses $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $98.0 $133.3 $113.7
Accrued interest $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $5.0 $21.9 $17.9
Accrued salaries and wages $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $86.5 $96.4 $85.3
property, and other taxes $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $52.1 $55.6 $49.6
Insurance financing $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $3.0 $3.9 $16.4
Other current liabilities $2.6 $2.9 $5.1 $0.0 $0.0 $0.0 $169.1 $128.5 $111.5 $66.7 $68.8 $59.3
Income tax payable $0.0 $0.5 $0.8 $3.0 $4.6 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
Dividends payable $1.7 $1.7 $1.5 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
$70.5 $63.8 $64.9 $9.4 $10.4 $5.8 $212.2 $190.8 $168.0 $333.9 $418.1 $381.8
Operating WC ($51.6) ($50.0) ($49.4) ($6.0) ($7.4) ($3.3) ($132.3) ($119.2) ($95.4) ($118.0) ($191.4) ($204.4)
Operating Long Term Assets
Long-Term Assets $704.2 $727.8 $818.8 $157.2 $158.9 $164.0 $1,191.5 $967.3 $803.6 $1,675.1 $5,156.9 $4,190.6
Less, Deferred income taxes (Derivative L.) $0.0 $0.0 $66.3 $47.3 $24.7 $15.6 $13.9 $216.4 $167.6
Noncurrent tax liabilities $70.3 $53.3 $66.2 $11.0 $12.0 $12.7 $20.0 $20.4 $33.9
Other Non-Current Liabilities $26.4 $25.4 $23.7 $17.8 $38.8 $47.4 $7.1 $7.7 $8.3
Operating LT Assets $607.5 $649.1 $662.6 $146.2 $146.9 $151.3 $1,126.5 $903.8 $740.6 $1,634.2 $4,912.5 $3,980.8
Net Operating Assets $555.9 $599.1 $613.2 $140.2 $139.5 $148.0 $994.2 $784.6 $645.2 $1,516.2 $4,721.0 $3,776.4
Net Debt
Debt Current $0.0 $0.0 $0.0 $20.0 $20.6 $26.9 $1.0 $215.8 $5.5 $27.6 $81.5 $44.6
Debt Long Term $441.0 $439.9 $332.6 $18.1 $29.5 $45.0 $369.2 $0.0 $127.6 $1,023.2 $2,649.1 $1,998.6
Cash & Cash Equivalents $192.6 $116.2 $134.7 $15.0 $19.7 $17.7 $80.8 $75.4 $71.9 $293.0 $260.5 $238.4
Restricted Cash $0.0 $4.9 $7.1 $0.3 $0.1 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
$248.4 $318.8 $190.8 $22.8 $30.3 $54.2 $289.4 $140.3 $61.2 $757.8 $2,470.1 $1,804.7
Net Equity $307.5 $280.3 $422.4 $117.4 $109.2 $93.9 $704.8 $644.3 $584.0 $758.4 $2,250.9 $1,971.6
Net Capital $555.9 $599.1 $613.2 $140.2 $139.5 $148.1 $994.2 $784.6 $645.2 $1,516.2 $4,721.0 $3,776.4
Current
Net Income $78.4 $63.1 ($27.6) $23.9 $21.5 $21.5 $46.4 $55.0 $58.3 $38.3 $120.8 ($152.1)
Tax Rate 25.1% 27.5% 25.0% 25.5% 23.8% 19.5% 39.4% 35.6% 36.3% 14.2% 13.3% 41.8%
Interest Expense - Interest Income $31.1 $32.0 $32.4 $2.2 $3.2 $4.0 $20.8 $6.1 $4.4 $42.3 $95.7 $80.5
NOPAT $101.7 $86.3 ($3.3) $25.5 $23.9 $24.7 $59.0 $59.0 $61.1 $74.6 $203.7 ($105.3)
NOPAT Margin 22.77% 21.19% -0.81% 30.51% 30.85% 32.27% 7.25% 7.57% 8.34% 2.88% 6.98% -3.63%
Operating ROA 18.29% 14.41% -0.54% 18.22% 17.16% 16.70% 5.93% 7.52% 9.47% 4.92% 4.32% -2.79%
Spread 8.92% 7.13% -13.27% 11.03% 9.11% 10.76% 1.57% 4.71% 4.84% 0.14% 0.96% -5.38%
Net Financial Leverage 0.808 1.137 0.452 0.194 0.277 0.577 0.411 0.218 0.105 0.999 1.097 0.915
ROE using NOPAT 25.50% 22.51% -6.53% 20.36% 19.69% 22.91% 6.58% 8.54% 9.98% 5.06% 5.37% -7.72%
ROE (NI over Equity) 25.50% 22.51% -6.53% 20.36% 19.69% 22.90% 6.58% 8.54% 9.98% 5.06% 5.37% -7.72%
Gross Margins 39.08% 34.10% 33.99% 49.82% 49.23% 49.48% 30.70% 30.14% 29.93% 26.07% 24.96% 23.48%
GCGC GameHost ChurchillDowns Penn National Inc.
