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| IN THIS ISSUE – June 4, 2010 | www.bullmarket.com |
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Feature Article By BullMarket.com: Macau Profits Help the Bottom Lines at Wynn, LVS By BullMarket.com: Member Q&A: MLPs and Carried Interest By NextInning.com: Member Q&A - A Look at PANL By BullMarket.com: Member Q&A: Rentech
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Macau Profits Help the Bottom Lines at Wynn, LVS Las Vegas Sands has bounced back from a tough 2009 to trade above $26 in April after sinking to less that $6.50 per share last summer. When we last checked in on the company in November 2009, Las Vegas Sands was planning an IPO on the Hong Kong exchange for its operations in Macau. The IPO was successful and the company's operations in China are run by its Sands China Ltd. subsidiary. LVS, through Sands China, is pushing ahead with construction of a new resort on the island that is expected to be the world's largest casino when it is completed. It will also house three hotels: the Shangri-La, Traders, and a Sheraton. The project had been suspended in November 2008 when the credit markets imploded and the heavily indebted LVS encountered cash-flow problems. LVS announced last week that it had closed a $1.75 billion round of financing for the project, which will feature 3,700 hotel rooms along with retail, gaming, and convention facilities that are set to open in late 2011. Phase two includes a 2,300-room Sheraton hotel tower, as well as other non-gaming amenities, and is expected to open approximately six months later. Timing for the completion of a third phase, which includes plans for a St. Regis hotel and apartments, will be announced at a later date. In other activities on the island, LVS announced a deal with Playboy Enterprises (PLA, $3.79, 0.05) to open two Playboy-themed entertainment and gaming facilities in Macau. The first club will open on the top of the Sands Macau. LVS also opened a new casino resort in Singapore in April. A soaring market in Macau and an improving picture in Las Vegas helped propel LVS to a better-than-expected first quarter. The company run by billionaire Sheldon Adelson still lost money, but it was less than Wall Street analysts had forecast. Sands China delivered a profit of $113.9 million for the quarter, more than four times better than the $26.9 million profit in the year-ago period. LVS overall reported a net loss of -$28.9 million, or -4 cents per share, compared with a year-ago loss of -$80.9 million, or -12 cents per share in Q1 2009. Adjusted net income grew to $53.5 million, or 7 cents per share, two cents better than analysts had forecast. Consolidated adjusted EBITDA grew by 43% to $371.0 million, compared to $260.0 million in the year-ago quarter. The adjusted EBITDA margin increased 370 basis points to 27.8% in Q1. Overall net revenue rose by nearly 24% to $1.33 billion. "Strong top-line growth in all our markets, coupled with increases in operational efficiency, contributed to substantial margin expansion and a record financial performance overall," Adelson said. "In Macau, we delivered $259.2 million of adjusted property EBITDA, with each of our properties, the Venetian Macau, Sands Macau, and Four Seasons Hotel Macau and Plaza Casino, delivering revenue and EBITDA growth, as well as EBITDA margin expansion," he said. "In Las Vegas, increases in gaming revenue driven by record table games drop, in concert with the impact of our efficiency programs, allowed us to deliver $105.3 million of adjusted property EBITDA during the quarter, and to expand our adjusted property EBITDA margin to 32.3%, an increase of 410 basis points compared to the first quarter of 2009." In addition to the Venetian and Palazzo resorts in Las Vegas, the company also operates a casino in Bethlehem, Pennsylvania. The two Nevada properties generated $325.5 million in net revenues, up from $318.6 million the prior, and operating income of $41.3 million compared to $25.5 million in Q1 2009. Adjusted EBITDA equaled $105.3 million, up from $89.8 million. Net revenues for Sands Bethlehem in Pennsylvania, in contrast, were $67.2 million and adjusted property EBITDA reached $11.0 million Q1, the highest total since the opening of the property last year. The slot handle at the property continued to expand, reaching $921.6 million for the quarter, which was an 8.7% sequential increase. Recently enacted legislation in the state permits table games. LVS expects to add 89 table games by Q3 and a hotel is expected to open in May 2011. LVS ended the quarter with $3.9 billion in cash on the books and $10.5 billion in debt. Wynn Resorts, meanwhile, has also been a strong performer this year, reaching a one-year high a penny shy of $94 in April. The strong market in Macau also helped Wynn