Century Casinos (CNTY)

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Francis D'Hondt

Charles Armstrong

Asset Prime

Century Casinos (NASDAQ: CNTY) owns 6 casino hotels in four countries: the United States, Canada, South Africa, and the Czech Republic. Century also runs casinos on cruise lines, mostly in Australia and New Zealand.^[1]

Century's opening of three new casinos in Edmonton, Canada; Central City, Colorado; and Newcastle, South Africa^[2] contributed to its 57.2% increase in revenue in 2007.^[3] However, Century was also affected by negative factors such as a struggling casino industry as a whole,^[4] unfavorable exchange rates between the US dollar and foreign currencies,^[5] stricter gambling regulations,^[6] and South African crime.^[7] In Q2 2008, Century's revenue was $21.55 million, a 4.9% dip from the year before.^[8]

Business Overview

Business and Financial Metrics

2007 Revenue by Geographic Segment ($ in millions): Year ending Dec. 31^[3]

In 2007, Century's revenue increased by 57.2% from the year before, primarily due to the fact that it was the first full year of operation for its casinos in Central City, Colorado; Edmonton, Canada; and Newcastle, South Africa.^[2] In addition to the overall increase, the three new casinos contributed to increases in revenue from all three of Century's segments.^[3] The addition of these new casinos also affected the company's distribution of revenue by geographic segment. Canada accounted for 21% of 2007 revenue, 14% more than in 2006.^[3] Meanwhile, the new casino in Central City raised Century's U.S. revenue by 6%, up to 39% of 2007 revenue, while South African revenue fell from 43% of 2006 revenue to 33% of 2006 revenue.^[2]

The operating income disparity is also primarily explained by Century's three newest casinos.^[3] In 2006, Century's operating expenses went up with the opening of the three casinos in the second half of the year, and as such, it was unable to make enough revenue from these properties to overcome the increased operating expenses.^[3] As a result, its operating income dipped from $5.95 million in 2005 to $3.25 million in 2006. In 2007, with a full year of operation from the three new casinos, Century was able to garner enough revenue to overcome the operating expenses, leading to a $10.46 million operating income.^[8] Promotional allowances, which are defined as the retail value of accommodations, food and beverage, and other services,^[10] increased by 63% in 2007.^[2]

Century's Revenue, Net Income, and Profit Margin for Fiscal Years 2005-2007^[3]

Business Segments

2007 Gross Revenue by Segments: Year ending Dec. 31^[2]

Gaming (85% of 2007 gross revenue)

This segment is made up of revenue obtained from customers' gambling activities within Century's casinos. These consist of money that its casinos earn from both electronic gaming machines (like slot machines and video poker) and traditional table games (such as roulette or black jack).^[2] Century Casinos' 2007 gaming revenue, which was recorded as $85.7 million, marked a 57.2% increase from the previous year.^[2] This large increase was primarily due to the first full year of operation for Century's three newest casinos. The three newest casinos (all named Century Casino & Hotels) in Central City, Colorado; Edmonton, Canada; and Newcastle, South Africa, accounted for $51.67 million in 2007 revenue (56.4% of total revenue).^[2] Century expects revenue from its Central City casino to increase even more in the near future as the casino matures, especially because of plans to add slot machines to the floor.^[2]

Much of the revenue in this segment comes from South Africa, which accounted for approximately $30 million in 2007 revenue.^[5] Century is the largest casino operator in the southern hemisphere, and has a commanding 44% market share of the South African casino market.^[11] In November 2006, however, a competitor opened a new casino in the Western Cape of South Africa, adding approximately 25% more slot machines to the market and decreasing Century's market share.^[5]

Nevertheless, although gaming revenue increased across the board, Century had slight problems with two of its casinos.^[5] Gaming revenue increased by only 2.5% in its Womacks casino in Colorado, due primarily to blizzards, and revenue at its Caledon, South Africa casino fell by 2% due to the declining exchange rate between the dollar and the South African Rand.^[5]

Lastly, combined gaming revenue from the Century Casino Millennium in Prague and from the cruise lines on which Century operate increased by 12.1% to $4.8 million in 2007.^[5] Century acquired a controlling interest in Century Casino Millennium in April 2006, and the increase in gaming revenue from this site was primarily due to a full year of operations at the casino. However, this was offset by a 13% decrease in cruise ship revenue^[3] due to the operation of fewer cruise ships in 2007.^[5] Nevertheless, cruise line executives expect business to pick back up in 2008.^[12]

Hotel/Food/Beverage (13% of 2007 gross revenue)