Calculation of ROE using NOPAT and Gross Margins
35
Appendix – Debt to Capital ratio for Competitors
Appendix – Historical Debt to Capital ratio for GCGC
Appendix – Debt Structure for GCGC
Debt Structure
Date Interest Principal Total
2014/12/31
2015/1/25 14.9 0 14.9
2015/7/25 14.9 0 14.9
2016/1/25 14.9 0 14.9
2016/7/25 14.9 0 14.9
2017/1/25 14.9 0 14.9
2017/7/25 14.9 0 14.9
2018/1/25 14.9 0 14.9
2018/7/25 14.9 0 14.9
2019/1/25 14.9 0 14.9
2019/7/25 14.9 0 14.9
2020/1/25 14.9 0 14.9
2020/7/25 14.9 0 14.9
2021/1/25 14.9 0 14.9
2021/7/25 14.9 0 14.9
2022/1/25 14.9 0 14.9
2022/7/25 14.9 450 464.9
Companies Debt Asset D/A Ratio
GCGC 613.8 1014 0.605
PENN 1246.425 2236.43 0.55
Churchilldown 1660 2360 0.7
Gamehost 56.7 173.6 0.33
Industry Average 0.55
Debt Asset D/A Ratio
2015 Q1 599 1025.8 0.58
2014 613.8 1014 0.605
2013 608.2 915.7 0.66
36
Appendix – Risk Factors for Build-Up approach
Appendix – Adjusted Income Tax Rate
2014
Applicable statutory income tax rate 26%
Earnings before income tax 104.7
Income tax at applicable rate 27.22
Effect
Non-deductible share-based compensation 0.6
Impact of different tax rates on subsidiary earning 0.5
Adj. to deferred tax
Revaluation of income tax liabilities -0.5
Other -1.5
Total income tax expense 26.32
Rate 25%
Risk Factor Amount
Risk free rate 1.77%
Market risk premium 5%
External Factors
Political environment 1.50%
Competition 1.00%
Barrier of entry -0.50%
Market phychology 1.00%
Internal Factors
Product and service -0.50%
Impact of long term obligations -0.50%
Customer dependency -0.50%
37
Appendix – WACC Calculation
Debt to Asset 74.71%
Equity to Asset 25.29%
Cost of debt 6.34%
Cost of Equity 12.54%
Tax rate 25.00%
WACC 6.73%
Appendix – Multiples Approach
Multiples Calculation (All Values in MM)
Penn National Gaming
Churchill Downs Gamehost
EBITDA 2015E 306.50 290.20 36.60
OCF* 220.00 141.62 28.10
EPS 2015E 0.46 3.93 0.75
Share Price, as of June 30, 2015 18.35 125.05 11.95
Shares Outstanding, Q1 2015 79.70 17.60 23.70
Market Cap, June 30, 2015 1,462.50 2,200.88 283.22
Debt Outstanding, Q1 2015 1,275.95 687.26 37.10
EV 2,738.45 2,888.14 320.32
EV/EBITDA 2015E 8.93 X 9.95 X 8.75 X
Share Price/EPS 2015E 39.89 X 31.82 X 15.93 X
EV/OCF 2015E 12.45 X 20.39 X 11.40 X
*Forward estimates were not available for all securities, so 2014 figures were used instead
38
Ajustments to Multiples
PENN
Churchill
Downs GameHost
Standard Ratios
ROE (NOPAT) 3 2 -
Gross Margin 2 - (1)
Custom Ratios
Customer Perception - - 2
Operating Agreement Power (2) (1) -
Vertical Integration (2) 1 1
Casino Concentration (2) (2) -
Workforce Engagement (1) (1) 1
Adjustment 0.00
EV/EBITDA
Price/EPS
2015E EV/OCF
Penn National Gaming 8.93 X 39.89 X 12.45 X
Churchill Downs 9.95 X 31.82 X 20.39 X
GameHost 8.75 X 15.93 X 11.40 X
Mean Multiple 9.21 X 29.21 X 14.75 X
Median Multiple 8.93 X 31.82 X 12.45 X
Adjustments for GCGC 1.00 1.00 1.00
Adjusted Multiple 8.93 X 31.82 X 12.45 X
EBITDA 2015E 190.50
Earnings 2015E 84.70
OCF 2014 163.10
Enterprise Value 1,702.04 2,030.17
Market Value of Debt 469.91 469.91
Equity Value 1,232.13 2,695.10 1,560.27
Minus Option Value 53.00 53.00 53.00
Common Shareholder Equity 1,179.13 2,642.10 1,507.27
Shares Outstanding Q1 2015 69.70 69.70 69.70
Calculated Share Price 16.92 38.67 21.63
39
Appendix – Property Concentration Risk
Casino Concentration Risk
GCGC Penn Churchill Downs GameHost
Criteria Weighting Raw Inverse contribution
Raw Inverse contribution
Raw Inverse contribution
Raw Inverse contribution
Top property revenue contribution
100% 48% 2.1 11% 9.1 10% 10 59% 1.7
Normalized inverse contribution
0.092 0.397 0.437 0.074
Appendix – Level of Vertical Integration
Level of integration
# Casino Raw score
# casino with hotel Raw score
Raw score
#casinos with both hotel and dining Raw score
Total Raw score
Normalized score
GCGC 10 2 20 3 35 0.1934
Churchill Downs 6 4 6 6 22 0.1215
PENN 19 20 36 30 105 0.5801
Gamehost 3 4 6 6 19 0.1050
#
casino
Raw
score
# casino
with hotel
Raw
score
# casino
with
dining
room
Raw
score
#casinos with
both
hotel and
dining
Raw
score
Total
Raw
score
Normalized
score
GCGC 10 10 1 2 10 20 1 3 35 0.19
Churchilldowns 6 6 2 4 3 6 2 6 22 0.12
PENN 19 19 10 20 18 36 10 30 105 0.58
Gamehost 3 3 2 4 3 6 2 6 19 0.11
40
Appendix – Operating Agreement Power
Company Agreement Information
The Great Canadian Gaming Corp
Operating Contracts in Three Provinces (British Columbia, Ontario and Nova Scotia and one State in the U.S.
They operate inside Canada and the United States, in Washington D.C.
Company operates a total of 13 casinos in the 3 provinces and 1 state, hence concentration is the highest. Concentration ratio of 0.31 (from 14/3)
The company deals with very high regulatory requirements since they operate in Canada, where the gaming regulations are at the provincial level
GameHost
Only operates in Alberta, Canada. Where they own two sizeable casinos
They only possess a gaming permit in the province of Alberta
Bound to very high regulation. Hence, high risk due to the lack of operating license diversification
Concentration of 0.33, since they operate 3 casinos in one province
Churchill Downs
Operates in 6 states, where they offer various venues for gaming and entertainment
They possess a federal gaming license that allows them to operate in the 6 states, although individual states have the right to prohibit or regulate the practice within their borders.
Concentration ratio of 0.40, from their 15 casinos/racetracks and 6 areas of operations
Bound to very lenient regulation since they only operate nationally in the U.S.
Penn National Gaming
Operates in 18 states in the United States and manages one property in Canada
This Company has the lowest concentration ratio of 0.69 from the 26 different casinos they have spread out over the 18 states.
Bound to medium amount of regulation since most operations are in the United States but must abide by Canadian policies in the one Canadian property they manage.