report better-than-expected results for the first quarter. Wynn also spun out its operations in China in an IPO in Hong Kong last October. Wynn earned $27 million, or 22 cents per share, in Q1, compared to a year-ago net loss of -$33.8 million, or -30 cents per share. Adjusted for one-time items, the company's profit equaled 26 cents, which was 14 cents better than Wall Street was expecting. Net revenues totaled $908.9 million, compared to $740.0 million a year ago. The revenue increase was driven by a 31.6% increase in revenues at Wynn Macau and a 9.3% revenue increase from the company's Las Vegas operations. Adjusted property EBITDA increased 52.6% to $241.9 million in Q1, compared to $158.5 million a year ago. The company opened its second casino resort on the island in April. Property-level earnings in Macau soared to $181.6 million, up 58% from the prior year. The operations in Macau are so important to the company that CEO Steve Wynn has announced he intends to move his headquarters to Macau at some point in the future. He plans to spend more time on the island before any move, calling it "appropriate" given the level of business the company does there. Wynn Resorts had $1.8 billion in cash on the balance sheet at the end of the quarter and total debt of $3.3 billion, including approximately $2.5 billion of Wynn Las Vegas debt and $768 million of Wynn Macau debt. The company paid a 25-cent per share dividend for the quarter. Capital expenditures during the first quarter of 2010 totaled approximately $90 million primarily related to Encore at Wynn Macau and the Beach Club at Encore at Wynn Las Vegas. Wynn caters to high rollers, going so far as to break out its take from VIPs versus the general public. VIP gambling in Macau was a main driver of the revenue and profit gain, which bodes well for the company's Encore resort on the island, which just opened. BMR Take: Las Vegas Sands and Wynn Resorts, with market caps of $16 billion and $10.5 billion respectively, are the two biggest publicly traded players in the U.S. casino sector and their CEOs have been among the faces of the industry for years. We think both are good companies, though we'd give Wynn the edge based on a stronger balance sheet with a reasonable level of debt. Its approach to growth has been conservative by Vegas' standards. Wynn's stock, however, is too rich for our taste at current levels. Had we bought shares when it dipped to around $60 earlier this year we probably would have skimmed some profits by now. The stock is also attracting short sellers; about 17% of the float was sold short as of the last reported figures two weeks ago. LVS, which we said was worth a bet when it was trading around only $4 back in April 2009 has a forward EV/EBITDA multiple 8x, using the 2011 consensus EBITDA estimate of $1.993 billion, (compared to 10x for Wynn). It isn't a bargain after a solid run, but the company's prospects have improved dramatically the past year. Still, we'd likely remain in the sidelines for now, as well.
Member Q&A: MLPs and Carried Interest A) Carried interest is the share of any profits that a general partner receives as compensation for successfully managing a fund or limited partnership. This type of compensation is put in place to motivate the general partner to work towards improving the performance of a fund or limited partnership. Carried interest has come under attack recently because hedge fund and private equity managers receive the bulk of their compensation this way. For firms involved in the private equity and investment management businesses, the carried interest has generally been taxed at the long-term capital gain rate instead of at the much higher ordinary income rate. On April 3, 2009, House Ways and Means Committee member Sander Levin (D-Mich.) introduced a new carried interest bill, H.R. 1935, which looks to treat all "investment services partnership interest" as ordinary income. For energy MLPs, carried interest includes the incentive distribution rights (IDR) that limited partners pay to their general partners (GP), typically 2%. However, this carried interest is from operating activities and not investment activities, and thus has been taxed as ordinary income all along for the GP. Despite The Wall Street Journal implying in an article last year that taxes would rise on all oil and gas partnerships, this appears not to be true and is disputed by the National Association of Publically Traded Partnerships. BMR Take: At this point in time, the new tax laws coming out of Washington are more likely to make most MLPs more attractive to income-oriented investors given their tax deferred status. We explained earlier how taxes in the healthcare bill should benefit the group. Note that we are currently working on our latest MLP special report and hope to publish it later this month.
