Val Project 6

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  IMMINENT INVESTORS DIANNE DE LUISETAKASHI HANZAWASMIT SHARMAPETER GENISULIA KIM ComanPriceDCF ValuationRelative ValuationOtion ecommendatioModel UsedValueultile UseValueValuation Trump Entertainment Resorts14.77$ FCFF321.43$ EV/EBITDA23.25$ Buy Morgan Stanley52.62$ DDM64.00$ PBV56.60$ Buy Wynn Resorts LTD.52.94$ FCFFSt50.30$ Forward PE29.48$ 57.69$ Sell NEC Electronics Corp.4,740.00$ FCFF27,761.00$ PE5,109.00$ Buy General Motors Corp.26.68$ FCFFSt17.88$ PBV17.19$ Sell   2 Trump Entertainment Resorts    – BUY  (DELISTED: Formally Trump Hotel and Casino Resorts Pre-Bankruptcy) Potential High Growth Company Overview Trump Hotel Casino Resorts filed Chapter 11 in November of 2004. According to public bankruptcy and restructuring plan documentation, upon restructuring the company will reemerge as Trump Entertainment Resorts. The company owns and manages four casino hotel properties: Trump Taj Mahal (Atlantic City), Trump Marina (Atlantic City), Trump Plaza (Atlantic City) and Trump Indiana (Gary, Indiana). -   Taj Mahal : Destination resort located on the northern end of AC’s boardwalk. Features 1,250 hotel rooms, including 242 suites, 19 dining and 12 beverage locations, parking for approximately 6,950 cars, 140,000 square feet of meeting space, and 159,086 square feet of gaming space housing approximately 4,419 slot machines, 129 tables, and 78 poker tables -   Plaza : Located at the center of AC’s boardwalk, the Plaza features 904 hotel rooms, including 140 suites, 36,000 square feet of conference space and 91,366 square feet of casino space housing 2,842 slot machines and 91 table games -   Marina : Located in the Marina district, the Marina features 728 guest rooms, including 153 suites, 97 of which are luxury suites, 79,700 square feet of gaming space housing 2,545 slot machines, 76 table games, a simulcast racetrack facility and approximately 58,000 square feet of convention, ballroom and meeting space -   Indiana : Located 25 miles from Chicago, Trump Indiana is located on a 280 foot gaming vessel with approximately 43,000 square feet of gaming space housing 1,632 slot machines, 30 table games, 30 poker tables and capacity to accommodate approximately 2,700 passengers. Shares a docking facility and 40,000 square foot land-based pavilion, which it shares with its joint venture partner, Majestic Star Casino. Valuation DCFF Rationale  : We used the three-stage FCFF discount model given the firm’s high degree of leverage (6.5x Debt/EBITDA upon emergence from bankruptcy). FCFF, unlike FCFE, more appropriately adjusts for the volatility brought on by significant debt repayment and the sensitivity of the value of equity (small % of overall firm capitalization) to assumptions about growth and risk. 3 Stage Rationale:   We selected a three-stage model because the firm, despite modest growth in the first few years, has the potential for significant growth as a result of the construction of a new hotel tower at its Taj Majal casino in Atlantic City. We expect the company to return to more normalized growth levels upon achieving the full benefit from these room additions (expected within 24 months of opening). Recommendation:   BUY Fair Value:   $21.43 (45% upside from expected emergence value of $14.7) The assumptions used to build the DCF model are as follows: Phase Stable High Stable Terminal Notes: Period2005-20072007-20092009-2014PerpetuityRisk Free Rate4.20%4.20%4.20%4.20%Based on 10 year treasury Bottom-up Beta Calculator: Unlevered beta for sector =  0.95 0.95 0.95 0.95 Based on industry average (see comps) Firm's Current mkt D/E ratio =70.90%76.03%57.10%46.27%Based on modelFirm's Current tax rate =42.00%42.00%42.00%42.00%As