Operating Agreement Power
Weight
The Great Canadian Gaming Corp
GameHost Churchill Downs Penn
Raw Normalized Raw Normalized Raw Normalized Raw Normalized
# Agreements(by Province/ State) 40% 4 0.055 1 0.014 6 0.083 18 0.248
Concentration (Operating Areas to Casinos) 10% 0.31 0.018 0.333 0.019 0.40 0.023 0.69 0.040
Operational Geography* 25% 3 0.083 1 0.028 2 0.056 3 0.083
Regulation Strength** 25% 1 0.036 1 0.036 3 0.107 2 0.071
Operating Agreements Power 100% 0.192 0.097 0.269 0.443
41
Appendix – Workforce Engagement Score
Workforce Engagement Score
GCGC Penn Churchill Downs Gamehost
Criteria Weighting Raw Weighted, normalize
Raw Weighted, normalize
Raw Weighted, normalize
Raw Weighted, normalize
Overall Company Score
50% 46% 0.1095 52% 0.1238 68% 0.1619 44% 0.1048
Friend Recommendation Score
50% 35% 0.1232 37% 0.1303 35% 0.1232 35% 0.1232
Engagement Score
0.2327 0.2541 0.2851 0.228
Appendix – Customer Perception
Customer Perception
Weight
The Great Canadian Gaming Corp
GameHost Churchill Downs Penn
Raw Normalized Raw Normalized Raw Normalized Raw Normalized
Average Casino Rating (out of 5 stars)
60% 0.73 0.154 0.61 0.129 0.78 0.167 0.71 0.150
Promotional allowances (% of revenues)
40% 5.0% 0.139 0.025% 0.001 4.00% 0.110 5.48% 0.151
Attract and support Patronage
100% 0.293 0.130 0.277 0.301
Average Casino Rating Promotional Allowances (% of revenues)
Rating Numerical
River Rock Casino 3.8/5 0.76
HardRock Casino Vancou 3.5/5 0.7
Fraser Downs Casino & R 4/5 0.8
Nanaimo Casino 3.5/5 0.7
View Royale Casino 4/5 0.8
Chances Maple Ridge 3/5 0.6
Chances Chilliwack 3.5/5 0.7
Casino Nova Scotia 3.9/5 0.78
Great American Casinos 3.5/5 0.7
Average 0.73
The Great Canadian Gaming Corp
42
Promotional Allowances (% of revenues)
Company Revenues Promotional Allowances Total
The Great Canadian Gaming Corp. $447 $23 5.0%
GameHost $76,804,757 $19,353 0.03%
Churchill Downs $813 $33 4.0%
Penn National Gaming $2,740,846 $150,319 5.5%
Boomtown Casino 3/ 5 0.6
Great Northern Casino 3/ 5 0.6
Deer Foot inn & Casino 3.1/5 0.62
Average 0.61
Harlows Casino 4.2/5 0.84
Calder Casino and Race 3.9/5 0.78
Oxford Casino 3.5/5 0.7
Miami Valley Gaming 3.9/5 0.78
RiverWalk Casino 4.1/5 0.82
Average 0.78
Argosy Casino Hotel 3.4/5 0.68
Argosy Casino Alton 3.9/5 0.78
Argosy Sioux 3.6/5 0.72
Boomtwon Casino Bolxi 3.6/5 0.72
M Resort 4.3/5 0.86
Hollywood Casino Aurora 3/5 0.6
Hollywood Casino Columbus 2.9/5 0.58
Hollywood Gulf Coast 3.6/5 0.72
Hollywood Casino Joliet 3.2/5 0.64
Hollywood Casino Kansas 3.5/5 0.7
Hollyowood Casino Lawrenceburg 3.5/5 0.7
Hollywood casino st Louis 3.5/5 0.7
Hollywood casino Toledo 3.5/5 0.7
Hollywood casino Tunica 3.5/5 0.7
Hollywood Casino Hotel & Raceway 4.5/5 0.9
Hollywood Casino as Charles Town 3/5 0.6
Average 0.71
Penn National Gaming
Churchill Downs
GameHost
43
Appendix – Ratio Analysis Summary
Ratio Analysis Summary
Ratio Weight Raw Data Normalized Weighted
GCGC Penn Churchill Gamehost GCGC Penn Churchill Gamehost GCGC Penn Churchill Gamehost
NOPAT ROE 30% 25.5% 5.06% 6.58% 20.36% 44.35% 8.80% 11.44% 35.41% 13.30% 2.64% 3.43% 10.62%
Gross Margin 20% 39.08% 26.07% 30.7% 49.82% 26.83% 17.90% 21.08% 34.20% 5.37% 3.58% 4.22% 6.84%
Concentration Risk 10% 2.1 9.1 10 1.7 0.092 0.397 0.437 0.074
0.92% 3.97% 4.37% 0.74%
Vertical Integration 10% 35 105 22 19 0.19 0.58 0.12 0.11
1.90% 5.80% 1.20% 1.10%
Operating Agreement 10% 8.31 23.69 11.4 3.33 0.192 0.443 0.269 0.097
1.92% 4.43% 2.69% 0.97%
Workforce Engagement 10% 0.81 0.89 1.03 0.79 0.2327 0.2541 0.2851 0.228
2.33% 2.54% 2.85% 2.28%
Customer Perception 10% 78% 76.48% 82% 63.25% 0.293 0.301 0.277 0.13
2.93% 3.01% 2.77% 1.30%
TOTAL: 28.67% 25.97% 21.53% 23.85%
44
Appendix – Pro-forma Income Statement
Income Statement 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Revenues 408.7 407.3 446.5 449.1 458.4 467.8 469.8 468.4 468.5Expenses
Human resources 163.8 160.5 164.8 161.3 161.2 162.1 161.4 160.9 161.0Property, marketing and administration 97.3 96.2 101.6 97.7 95.1 93.6 93.3 93.0 93.0Litigation settlement 11.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0EBITDA 136.6 150.6 180.1 190.1 202.1 212.1 215.1 214.5 214.5Other Income & Expenses
Share-based compensation 3.6 9.7 4.8 4.8 4.8 4.8 4.8 4.8 4.8Equity-Based 2.2 2.3 2.4 2.4 2.4 2.4 2.4 2.4 2.4Cash-Based 1.4 2.6 1.5 1.5 1.5 1.5 1.5 1.5 1.5