This segment consists of revenue that Century Casinos obtains through hotel room bookings and food and beverage purchases at the hotel and restaurant portions of its properties.^[5] Fiscal 2007 marked the first year that Century had hotels at all six of its international properties, with hotels opening at its three newest properties in Central City, Colorado; Edmonton, Canada; and Newcastle, South Africa from late 2006 to 2007.^[5] And although delays kept Century from opening its hotel in Edmonton until March of 2007 (the casino opened in November 2006), its revenue from the segment increased to $12.8 million in 2007, a 111.3% increase from the year before. This increase was primarily due to the opening of the three aforementioned new properties, which accounted for $6.3 million of revenue in 2007, a 250% increase from 2006.^[2]

Other (2% of 2007 gross revenue)

This segment consists of all revenue that falls under neither the gaming segment nor the hotel, food, and beverage segment. In 2007, Century obtained 75.6% more revenue from this segment than in 2006 ($2.06 million compared to $1.17 million).^[2]

Key Trends and Forces

An emphasis on worldwide expansion is helping Century Casinos grow and prosper

Since 2005, Century has expanded by erecting casinos in Colorado, Canada, and South Africa.^[13] For example, in 2007, the Century Casino & Hotel in Central City, Colorado obtained $20.37 million in revenue in its first full year of business, a 136% from its 2006 figures.^[3] Further, as of September 2007, Century agreed to a $1.1million payment towards the construction of a paved road between the cities of Caledon and Hermanus, two vacation hotspots in South Africa. The company expects this construction to increase traffic to its Caledon Hotel, Spa, and Casino, and in turn expects the hotel's revenue to increase from the $18.14 million it made in 2007.^[14][3] Furthermore, the casino industry is growing, and is expected to take in $80 billion in global revenue by 2012, a 129% increase from 1998 figures.^[15]

Economic cycles that decrease disposable income hurt the gambling industry

In 2008, domestic disposable income suffered from factors such as all-time highs in oil prices, and a struggling U.S. housing market. As of June 2008, the price of oil had reached $117.40 a barrel, a 76.8% increase from 2007.^[16] These factors have contributed to shaky consumer confidence, which has sent the Applied Analysis Gaming Index, which includes casino operators and gaming machine manufacturers, down by 15.7 percent in January 2008.^[4] Century's struggles with its Womacks Casino and Hotel in Cripple Creek, Colorado reflect this trend. In 2006, Womacks took in $16.26 million, a figure that grew only to $16.72 million in 2007.^[17]

Exchange Rates: South African Rand to US Dollar^[18]

Century Casino's international revenue is affected by fluctuating exchange rates

As a company that obtained over half of its 2007 revenue overseas,^[3] Century is vulnerable to changing exchange rates. When the value of the dollar depreciates, Century's international sales grow in dollar terms. From 2006-2008, the dollar depreciated relative to the Canadian Dollar and Czech Koruna.^[19][20] However, the dollar actually appreciated relative to the South African Rand (ZAR),^[18] an important currency to a company that obtained 33% of its 2007 revenue in South Africa.^[3] In fact, gaming revenue in Century's casino at Caledon, South Africa, decreased by 2% from 2006 to 2007 almost exclusively because of these changing rates.^[5]The net effect was a $1.2 million dollar loss due to exchange rates in 2007, compared to a $1.7 million dollar gain in 2006.^[21] With the dollar beginning to strengthen again relative to the Canadian Dollar and Koruna in the summer of 2008,^[22] the company expects to lose even more revenue to exchange rates in the coming years.

Changing gambling regulations in Colorado hurt Century's business

Like the rest of the casino industry, Century is subject to constantly changing government regulations on gambling. In January 2008, the Colorado state government enacted a new law prohibiting smoking in state casinos. This new piece of regulation had disastrous effects on the business of state casinos, as revenue at Colorado casinos fell by 10.7% during the beginning of 2008, the worst drop in the industry's history.^[6] And because Century obtained nearly $37 million (40.5%) in 2007 revenue from its operations in Colorado,^[3] the state's struggling casino industry will also cause a decrease in Century's 2008 revenues from the state.

Century's business is affected by the high South African crime rate

South Africa has the sixth highest murder rate in the world, with an estimated 19,202 murders amongst its 47 million inhabitants between April 2006 and March 2007.^[23] A survey indicated that 18% of South Africans who sold their homes in Q2 2007 cited emigration as the reason for selling, up from 9% in Q4 of 2006.^[7] Another survey showed that up to 20% of South Africans were seriously considering emigration as of May 2008.^[7] Many of these individuals cited the crime rate as a main contributing factor to their decision.^[7] The dangerous social environment of South Africa is harmful to business because it deters potential tourists from visiting Century's South African casinos,^[24] from which it obtains nearly a third of total revenue.^[3]

Competition

Because the casino/hotel industry depends largely on tourists for its business, Century competes with different casino operators around the world for business from tourists.^[25] In many cases, casinos in more attractive locations form more recognizable companies will have a competitive advantage over other companies.^[25] For example, casinos in Las Vegas can compete with casinos in Colorado in that they are similar establishments in similarly attractive tourist environments.^[26] Century Casinos' competitors include:

