Waukegan Casino Build Will Secure $325 Million Financing

Key Takeaways

• Permanent casino operations in Waukegan and Chamonix are anticipated to boost revenues and margins significantly through venue improvements and market share growth.
  
• Enhanced digital marketing and consumer analytics use aim to optimize operations, boosting operational efficiency and earnings.
  
• Full House Resorts faces financial risks due to reliance on debt for casino projects, rising operating expenses, competition, and uncertainties in relocation strategies and material costs.

Catalysts

Owns, leases, operates, develops, manages, and invests in casinos, and related hospitality and entertainment facilities in the United States.

• The approval of the Waukegan casino license by the Illinois Supreme Court allows Full House Resorts to secure financing and proceed with constructing a $325 million permanent casino in Waukegan. This could significantly increase revenues and margins as temporary facilities transition to more profitable permanent operations.
  
• American Place casino, despite operating in a temporary structure, has shown strong revenue growth and has a competitive advantage being the only casino in Lake County, with favorable demographics suggesting further potential for revenue and margin improvement.
  
• The completion and maturation of the Chamonix Casino in Colorado, expected to yield $50 million in annual income at maturity, indicates future revenue growth. The ongoing management optimization and market share expansion efforts are expected to drive up earnings as the property becomes fully operational.
  
• The possibility of relocating the Rising Sun casino license to more lucrative markets like Indianapolis or Fort Wayne, where the legislative environment may permit such moves, could greatly enhance future revenue streams and improve net margins given higher business potential in these regions.
  
• Strategic management changes and optimization initiatives, such as the transition to digital marketing and use of detailed consumer analytics, are expected to improve operational efficiencies and net margins across the company’s portfolio, leading to better earnings.

Full House Resorts Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Full House Resorts's revenue will grow by 9.1% annually over the next 3 years.
• Analysts are not forecasting that Full House Resorts will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Full House Resorts's profit margin will increase from -13.9% to the average US Hospitality industry of 7.1% in 3 years.
• If Full House Resorts's profit margin were to converge on the industry average, you could expect earnings to reach $26.8 million (and earnings per share of $0.69) by about April 2028, up from $-40.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.1x on those 2028 earnings, up from -2.9x today. This future PE is lower than the current PE for the US Hospitality industry at 22.4x.
• Analysts expect the number of shares outstanding to grow by 3.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Full House Resorts Future Earnings Per Share Growth

Risks

• The company faces significant financial risk as they plan a $325 million permanent casino build for American Place, and are reliant on favorable debt markets, with no intention to issue equity or engage with REITs, which could impact overall financial stability and net margins if financing terms are unfavorable or costs overrun.
  
• Operating challenges in Chamonix are evident, with higher-than-expected expenses and the property not yet reaching anticipated revenues, resulting in a loss in the fourth quarter, which could affect overall earnings if improvements are not realized quickly.
  
• Rising competition in the gaming industry, especially in regions like Indiana and Illinois, where other casinos are being relocated and expanded, may put pressure on Full House Resorts’ market share and lead to reduced revenues and earnings in those areas.
  
• There's a potential threat from fluctuating construction material prices and tariffs which could increase the costs of building their permanent casinos, impacting capital expenditure and future profitability.
  
• The economic outlook and success of moving a gaming license to a potentially more profitable location in Indiana are still uncertain and require legislative approval, creating risks around future revenue projections in that state if relocation efforts do not succeed.

Valuation

• The analysts have a consensus price target of $5.5 for Full House Resorts based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $7.0, and the most bearish reporting a price target of just $5.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $378.8 million, earnings will come to $26.8 million, and it would be trading on a PE ratio of 11.1x, assuming you use a discount rate of 11.4%.
• Given the current share price of $3.24, the analyst price target of $5.5 is 41.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.