RSU Incentive Program 0.0 0.0 0.9 0.9 0.9 0.9 0.9 0.9 0.9Special Share-Based Award 0.0 4.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Restructuring and other 5.1 2.0 0.8 2.6 2.6 2.6 2.6 2.6 2.6Impairment of goodwill 3.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0(Reversal of) impairment of long-lived assets 61.1 (28.5) (4.7) 0.0 0.0 0.0 0.0 0.0 0.0Foreign exchange gain and other 6.8 (0.9) (2.4) 0.0 0.0 0.0 0.0 0.0 0.0Amortization 51.6 48.5 45.3 49.0 49.0 49.0 50.0 51.0 52.0EBIT 5.2 119.8 136.3 133.7 145.7 155.6 157.7 156.0 155.1Interest and financing costs, net 37.0 32.8 31.6 27.1 26.1 25.2 23.3 21.4 20.4
ST Interest Expense 1.8 2.8 2.6 0.0 0.0 0.0 0.0 0.0 0.0Interest Expense on Revolving Credit Facil ity 2.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2LT Loan Coupon Interest Exp. 29.7 29.7 29.8 29.3 29.4 29.4 29.5 29.6 29.6Interest Income (1.3) (1.7) (2.5) (4.0) (5.0) (6.0) (8.0) (10.0) (11.0)Bank Charges and Other 4.6 0.8 0.5 0.7 0.6 0.6 0.6 0.6 0.6
EBT (31.8) 87.0 104.7 106.6 119.6 130.4 134.4 134.7 134.6Income benefit (taxes) 4.2 (23.9) (26.3) (26.8) (30.0) (32.8) (33.8) (33.8) (33.8)
Net Earnings (27.6) 63.1 78.4 79.8 89.5 97.6 100.6 100.8 100.8
Change in Retained Earnings
Opening Retained Earnings 72.4 (32.2) 2.0 80.0 120.0 165.0 214.0 265.0 316.0Net Earnings (27.6) 63.1 78.4 79.8 89.5 97.6 100.6 100.8 100.8Repurchase of Common Shares (77.0) (28.9) 0.0 0.0 0.0 0.0 0.0 0.0 0.0Dividends 0.0 0.0 0.0 (40.0) (45.0) (49.0) (50.0) (50.0) (50.0)Closing Retained Earnings (32.2) 2.0 80.4 119.8 164.5 213.6 264.6 315.8 366.8
Proforma Financial Statements
45
Appendix – Pro-forma Statement of Financial Position
Statement of Financial Position 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Current Assets
Cash and cash equivalents 121.1 192.6 324.4 377.1 442.3 505.0 560.0 612.8 664.3Cash in Banks 100.9 152.4 243.7 279 336 392 441 488 535
Cash Floats 10.2 10.1 10.1 10.1 10.1 10.1 10.1 10.1 10.1Cash Equivalents 10.0 30.1 70.6 88.5 96.3 103.3 109.0 114.3 119.2
Accounts receivable 7.7 7.2 6.3 7.6 7.4 7.4 7.6 7.5 7.5Income taxes receivable 0.0 3.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0Prepaids, deposits and other assets 6.1 8.0 7.4 7.4 7.6 7.8 7.8 7.8 7.8
Total Current Assets 134.9 211.5 338.1 392.1 457.4 520.1 575.5 628.1 679.6Property, plant and equipment at NBV 621.3 596.3 574.0 566.2 560.8 559.1 562.8 570.8 578.7
Land 71.1 71.4 71.4 71.5 71.6 71.8 72.0 72.2 72.4Buildings and Buildings Improvements 499.4 478.7 457.0 443.2 430.4 419.1 410.0 402.8 395.0
Leasehold Improvements 27.3 24.8 23.1 22.7 22.5 22.7 23.4 24.5 25.5Equipment 15.9 17.8 14.1 15.0 16.4 18.7 22.2 26.8 31.7
Properties Under Development 7.6 3.6 8.4 13.8 19.9 26.9 35.1 44.6 54.1Intangible assets 73.3 75.8 69.8 57.7 46.8 37.0 28.1 20.2 12.2
Goodwill 20.1 20.6 21.1 21.1 21.1 21.1 21.1 21.1 21.1
Deferred tax assets 9.9 8.8 8.9 8.9 8.9 8.9 8.9 8.9 8.9Other assets 3.2 2.7 2.2 2.2 2.2 2.2 2.2 2.2 2.2
Total Long Term Assets 727.8 704.2 676.0 656.1 639.8 628.3 623.1 623.2 623.1
Total Assets 862.7 915.7 1,014.1 1,048.2 1,097.2 1,148.4 1,198.6 1,251.3 1,302.7
Current Liabilities
Accounts payable and accrued liabilities 60.4 67.9 60.3 62.3 61.7 62.5 61.9 61.8 62.0
Accounts Payable 30.2 34.0 30.2 32.1 31.6 32.3 31.7 31.7 31.8
Accrued Liabilities 30.2 34.0 30.2 30.2 30.2 30.2 30.2 30.2 30.2ST Debt 0.0 0.0 0.0 0 0 0 0 0 0
Income taxes payable 0.5 0.0 7.2 7.9 8.1 9.0 9.9 10.2 10.2Current Portion of LT Debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other liabilities 2.9 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6Total Current Liabilities 63.8 70.5 70.1 72.8 72.4 74.1 74.3 74.6 74.7
Long-term debt Carrying Value 439.9 441.0 442.0 443.1 444.1 445.2 446.2 447.3 448.3Face Value of Debt 450.0 439.9 441.0 442.0 443.1 444.1 445.2 446.2 447.3
Less, Transaction Costs Adj. (10.5) 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1
Derivative Liablilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Deferred credits, prov. and other liabilities 25.4 26.4 27.4 26.7 26.0 25.3 24.6 23.9 23.3
Deferred credits, non-current 19.1 18.4 17.7 17.0 16.3 15.6 14.9 14.2 13.6Provisions, non-current 3.4 3.8 3.6 3.6 3.6 3.6 3.6 3.6 3.6
Other non-current l iabilities 2.9 4.2 6.1 6.1 6.1 6.1 6.1 6.1 6.1Deferred tax liabilities 53.3 70.3 74.3 66.0 70.2 70.2 68.8 69.7 69.5
