Century Casinos (CNTY) is an interesting proposition because its shares trade at a huge discount to net asset value. Essentially, that means if we liquidate the entire company today – selling all its assets and repaying all its obligations, we will get a value that is much higher than the current market capitalization. In fact, it can fetch another $100 million (or another $4 a share) more than the current price it is selling on the stock exchange.
Century Casino develops and operates midmarket, regional casinos in regulated markets worldwide. In its last ten years of operation, it has managed casinos in the U.S., Canada, South Africa, Czech Republic and Poland. Today, it has 24 casino operations with approximately 3,000 slot machines and 200 table games. Unlike bigger gaming and entertainment companies like Las Vegas Sands or MGM Casinos, Century’s gaming operation is defined by its large slot machine based business.
In the markets that they operate, approximately 90% of its revenues are driven by slot machine games. Of its owned and operated casinos, two of them are in the U.S., and the other two are in Canada. Its 33% stake in the company Casinos Poland also gives it a footprint in Eastern Europe with seven owned and managed casinos. Furthermore, Century also manages (and does not own) a casino in Aruba, and another 12 casinos on family vacation cruise ships.
Net asset value adjustments
When we look at the balance sheet of the company, some of the line items should be adjusted to better reflect the true value of Century’s assets. For example, property, plant and equipment are recorded at the historical cost which the company paid for it due to U.S. accounting rules. As a result, even when land or building appreciates in prices after decades, the balance sheet does not capture that increase in value.
For Century, it is fair to adjust their land and building holdings up 20% as land price has increased in both Calgary and Colorado since they purchased them from between 1996 and 2006. Furthermore, buildings improvements in casino tend to incorporate expensive fixtures and decorations, thus new entrants might have to incur additional capitals to acquire similar properties.
Similarly, some other items such as equipment or goodwill should be written down or completely neglected. Equipment tend to go through wear and tear and gaming devices change every few years as new slot machines incorporating better games are introduced. Hence, the balance sheet number might not be as reflective of the diminishing value of the equipment.
After making the necessary adjustments, the net asset value of Century Casino comes up to $163 million – significantly higher than its current market capitalization of $63 million.
Staggered Boards and Poison Pills
Of course, behind every bargain, there are always certain areas of the company that the market is concerned about. When we make a liquidation analysis of Century Casino, we assume that we can take over the company today and sell its assets. However, there are many impediments toward that.
For example, Century Casino adopts what investment professionals call a staggered board. Even though the public float of the company is at 79.05% and total management ownership is only at 20.95%, a full takeover would be hard to execute because shareholders can only vote two directors out every year. For a full takeover, it will take at least three years before the shareholders can have control over the board.
Furthermore, the company has adopted plans that allow its board of directors to issue shares of preferred stock, thus potentially diluting any hostile bidder’s stake, without stockholder approval. The stock also has a provision which requires approval of certain business combinations by holders of 80% of their outstanding shares of voting stock. This makes it hard for a hostile bidder to obtain full control as management owns 20.95% of the company.
Written by SiHien Goh