Ann: Market Update, page-13

My 2c...a frogurt moment.

- See's "Donaco Market Update" in middle of confessions season. That's bad.
- Guidance re-affirmed. That's good.
- Management contract ended without successful renegotiation. That's bad.
- Management fee no more. That's good.
- Gap in replacing Thai VIP player stream and untested management (in Thai market) filling the void, also leading to at least one quarter of reduced player volume. That's bad.
- Vivo Towers collaboration to fill 100 table capacity with Malay & Chinese. That's good.


I must admit to expecting our Thai former owner to continue working for a fee but at a much reduced figure. I can only hope that management were working behind the scenes preparing PLAN B, i.e. moving staff from Vietnam to Cambodia and making early approaches to new junket operators. A little uncertain for at least another quarter or two I suspect to see how we transition.

Stepping back and looking at my modelling. I had the Star growing at a faster rate than it has. Last two years we've only just scraped past the $60USD mark (probably a good reason why management arrangement wasn't renewed/renegotiated). Conversely I had the Aristo barely moving but this has turned out to far exceed my growth expectations.

When I include debt repayments (essentially assuming them to be a recurring cost, which they of course are not) then I place fair value right now at 38c per share and falling to just 20c per share in FY18.

This is based upon a lost quarter at the Star and full year venue EBITDA of $50USD (yes pessimistic i know), a 5% boost at the Aristo (also pessimistic), the whopping balloon payment of $54USD in June 2018 and a PE of 15.

If I take away debt repayments (as most probably do), then I get fair value at ~$1 per share now and into next year with all other assumptions remaining. So still very undervalued.

Surprise to the upside factors are of course the Vivo Towers hook up, a faster than expected take up of Thai Junket operators in the VIP space and new management bringing some growth back to the Star. There is of course the win rate too which will reveal if the Star actually performed better or worse than it seems.

Downside factors are all the usuals. Cambodia decides to tax us or at least increase the license fee. War breaks out and the borders close. Thailand legalise gambling. China legalise gambling. Win rate turns bad or player trends move away from Baccarat and instead choose a lower win rate game.

Re Dividends... I'm not expecting an uplift in Fy18 given the short term uncertainty and the enormous debt balloon payment at the end of the year. All things being equal, the company should generate enough free cash flow in FY18 to pay off the debt and maintain the current dividend rate without diving into cash reserves but it will be a close thing. AFTER THAT HOWEVER....I can easily see the company doing a buy back of shares and/or an acquisition with all the free cash that should start to spit off. Dividends are nice too but without franking credits they are less attractive. One thing this stock sorely misses is any sort of solid upward trend, and a sustained momentum shift, could lift the company from the current 6-8 times PE range into a more sensible 10-12 times range. A buy back could be the catalyst for such a move.

Final thoughts...still very comfortable, still buying (though I've slowed up this year), still looking forward to Fy19 when we are in clear air of no debt/fees and looking for a home for the piles cash being generated.