Total Long Term Liabilities 518.6 537.7 543.7 535.7 540.3 540.6 539.6 540.9 541.1
Total Liabilities 582.4 608.2 613.8 608.4 612.6 614.7 613.9 615.5 615.9
Shareholders' Equity
Share capital and contributed surplus 313.5 305.1 318.8 319.0 319.0 319.0 319.0 319.0 319.0Accumulated other comprehensive loss (1.0) 0.4 1.1 1.0 1.0 1.0 1.0 1.0 1.0
Retained Earnings (32.2) 2.0 80.4 119.8 164.5 213.6 264.6 315.8 366.8Total Shareholder's Equity 280.3 307.5 400.3 439.8 484.5 533.6 584.6 635.8 686.8
Total Liabilities & Shareholder's Equity 862.7 915.7 1,014.1 1,048.2 1,097.2 1,148.4 1,198.6 1,251.3 1,302.7Ratios: Current Ratio 2.1 3.0 4.8 5.4 6.3 7.0 7.7 8.4 9.1Total Debt to Adjusted EBITDA 7.3 2.5 2.4 2.4 2.2 2.1 2.1 2.1 2.1Interest Coverage Ratio 0.1 3.6 4.3 4.9 5.6 6.2 6.8 7.3 7.6Total debt/equity 1.6 1.4 1.1 1.0 0.9 0.8 0.8 0.7 0.7ROE -10% 21% 20% 18% 18% 18% 17% 16% 15%Operating income margin 1% 29% 31% 30% 32% 33% 34% 33% 33%Adjusted EBITDA 60.4 178.0 186.4 187.5 199.5 209.4 212.5 211.8 211.9
46
Appendix – Pro-forma Cash Flow Statement
Cash Flow Statement 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Cash Flows from Operating Activities
Earnings before income taxes (31.8) 87.0 104.7 106.6 119.6 130.4 134.4 134.7 134.6
Amortization 51.6 48.5 45.3 49.0 49.0 49.0 50.0 51.0 52.0
Reversal of impairment of long-lived assets 61.1 (28.5) (4.7) 0.0 0.0 0.0 0.0 0.0 0.0
Impairment of Goodwill 3.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Share-based compensation 3.6 9.7 4.8 4.8 4.8 4.8 4.8 4.8 4.8
Interest and financing cost, net 37.0 32.8 31.6 27.1 26.1 25.2 23.3 21.4 20.4
Foreign exchange gain and other 6.8 (0.9) (2.4) 0.0 0.0 0.0 0.0 0.0 0.0
Special share-based award 0.0 (4.8) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other 0.1 (1.5) (1.8) (1.8) (1.8) (1.8) (1.8) (1.8) (1.8)
Equity investment loss 3.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Cash Flow From Operations Before WC 135.1 142.3 177.5 185.7 197.7 207.6 210.7 210.0 210.1
Changes in non-cash working capital (2.2) 3.3 (2.9) 0.6 (0.6) 0.7 (0.9) 0.1 0.2
Accounts receivable 0.0 1.5 0.2 (1.3) 0.1 0.1 (0.3) 0.1 0.0
Prepaids, deposits and other assets 0.5 (1.9) 0.6 (0.0) (0.2) (0.2) (0.0) 0.0 (0.0)
Accounts payable and accrued liabilities (2.7) 3.7 (3.7) 2.0 (0.5) 0.8 (0.6) (0.0) 0.1
Dividends paid 0.0 0.0 0.0 (40.0) (45.0) (49.0) (50.0) (50.0) (50.0)
Income taxes paid (11.5) (10.2) (11.5) (26.8) (30.0) (32.8) (33.8) (33.8) (33.8)
Cash generated by operating activities 121.4 135.4 163.1 119.6 122.1 126.6 126.0 126.3 126.4
Cash Flows from Investing Activities
Purchase of property, plant and equipment (25.4) (24.8) (14.8) (32.7) (36.7) (41.7) (48.7) (54.7) (54.7)
Related accounts payable 1.0 (3.4) 3.7 3.7 3.7 3.7 3.7 3.7 3.7
Georgian Downs facility settlement payment 0.0 31.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Equity Investment Loss (3.5) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Interest income received 1.3 1.6 2.5 4.0 5.0 6.0 8.0 10.0 11.0
Other 0.0 (1.2) 0.3 (3.5) 3.0 1.5 0.5 1.3 0.1
Cash used in investing activities (27.6) 7.1 (12.0) (32.2) (28.7) (34.2) (40.2) (43.4) (43.6)
Cash Flows from Financing Activities
Proceeds from exercise of incentive stock options, net of issuance costs7.9 7.0 11.3 0.0 0.0 0.0 0.0 0.0 0.0
Proceeds from long-term debt 450.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Repayment of debt and derivative (403.4) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Debt refinancing transaction costs (14.9) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Purchase of common shares (130.1) (46.6) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Interest paid (24.4) (32.6) (32.2) (31.1) (31.1) (31.2) (31.3) (31.4) (31.4)
Cash used in financing activities (114.9) (72.2) (20.9) (31.1) (31.1) (31.2) (31.3) (31.4) (31.4)
Effect of foreign exchange on cash and cash equivalents0.4 1.2 1.6 (3.5) 3.0 1.5 0.5 1.3 0.1
Cash inflow (outflow) (20.7) 71.5 131.8 52.7 65.2 62.7 55.0 52.8 51.5
Cash and cash equivalents, beg. of period 141.8 121.1 192.6 324.4 377.1 442.3 505.0 560.0 612.8
Cash and cash equivalents, end of period 121.1 192.6 324.4 377.1 442.3 505.0 560.0 612.8 664.3
0.0 0.0 0.0 0.0 0.0 0.0 0.0
47
Appendix – PPE The full breakdown of each of the items in PPE and intangible assets are shown with all our assumptions in the
appendix.