• MGM MIRAGE (MGM) runs hotels and casinos in markets around the world, primarily in gambling hotspots Las Vegas and Macau. Although MGM does not own properties in any of the markets in which Century operates, it does compete with Century for potential clients.^[27] As perhaps the most recognizable casino operator in the industry, MGM is thus a huge threat to Century's business because of its popularity and locations in popular tourist locales. MGM is also the company behind the Bellagio, the most profitable casino in Las Vegas.^[27]
• Las Vegas Sands (LVS), like MGM, also primarily operates its hotels and casinos in Las Vegas and Macau. Also like MGM, LVS thus indirectly competes with Century for customers.^[28] Las Vegas Sands is perhaps best known as the company behind the Venetian, the second most profitable casino in Vegas behind MGM's Bellagio.^[28]
• Pinnacle Entertainment (PNK) develops, owns, and operates casino gaming resorts around the world. In addition to its six main casinos in Nevada, Louisiana, Indiana, and Missouri, Pinnacle operates several small casinos in Argentina.^[29] Pinnacle thus directly competes with MGM and LVS in the Nevada market, and with Century Casinos for tourists within in the U.S. market.^[29]
• Monarch Casino & Resort (MCRI) owns and operates the Atlantis Casino Resort, a hotel/casino facility in Reno, Nevada. Atlantis consists of 1,000 hotel rooms, 51,000 square feet of casino space (complete with 38 table games and approximately 1,450 slot machines),^[30] and nine high-quality food outlets for dining purposes. As a result of these impressive facilities and attractive location, Atlantis is one of the most popular casinos in the United States.^[30] Further, as on summer of 2008, Monarch initiated an expansion plan that will increase Atlantis' size to approximately 116,000 square feet, a move it expects will make it into an even more attractive tourist spot.^[30]

References

1. ↑ CNTY 2007 10-K, Item 1: Business, page 4-5
2. ↑ ^{2.00 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 2.10 2.11} CNTY 2007 10-K, Item 7: Management’s Discussion and Analysis of Financial Condition, page 29
3. ↑ ^{3.00 3.01 3.02 3.03 3.04 3.05 3.06 3.07 3.08 3.09 3.10 3.11 3.12 3.13} CNTY 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Discussion, page 28
4. ↑ ^{4.0 4.1} ReviewJournal.com: Casino-stock index declines during January
5. ↑ ^{5.0 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9} CNTY 2007 10-K, Item 7: Management’s Discussion and Analysis of Financial Condition, page 30
6. ↑ ^{6.0 6.1} The Denver Channel: Colorado Casino Revenue Down 10.7 Percent
7. ↑ ^{7.0 7.1 7.2 7.3} Crime in South Africa: SA 'fright flights' rocketing
8. ↑ ^{8.0 8.1 8.2 8.3 8.4} Google Finance: CNTY
9. ↑ CNTY 2006 10-K, Item 8: Financial Statements and Supplementary Data, page F-5
10. ↑ CNTY 2007 10-K, Item 8: Financial Statements and Supplementary Data, page F13
11. ↑ Casino Association of South Africa: Welcome to CASA
12. ↑ MSNBC: Recession? Not for the cruise industry
13. ↑ CNTY 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Discussion, page 25-26
14. ↑ Nollenberger Capital Partners Initiation of Coverage: Century Casinos, Inc.
15. ↑ SeekingAlpha: Century Casinos: Interesting Play, Not for the Faint of Heart
16. ↑ Inflation Data: Historical Oil Prices
17. ↑ CNTY 2007 10-K, Item 7: Management’s Discussion and Analysis of Financial Condition, page 28
18. ↑ ^{18.0 18.1} ZAR to USD Exchange Rates
19. ↑ USD to CAD Exchange Rates
20. ↑ CZK to USD Exchange Rates
21. ↑ CNTY 10-K, Item 8: Financial Statements and Supplementary Data, page F-8
22. ↑ International Herald Tribune: Dollar shows signs of strengthening after lurching lower for 6 years
23. ↑ Crime in South Africa: About
24. ↑ CNTY 2007 10-K, Item 1A: Risk Factors, page 15
25. ↑ ^{25.0 25.1} CNTY 2007 10-K, Item 1: Business, page 6
26. ↑ CNTY 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition, page 26
27. ↑ ^{27.0 27.1} Wikinvest: MGM
28. ↑ ^{28.0 28.1} Wikinvest: LVS
29. ↑ ^{29.0 29.1} Pinnacle Entertainment: About Us
30. ↑ ^{30.0 30.1 30.2} Monarch Casino & Resort: Company Profile
31. ↑ Google Finance: MGM
32. ↑ Google Finance: LVS
33. ↑ Google Finance: PNK
34. ↑ Google Finance: MCRI