Tuesday, April 10, 2012

Where I Went Wrong On My Analysis Of UWN's AG Trucano Deal.

Ok, so, I am more than willing to admit when I get something wrong. My analysis of the AG Trucano deal did have some bad analysis in it. I am sorry for that and am dedicating this post to it...

Here is what I said that wasn't entirely correct:
Looking at the most recent annual report for gaming operation in South Dakota, we see that there was approximately $95.5 million in revenue generated by slot machines... If 24% of this went to AG Trucano (which, may not hold true due to revenue distribution) and there are no major changes in the South Dakota Gaming market, we can expect for Nevada Gold's revenues to go up by just a hair under $23 million... This is pretty significant for a company that has generated around $55 million dollars in revenue in the trailing 12 months.
Considering that the company paid ~4x trailing EBITDA, or $5.2 million (per the presentation that I saw at the annual meeting), that implies additional EBITDA of $1.05 million. If they get up to just 15% EBIDTA margins on, say, ~$25 million in revenue, that would imply additional EBIDTA of just under $4 million at some point in the future… Even if revenues for Trucano fall to $20 million, they will still be flying.
OK, so, where I messed up was in using the state's revenue numbers, then assuming that AG Trucano was literally getting (in revenue) the percent of it that their machines occupied in the Deadwood market. As such, my revenue expectations are WAAAAY off. In the conference call before last for UWN, it came out that the company has revenue sharing agreements in place that will give the owner of the space, say, 70% of the revenue of the slot machines. As such is the case, while the company is responsible for the production of more than $20 million of revenues in the Deadwood market, AG Trucano (soon to be UWN) probably doesn't get that for it's top line. If they get 30% of the money that their market share would indicate, then their EBITDA margins go from a paltry 5%, to almost 21%. Those margins are pretty juicy and would be hard to improve by a huge amount, I would imagine. 

I still think that there will be some cost savings coming from the company's new perspective on the operation. There should be expansion in the Deadwood market, new marketing, and synergies that will be recognized. Furthermore, on the earlier mentioned conference call for UWN, Bob Sturges noted that the present CEO of Trucano would be staying with the operation for a year for a transitional period. I have no idea what his present salary is, but, there may be further cost savings once he leaves. Additionally, the company is going to try to grow the top line of the operation, which seems to be quite scalable. So, that should improve earnings of the operation as well.

Another point, is that if ELSTs are legalized in Washington, I would imagine that Mike Trucano would be a valuable asset to tap for setting machines up in the Washington card rooms (even if he would just be a part time consultant). Additionally, it seems that the government in South Dakota is trying to improve the revenue that it's gaming generates- again, a plus. I found it interesting that Wells Fargo expanded their line of credit with Nevada Gold so that they could pay the taxes on the machines in the area. I would imagine that this means that there will be a nice overall infusion of cash into the operation, given that a bit of the money from the S-1 was used to keep in the coffers of Trucano. Overall, these 2 actions essentially free up more cash for UWN to use in an acquisition... If that is the case, then, I would likely be happy with that move (even despite the dilution and the high interest rate the company is paying to borrow money) just from considering how well they tend to buy gaming properties.

Getting back to the original point of this post, in light of my faulty analysis, this provides a good reason to always heed the advice of my disclaimer. After all, I am human, and do screw up from time to time.

File this one under "me being wrong." :)

Disclosure/Disclaimer: I and various members of my family are long shares of Nevada Gold (UWN). I reserve the right to change any of my positions at any time. This is not advice of any kind. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.


Anonymous said...

I am somewhat let down by UWN's latest earnings.

I would prefer that they start with what they have on their plate. Start "digesting" what they have acquired and expand revenue, cut costs, improve customer experience and start making money.

Management has down a pretty good job so far, but they need to start EARNING money. They don't have to hit a home run, but I would like to see quarters of earnings of $.00, $.01, & $.03 a share in true earnings.

If they can expand to VLT in WA, great. If they can open the racetrack casino in Vegas, great. If they can pick up a tuck acquisition in WA, great...


I will still be holding no matter what for the next few quarters. After that, I might consider redeploying capital to more promising ventures...

J said...

Ragnar - I just found your blog from SA and am new to both sites. I appreciate your coverage of UWN as the Yahoo message boards don't do it for me.

Anonymous - I agree completely. While I don't have a lot tied up in UWN, I'm disappointed with the company thus far in terms of shareholder appreciation. This may and probably will be a sideline pick until greater earnings follow but not making money on UWN right now, that's for sure.

Thanks both of you for your insight