Land 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Opening balance $82.2 $71.1 $71.4 $71.4 $71.5 $71.6 $71.8 $72.0 $72.2 New investments $0.1 $0.1 ($0.2) $0.1 $0.1 $0.1 $0.2 $0.2 $0.2 Translation and Impairments ($11.2) $0.2 $0.2 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
Ending balance $71.1 $71.4 $71.4 $71.5 $71.6 $71.8 $72.0 $72.2 $72.4
Buildings and Buildings Improvements
2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Cost $681.4 $673.2 $675.3 $687.3 $700.9 $716.6 $735.2 $756.3 $777.7
Accumulated Depreciation $182.0 $194.5 $218.3 $244.2 $270.5 $297.5 $325.0 $353.4 $382.5
Net Book Value $499.4 $478.7 $457.0 $443.1 $430.4 $419.1 $410.1 $403.0 $395.2
Opening balance $673.2 $499.4 $478.7 $457.0 $443.1 $430.4 $419.1 $410.1 $403.0 New investment $8.5 $22.6 $1.1 $12.0 $13.6 $15.7 $18.6 $21.2 $21.4 Settlement Payment $0.0 ($31.5) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Translation ($0.2) $0.5 $0.7 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Impairments ($18.0) $13.0 $0.9 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 - Prior Years Depreciation ($136.5) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 - Depreciation ($27.6) ($25.3) ($24.4) ($25.9) ($26.4) ($26.9) ($27.6) ($28.3) ($29.1)
Net Book Value on Balance Sheet $499.4 $478.7 $457.0 $443.1 $430.4 $419.1 $410.1 $403.0 $395.2
Leasehold Improvements 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Cost $81.4 $82.6 $84.1 $86.8 $89.9 $93.5 $97.7 $102.5 $107.3
Accumulated Depreciation $54.1 $57.8 $61.0 $64.1 $67.4 $70.7 $74.3 $77.9 $81.8
Net Book Value $27.3 $24.8 $23.1 $22.7 $22.5 $22.7 $23.4 $24.5 $25.5
Opening balance $76.3 $27.3 $24.8 $23.1 $22.7 $22.5 $22.7 $23.4 $24.5
New investment $5.2 $1.0 $1.1 $2.7 $3.1 $3.6 $4.2 $4.8 $4.8 Disposals $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
Translation ($0.2) $0.0 $0.2 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
Impairments $0.0 $0.0 ($0.2) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 - Prior Years Depreciation ($51.1) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
- Depreciation ($2.9) ($3.5) ($2.8) ($3.1) ($3.2) ($3.4) ($3.5) ($3.7) ($3.9)
Net Book Value on Balance Sheet $27.3 $24.8 $23.1 $22.7 $22.5 $22.7 $23.4 $24.5 $25.5
48
Equipment 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Cost $109.2 $117.8 $122.2 $131.0 $140.9 $152.4 $166.0 $181.5 $197.1
Accumulated Depreciation $93.3 $100.0 $108.1 $116.0 $124.5 $133.7 $143.7 $154.6 $165.2
Net Book Value $15.9 $17.8 $14.1 $15.0 $16.4 $18.7 $22.3 $26.9 $31.9
Opening balance $102.3 $15.9 $17.8 $14.1 $15.0 $16.4 $18.7 $22.3 $26.9 New investment $7.2 $8.5 $4.3 $8.8 $9.9 $11.5 $13.6 $15.5 $15.6 Disposals $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Translation $0.0 $0.1 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Impairments ($0.4) $0.2 ($0.1) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 - Prior years' Depreciation ($86.1) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 - Depreciation ($7.1) ($6.9) ($7.9) ($7.9) ($8.5) ($9.2) ($10.0) ($10.9) ($10.7)
Net Book Value on Balance Sheet $15.9 $17.8 $14.1 $15.0 $16.4 $18.7 $22.3 $26.9 $31.9
Properties Under Development 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Opening balance $7.8 $7.6 $3.6 $8.4 $13.8 $19.9 $26.9 $35.2 $44.6 New investment $3.4 ($4.0) $4.8 $5.4 $6.1 $7.0 $8.3 $9.5 $9.6 -Prior Years Depreciation ($3.6) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
Net Book Value on Balance Sheet
$7.6 $3.6 $8.4 $13.8 $19.9 $26.9 $35.2 $44.6 $54.2
Intangible Assets 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Opening balance $224.5 $73.3 $75.8 $69.8 $57.7 $46.8 $37.0 $28.1 $20.2 -Prior Years Amortization and Impairment
($104.8) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
-Amortization ($14.0) ($12.8) ($10.2) ($12.1) ($10.9) ($9.8) ($8.8) ($7.9) ($7.9) Impairments ($32.4) $15.3 $4.2 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
Net Book Value on Balance Sheet
$73.3 $75.8 $69.8 $57.7 $46.8 $37.0 $28.1 $20.2 $12.2
49
Appendix Top-Down Revenue Forecast
71320CA-Canada Gambling Industry
Year Revenue $ million
Growth %
GCGC Gaming Revenue
GCGC FDC Revenues
less, Promotional Allowance
% of Global Industry Revenue
2012 $15,729.9 0.8% $ 294.9 $ 35.2 $ (19.8) 1.973%
2013 $15,301.8 -2.7% $ 274.2 $ 34.1 $ (18.5) 1.894%
2014 $15,161.3 -0.9% $ 308.4 $ 37.7 $ (22.6) 2.134%
2015E $15,329.5 1.1% $ 330.4 $ 37.7 $ (22.9) 2.155%
2016E $15,697.5 2.4% $ 341.7 $ 37.7 $ (23.4) 2.177%
2017E $15,493.4 -1.3% $ 337.2 $ 37.7 $ (23.1) 2.177%
2018E $15,834.2 2.2% $ 334.3 $ 37.7 $ (23.6) 2.111%
2019E $15,500.1 -2.1% $ 330.5 $ 37.7 $ (23.1) 2.132%
2020E $15,571.4 0.5% $ 329.4 $ 37.7 $ (23.2) 2.115%
OD4372 - Horse Racing Tracks in the US
Year Revenue $ million
Growth % GCGC Racetrack Rev.
