FY2016 Results summary

DNA FY2016 Results

After struggling with low win rates at Aristo, DNA has turned a corner.
The first point to note is that headline EBITDA at 97m exceeded guidance of 90-95m. However, this by its self is rather meaningless. More meaningful, was the strong double digit revenue growth at the Aristo and the Star in both constant currency and currency adjusted terms.

One off items included a 55.2m uplift in the Star’s assessed valued, which contributed to a 20.5m fee to current management (the “deal” expires in FY2017). This was disappointing because the 55.2m uplift was an accounting gain and the cost (due to current managers – old owners – exceeding guaranteed EBITDA of 60m USD) was straight from cash profits. There was also a one off 11.8 m in merger and acquisition costs. The result was a positive 22.9m to NPBT. This is simply an accounting gain and needs to be removed to determine underlying profitability.

Most pleasing was the fact that win rates at the Aristo improved dramatically. Win rates (i.e. the expected return to the casino on high roller bets) should average 2.85% for baccarat. The Aristo had been drastically underperforming which was a bad look. In May the win rate went to 3.52% and then 3.96% in June and resulted in 2.2% over FY16 and a significant improvement on where it was heading after their most recent update. The Star win rate is a healthy 2.97% for FY16.

The GAAP NPAT was 77.2m. However, when the 20.5m is removed and approx. 1m added back in for tax paid on this, underlying NPAT is around 58m. Compared to a market cap 382m this looks attractive.

I predominantly use cash flows when valuing companies because they are hard to manipulate. As in my previous post 18376506 I did a bit of backwards working on the FCF and came up with 32m (min). I did check the debt pay down came from FCF in a phone call to Ben Reichel. Actual operational cash flow was 48m. Now that figure is a little high for ongoing FCF due various incidentals, still it indicates the business is generating more cash than I expected after the latest update. At this rate shareholders are getting over a 12% yield on OCF. This is high compared to most companies I have been looking at this reporting season.

Debt has been decreasing and annual costs are down to less than 20m AUD p.a. A dividend of 1 cent unfranked was announced. This gives a yield of 2% or if the same is announced as an interim for DH16 the yield would be 4%. The new executive incentive remuneration looks fair, unlike the egregious gouging I have witnessed from some companies of late. The US domiciled companies I hold are particularly bad for this.

The result was that underlying cash flow and earnings were stronger than anticipated. The extra 20.5m performance fee was disappointing, because it was due to an accounting gain. I would like to hear from posters who have more info on this.

Andrew