Great Canadian (TSX:GC) is a gaming, entertainment and hospitality company that operates in Canada and the United States. The firm’s revenue comes from casinos, horse racing tracks, community gambling and hospitality.
The company reports a market capitalization of $2.43 billion with a 52-week low of $37.67 and a 52-week high of $56.32.
Based on my calculations using a discounted cash flow (DCF) valuation model, I determined that Great Canadian has an intrinsic value of $31.61 per share.
Assuming less than average industry growth, the intrinsic value would be $29.79 per share, and higher than average industry growth would result in an intrinsic value of $33.68 per share.
At the current share price of $43.00, I believe Great Canadian is significantly overvalued. Investors looking to add a hospitality and gaming company should avoid Great Canadian at current prices.
Interested investors should follow the stock through 2020 for an opportunity to buy shares for less than intrinsic value.
Great Canadian has an enterprise value of $2.4 billion, representing the theoretical price a buyer would pay for all of Great Canadian’s outstanding shares plus its debt.
One of the things to note about Great Canadian is its low leverage with debt at 20.5% of total capital versus equity, at 79.5% of total capital.
For the nine months ended September 30, 2019, the company reports a strong balance sheet with retained earnings of $231 million, up from $145 million in 2018. This suggests the company has been reinvesting surpluses into itself — a good sign.
The company also reports cash of $310 million on $32 million of lease liabilities, which means it has more than enough cash to cover its short-term debt obligations.
This is a good sign for investors, as it means the company does not have to rely on its credit facilities for its current debt, thereby freeing up the facility to fund business growth.
Overall revenues for the period are up sharply from $848 million in 2018 to $998 million in 2019 (+18%). Even with increasing operating expenses, the company has managed to increase its bottom line to $233 million for the period up from $191 million in 2018.
From a cash flow perspective there are a couple of important things to note. First, the company repaid $135 million of credit facilities, which is offset by a $171-million draw on the facilities.
Second, the company spent $99 million on the repurchase of common shares. This is often done by senior management to indicate to investors that it believes the share price is undervalued.
Investors looking to buy shares of a gaming and hospitality company should avoid Great Canadian for now. Although the company reports a solid balance sheet with strong retained earnings and a healthy cash balance, I believe the company is overvalued.
Using a discounted cash flow model (DCF) I determined the intrinsic value of Great Canadian to be $31.61, which is a materially less than the $43.00 at which it is currently trading at writing.
Looking at my model, the causes of this are a growing accounts receivable and capital expenditure accounts that are cash outflows.
This consumes cash and subsequently reduces the intrinsic value of Great Canadian.