% of Global Industry Revenue
2012 $ 3,866.2 0.8% $ 15.8 0.409%
2013 $ 3,788.8 -2.0% $ 14.3 0.377%
2014 $ 3,693.3 -2.5% $ 14.6 0.395%
2015E $ 3,590.6 -2.8% $ 12.4 0.345%
2016E $ 3,650.7 1.7% $ 10.8 0.295%
2017E $ 3,720.1 1.9% $ 9.1 0.245%
2018E $ 3,627.6 -2.5% $ 7.1 0.195%
2019E $ 3,543.0 -2.3% $ 6.9 0.195%
2020E $ 3,514.5 -0.8% $ 6.8 0.193%
72111CA Hotels & Motels in Canada
Year Revenue $ million
Growth % GCGC Hospitality revenues
% of Global Industry Revenue
2012 $14,468.1 0.8% $ 82.6 0.571%
2013 $14,637.1 1.2% $ 103.2 0.705%
2014 $14,782.3 1.0% $ 108.4 0.733%
2015E $14,905.1 0.8% $ 109.3 0.733%
2016E $15,065.7 1.1% $ 110.5 0.733%
2017E $15,294.5 1.5% $ 112.2 0.733%
2018E $15,593.1 2.0% $ 114.3 0.733%
2019E $15,713.8 0.8% $ 116.4 0.741%
2020E $15,923.8 1.3% $ 117.8 0.740%
50
From the analysis of the top down and bottom up revenue forecasting, our estimate for forecasting the annual revenue
is the lower of the two values we calculated. We are placing the revenue from the estimates on our discounted cash
flow valuation. The percentage change in growth shows that the revenue rises steadily for a few years until 2017 and
then stabilizes to perpetuity at a rate close to 0.5%. This is aligned with our key assumptions based on the industry
analysis and future outlook for the business.
GCGC Total Revenues
Year Top Down Bottom Up Estimate % Change in g
2012 $ 408.70 $ 408.70 $ 408.70
2013 $ 407.30 $ 407.30 $ 407.30 -0.3%
2014 $ 446.50 $ 446.50 $ 446.50 9.6%
2015E $ 466.91 $449.08 $ 449.08 0.6%
2016E $ 477.23 $458.44 $ 458.44 2.1%
2017E $ 473.12 $467.77 $ 467.77 2.0%
2018E $ 469.84 $477.41 $ 469.84 0.4%
2019E $ 468.43 $487.35 $ 468.43 -0.3%
2020E $ 468.50 $483.69 $ 468.50 0.5%
$420
$430
$440
$450
$460
$470
$480
$490
$500
2015E 2016E 2017E 2018E 2019E 2020E
Estimation of Revenue
Top Down Bottom Up Revenue Estimate
51
Appendix - Bottom-Up Revenue Forecast
Properties Location
Annual Pop
Growth
Opinion
Adjustment
Growth
Estimate
River Rock Casino Resort River Rock Casino Resort Richmond, BC 1.10% New VIP area, additional tables added 2% 0% 4%
Hard Rock Casino Vancouver Hard Rock Casino Vancouver, BC 1.80% Adoption of Hard Rock brand, New high
limit baccarat, Phaise II of transformation
upcoming4% 0% 6%
Vancouver Island Casinos Casino Nanaimo
View Royal Victoria
Nanaimo, BC
Victoria, BC
1.2%
0.8%
None0% 0% 1.00%
Other BC Casinos Chances Maple Ridge
Chances Dawson Creek
Chances Chilliwack
Maple Ridge, BC
Dawson Creek, BC
Chilliwack, BC
1.98%
2.9%
2.4%
None
0% 1% 3.43%
Nova Scotia Casinos Casino Nova Scotia x 2 Halifax, NS
Sydney, NS
1%
-0.5%
Upcoming $10M revitalization plan,
unspecified timing1% -2% -0.75%
Great American Casinos Great American Casino x 3 Tukwila, WA
Lakewood, WA
Everett, WA
1.1%
0.1%
0.7%
Kent Casino shut down in March, 2015
(adjustment of ~ $2.8 or -12% of revenues
in year 1)
0% 0% 0.63%
BC Racinos Fraser Downs Race Track and Casino
Hastings Racecourse and Casino
Surrey, BC
Vancouver, BC
3.5%
1.80%
Renovations at Fraser Downs Casino2% 1% 5.65%
Ontario Racetracks Flamboro Downs
Georgian Downs
Dundas, ON
Innisfil, ON
0.2%
1.2%
None0% -2% -1.30%
Asset Class Recent or Planned Material Upgrades?
Bottom Up Revenue Forecast
2014 2015 E 2016 E 2017 E 2018 E 2019 E 2020 E
Annual
Growth
Rate
Terminal
Growth
Rate
0.50%
Gaming Revenues
River Rock Casino Resort 146.7 152.7 159.0 165.5 172.3 179.3 180.2 4% 0.50%
Hard Rock Casino Vancouver 38.3 40.5 42.9 45.4 48.0 50.8 51.0 6% 0.50%
Vancouver Island Casinos 29.6 29.9 30.2 30.5 30.8 31.1 31.3 1% 0.50%
Other BC Casinos 15.1 15.6 16.2 16.7 17.3 17.9 18.0 3% 0.50%
Nova Scotia Casinos 35.3 35.0 34.8 34.5 34.3 34.0 34.2 -1% 0.50%
Great American Casinos 24.0 21.3 21.4 21.5 21.7 21.8 21.9 1% 0.50%
BC Racinos 19.4 20.5 21.7 22.9 24.2 25.5 25.7 6% 0.50%
Total 308.4 315.5 326.0 337.0 348.4 360.4 362.2
Facility Development Commisssion*
Percent of Gaming Revenue 12.2% 12.2% 10.4% 8.6% 6.8% 5.0% 3.2%
River Rock Casino Resort 20.8 18.7 16.6 14.3 11.8 9.0 5.8
Hard Rock Casino Vancouver 6.2 5.0 4.5 3.9 3.3 2.6 1.6
Vancouver Island Casinos 4.7 3.7 3.1 2.6 2.1 1.6 1.0
Other BC Casinos 2.9 1.9 1.7 1.4 1.2 0.9 0.6
BC Racinos 3.1 2.5 2.3 2.0 1.6 1.3 0.8
Total 37.7 31.7 28.1 24.2 20.0 15.3 9.9
Hospitality, Lease, and Other Revenues
River Rock Casino Resort 47.5 49.4 51.5 53.6 55.8 58.1 58.4 4% 0.50%
Hard Rock Casino Vancouver 10.7 11.3 12.0 12.7 13.4 14.2 14.3 6% 0.50%
Vancouver Island Casinos 4.5 4.5 4.6 4.6 4.7 4.7 4.8 1% 0.50%
Other BC Casinos 4.0 4.1 4.3 4.4 4.6 4.7 4.8 3% 0.50%
Nova Scotia Casinos 6.6 6.6 6.5 6.5 6.4 6.4 6.4 -1% 0.50%
Great American Casinos 8.0 7.1 7.1 7.2 7.2 7.3 7.3 1% 0.50%
BC Racinos 6.7 7.1 7.5 7.9 8.3 8.8 8.8 6% 0.00%
Ontario Racetracks 20.4 20.1 19.9 19.6 19.4 19.1 19.1 -1% 0%
Total 108.4 110.3 113.3 116.5 119.8 123.3 123.7
Racetrack Revenues
BC Racinos 9.9 9.6 9.3 9.0 8.8 8.5 8.5 -3% 0%
Ontario Racetracks 4.8 4.7 4.5 4.4 4.2 4.1 4.1 -3% 0%
Total 14.7 14.3 13.8 13.4 13.0 12.6 12.6
Promotional Allowances (22.7) (22.7) (22.8) (23.3) (23.8) (24.3) (24.8) -5% of revenues
Grand Total Revenues 446.5 449.1 458.4 467.8 477.4 487.3 483.7
FDC estimated at 12% of gross gaming revenues for associated facility
The FDC amount
should eventually
equal about 3% of
gross gaming revenue
per year.