Member Q&A - A Look at PANL A) Thank you for posing a good question. Another Next Inning reader wrote today asking about how to invest in the OLED trend and, as you noted, PANL is clearly a stock that investors have gravitated towards in hopes of profiting from the emergence of the technology. PANL is primarily an Intellectual Property (IP) company that has developed a variety of enabling IP for the OLED industry. According to the company's web site, it has agreements with virtually all the major players in the OLED space including Samsung, LG and Sony. In addition to licensing and transferring IP, PANL also participates in the sale of materials for OLED production. While there is little doubt this business should grow going forward, there is nothing close to a consensus agreement among the analysts covering the stock as to how this aggregate growth in OLED will impact PANL's forward revenue or ability to operate at a profit. What we know is that in 2009, when OLED technology was more a science experiment than a mass-production technology, PANL reported less than $16M in revenue and a net loss of $0.56 per share. We also know that for Q1 2010, PANL reported revenue of $4.2M, down from $4.9M in Q4, and a loss of $0.08 per share; an improvement from the $0.10 loss recorded for Q4. Much of these sequential changes were driven by one time events below the operating line (benefit from warrant pricing and a tax credit) and changes in deferred revenue and license fees and therefore are not of material consequence. What's important here is whether or not there will be an inflection point in the future for PANL and, if so, when will it happen and how big will it be. For 2010 analysts are predicting revenue will come in some where between $15M and $29M with net losses ranging from $0.14 to $0.65. For 2011 analysts are predicting revenues between $22M and $68M (more than a 3x spread) and a bottom line that ranges from $0.40 loss to a $0.66 profit. If we look at PANL's balance sheet, we can see the company has ample strength to carry it forward for quite some time (assumes no need for radically different capital investment than we've seen in recent years). As of the end of the March quarter, PANL had $63M in net cash and net current assets valued at $58M (adjusted for deferred revenues and deferred license fees). On a per share basis, these represent values of $1.70 and $1.56 respectively. While this provides little cushion below a $18.30 stock price, I see it as adequate to sustain operations. Even if we base our value assessment off PANL's outstanding share count (I don't know how much dilution we'll see once the company reports a profit and, with that, a fully diluted share count), we can see that at $18.30 PANL is being valued at nearly $700M. The not so subtle implication here is even if we use the highest of the analysts estimates for 2011, the forward price to sales ratio for PANL is over 10 to 1. If we run a forward price to earnings ratio based on, again, the highest 2011 estimate, we can see that at $18.30 the stock is trading at a forward ratio of 27.7 to 1. Both of these data points suggest speculators have already priced this stock well above where I could rationalize a fair valuation. Bottom Line: Unfortunately, I'm not close enough to the OLED world to know of any other direct and pure play investments to leverage in the sector. While there is always a chance that PANL will outperform the expectations of even the most optimistic analyst, I think the balance of risk and potential reward here is unfavorable on both an absolute and on a relative basis. However, due to its apparently strong IP positioning, I think PANL is a stock to watch going forward and if it temporarily loses its luster, is a stock to consider.