52
Appendix – DCF Assumption
Actual Actual Actual Forecast Forecast Forecast Forecast Forecast Forecast
2012 2013 2014 2015 2016 2017 2018 2019 2020
Interest on short term debt on opening balance 2.06% 2.06% 2.06% 2.16% 2.26% 2.36% 2.46% 2.56% 2.66%
Interest on long term debt on average balance 6.76% 6.76% 6.76% 6.63% 6.63% 6.63% 6.63% 6.63% 6.63%
Interest income on opening cash balance 1.37% 1.37% 1.37% 1.40% 1.45% 1.50% 1.65% 1.75% 1.75%
Expenses as a % of Sales
Human resources 40% 39% 37% 36% 35% 35% 34% 34% 34% start with declining by 1%
Property, marketing and administration 24% 24% 23% 22% 21% 20% 20% 20% 20% start with declining by 1%
Litigation settlement 2.69% 0.00% 0.00% constant
Restructuring and other $5.10 $2.00 $0.80 $2.63 constant
Impairment of goodwill $3.20 $0.00 $0.00 constant
(Reversal of) impairment of long-lived assets $61.1 ($28.5) ($4.7) $0.0 constant
Foreign exchange gain and other $6.8 ($0.9) ($2.4) $0.0 constant
Income taxes (benefit) 13.21% 27.48% 25.12% tax rate constant
Dividends (Dividend Payout Ratio) 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% Payout Ratio Constant
Statement of Financial Position
Cash and cash equivalents PLUG
Accounts receivable - days sales 6.88 6.45 5.15 6.16 5.92 5.74 5.94 5.87 5.85 DSO Adjustment
Income taxes receivable -$ 3.70$ -$ constant
Prepaids, deposits and other (% of sales) 1.49% 1.96% 1.66% constant
Goodwill 20.10$ 20.60$ 21.10$ constant
Deferred tax assets 9.90$ 8.80$ 8.90$ constant
Other assets 3.20$ 2.70$ 2.20$ constant
Accounts payable (DPO of HR & P, M & Admin) 42.22 48.27 41.31 45.25 44.94 46.15 45.45 45.51 45.71 DOP Adjustment
Accrued Liabilities $30.20 $33.95 $30.15 constant
Income taxes payable (% of prior year's expense) 30.1% constant
Derivative Liablilities $0.0 $0.0 $0.0 constant
Deferred tax liabilities $53.3 $70.3 $74.3 constant
Share capital and contributed surplus $313.5 $305.1 $318.8 constant
Accumulated other comprehensive loss ($1.0) $0.4 $1.1 constant
WACC 6.73%
Breakdown of DCF Assumptions
following term structure of
interest rates
Description
53
Appendix – DCF Calculation
Discounted Cash Flow 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2020E
EBIT 5.2 120.0 136.0 134.0 146.0 156.0 158.0 156.0 155.0
Less, Taxes 4.2 (23.9) (26.3) (26.8) (30.0) (32.8) (33.8) (33.8) (33.8)
Net operating profit after tax 9.4 96.1 109.7 107.2 116.0 123.2 124.2 122.2 121.2
Amortization 51.6 48.5 45.3 49.0 49.0 49.0 50.0 51.0 52.0
Net operating cash flow after tax 61.0 144.6 155.0 156.2 165.0 172.2 174.2 173.2 173.2
Changes in Non-Cash Working Capital
Accounts receivable 0.0 1.5 0.2 (1.3) 0.1 0.1 (0.3) 0.1 0.0
Prepaids, deposits and other assets 0.5 (1.9) 0.6 (0.0) (0.2) (0.2) (0.0) 0.0 (0.0)
Accounts payable and accrued liabilities (2.7) 3.7 (3.7) 2.0 (0.5) 0.8 (0.6) (0.0) 0.1
Net change in WC (2.2) 3.3 (2.9) 0.6 (0.6) 0.7 (0.9) 0.1 0.2
Investing activities (25.4) (24.8) (14.8) (32.7) (36.7) (41.7) (48.7) (54.7) (54.7)
Free Cash Flows 37.8 116.5 143.1 122.9 128.8 129.9 126.5 118.4 118.3 118.9
Terminal Value 1,909
Time Until Cash Flow (years) 0.5 1.5 2.5 3.5 4.5 5.5 5.5
Discount Factor 0.968 0.907 0.850 0.796 0.746 0.699 0.699
Discounted Free Cash Flow 119 117 110 101 88 83 1,334
Terminal Growth Rate 0.5%
WACC 6.73%
Total Value of Discounted Free Cash Flows 1,952 68%
Less Market Value of Debt 470
Value of Equity 1,482
Less Option Value 53
Common Shareholder Equity 1,429
Number of Shares Outstanding (MM) 69.7
Value Per Share 20.50
Percentage in Terminal Value
54
Appendix – Black-Scholes Option Value
Calculation of Outstaning Option Value
Inputs
Option type: 1=call, -1=put 1
Stock price: 24.01
Strike price: 13.68
Maturity: 3.5
Risk-free rate: 0.012
Dividend yield: 0
Volatility: 0.258
Calculate option price:
d1: 1.4938
d2: 1.0111
N(d1): 0.9324
N(d2): 0.8440
Call price 11.32
Number of Shares Outstanding 4,691,000
Total Value of Outstanding Options 53,079,917