Member Q&A: Rentech A) Rentech is a small-cap company that operates in two segments: fertilizer and alternative energy. The company produces nitrogen-based fertilizer made from natural gas, which it sells across the Midwest. It generally funnels the cash flow from this business into its alternative energy business where it is developing a plasma based gasification system to convert fossil, biomass, and waste materials into synthesis gas, which in a second step are then refined into clean burning fuels, including military and commercial jet fuels and ultra low sulfur diesel. The company has two development projects: one in Rialto, California and one in Natchez, Mississippi. The Rialto Project when finished is expected to convert biomass and fossil fuels into 600 barrel/day of liquid synthetic fuels and 35 megawatts of electric power. The Natchez Project, meanwhile, is anticipated to produce 30,000 barrels per day of synthetic fuels and 120 megawatts of power. Neither project has secured construction financing. Some analysts have questioned the Rialto Project, believing it has marginal economic returns unless gasoline prices are very high. They also feel the process is unproven, and relatively risky. In December, the company projected a 30-year unlevered after-tax internal rate of return of 11-15% on the project. The Natchez project, meanwhile, has signed a memorandum of understanding with 13 domestic & international carriers for the project's entire jet fuel production of 250 million gallons/year. Rentech has also signed long-term contracts to sell captured C02 from the project for use in enhanced oil recovery in the Gulf. The project is projected to come online in 2014. In a December interview on CNBC Rentech CEO D. Hunt Ramsbottom said that the price of the fuel from the project would be "competitive" with jet fuel prices. For its fiscal Q2 ended March 31st, the company saw its revenue rise 14% to $19.2 million, helped by increased ammonia volume in its fertilizer segment. Its net loss was -$16 million, or -7 cents per share, versus -$25 million, or -15 cents per share, a year ago. Adjusted EPS was a loss of -6 cents. The company ended the quarter with $70.4 million in cash and $100.3 million in debt. "The synthetic fuels produced using the Rentech process are ready for commercialization; they are drop-in high-value jet and diesel fuels that can be produced economically and at large scale, the only alternative fuel type certified for commercial aviation and also the United States military," Ramsbottom said on the conference call. "These low cost feedstocks that do not compete with food and have a lower carbon -- have a lower regulated emissions and carbon footprints than petroleum based fuels." "Since the acquisition of SilvaGas, we’ve developed four distinct product offerings for project development in North America and licensing worldwide. Product number one, what we call repowering boilers. Our Rentech-SilvaGas gasifier can replace the coal input at existing coal-fired boilers to produce renewable power, helping producers meet their renewable mandates and reduce emissions. Product number two, standalone biomass-to-power. Our Rentech-SilvaGas gasifier combined with a gas turbine can produce renewable power at brownfield and greenfield sites, this technology offering efficiently uses biomass and reduces emissions. Product number three, biomass-to-fuels and power. Our Rentech-SilvaGas gasifier and the Rentech Fischer-Tropsch process integrated with our Proprietary Gas Cleanup Technology can produce low-carbon, synthetic jet or diesel fuel and base load renewable power. Our Rialto project in California is a great example of product number three." "Product number four: fossil and biomass-to-fuels and power. Using commercially available coal or petrol gasification with our Rentech’s SilvaGas and Fischer-Tropsch technologies, we can produce ultra-clean jet or diesel fuels on a large-scale from combination of fossil and biomass resources. With carbon capture and sequestration, our fuels have a carbon footprint significantly better than petroleum. Our Natchez project is an example of product number four." BMR Take: At this point, Rentech is a highly speculative stock that is a bet its alternative fuel technology will eventually take off. The prospects for its Natchez Project look decent, but with the fuel not projected being cheaper than jet fuel, it certainly isn't a slam-dunk; after all, while the airlines may want to be environmentally friendly, it’s a difficult industry that struggles turning a profit. Meanwhile, we've never found the nitrogen-based fertilizer business particularly attractive, and Rentech has the disadvantage of being a smaller player who sells its production to a competitor to distribute. In addition, Rentech is facing a class action lawsuit after it had to restate its earnings for 2008 and 2009, and is facing a large amount of potential share dilution with recent actions such as issuing convertible notes and warrants, restricted stock awards as part of the SilvaGas acquisition, and an equity distribution agreement with Knight Capital. The stock is best suited for only the most aggressive investors.
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