disclosed in company filings Bottom-up beta for firm = 1.34 1.37 1.26 1.20 CalculationExpected Return on the Market10.00%10.00%10.00%10.00%Expected return - Chase Gaming Index Cost of Equity (CAPM) 11.98% 12.14% 11.54% 11.19% CAPM CalculationDebt1418.21686.41471.41082.1ModelEquity582582582582Model Debt/(Debt+Equity) 70.90% 74.34% 71.66% 65.03% Based on model Pre Tax Cost of Debt 8.23% 7.65% 7.15% 6.65% ModelTax Rate42.00%42.00%42.00%42.00%As disclosed in plan After Tax Cost of Debt 4.78% 4.44% 4.15% 3.86% Calculation WACC6.87%6.41%6.24%6.42% Calculation     3 Based on these inputs our valuation is as follows: Valuation Composition Pre-Reorg Reorg Plan Value Post Reorg Fair Value (based on DCFF) Present Value of FCFF in Stage 1 - stable growth phase ($193.91) Present Value of FCFF in Stage 2 - High growth phase $160.91 Present Value of FCFF in Stage 3 - stable growth phase $390.50 Present Value of Terminal Value of Firm = $1,862.26 Value of the firm = $1,900.00 $2,047.00 $2,219.76 + Cash and Marketable Securities = $30.00 $90.00 $90.00 Market Value of Debt = $1,850.00 $1,465.00 $1,465.50 Implied Value of Equity = $80.00 $582.00 $844.26 Shares Outstanding 29.90 39.40 39.40 Value of Equity per Share = $2.68 $14.77 $21.43 % Variance Versus Plan 45.1% Relative Valuation We used 15 companies to perform the relative valuation analysis. This data was collected from companies that operate in both local and destination gaming markets in the US. Our selections were based on those companies that were most “alike” (based on size, asset quality, diversification and leverage) to Trump Entertainment Resorts upon emergence from bankruptcy (see Appendix Exhibit A for more detail). The EV/EBITDA multiple here is 9.6x resulting in a stock price of $23.25. Trump Entertainment See Public Comps Worksheet   EV/2005E EBITDA EV/Revenue P/EIm lied Multi le 9.6x 2.5x 21.6xCurrent Price (Post Reorganization) $14.77 $14.77 $14.77Implied Enterprise Value $2,291.43 $2,924.43 $1,731.46Total Debt $1,465.50 $1,465.50 $1,465.50 Cash$90.00$90.00$90.00 Net Debt $1,375.50 $1,375.50 $1,375.50Implied Equity Value $915.93 $1,548.93 $355.96 Shares Outstanding39.4039.4039.40 Im lied Price Based on Industr $23.25 $39.31 $9.03 % (Over)/Under Valued57.4%166.1%-38.8% Peer Group Averages      4 Regressions were completed with the EV/EBITDA, the EV/Revenue and the PE multiples. The EV/EBITDA produced the highest R-squared.(See Exhibit Below) Return on Capital Vs. EBITDA Multipley = 0.0083x + 0.0375R 2  = 0.63320.0%5.0%10.0%15.0%20.0%25.0%30.0%35.0%0.005.0010.0015.0020.0025.00 EV/EBITDA      R     O     C   Regression Analysis For our regression analysis, we selected a broader sample of 29 companies from the Gaming and Lodging sector to more accurately compare against the industry. The Regression equation is: EV/EBITDA Multiple (EV/EBITDA versus ROC) = .938 (Intercept) + 75.89 (ROC)  The Regression Summary is: Regression Statistics Multiple R 0.795723932 R Square 0.633176576  Adjusted R Square 0.619590523 Standard Error 2.912647626 Observations 29 Coefficients Standard Error t Stat Intercept 0.938764372 1.476984032 0.635595478 ROC 75.89134478 11.11671513 6.826777864 EV/EBITDA= 7.97x Based on our analysis, TER’s predicted EV/EBITDA multiple is 7.97x forward EBITDA, resulting in an implied equity value per share of $15.40. EV/EBITDA=7.97x EBITDA $248.77Valuation Multiple 7.97x Enterprise Value$1,982.27 Net Debt $1,375.50 Equity Value$606.77 S/O 39.40 Implied Price Per Share$15.40Current Price$14.77% Over/(Under) Valued4.26%ROC Line Fit Plot0.005.0010.0015.0020.0025.0030.000.0%5.0%10.0%15.0%20.0%25.0%30.0%35.0%ROC      E     V      /     E     B     I     T     D     A   Market Valuation The Market regression equation is: Enterprise Value /EBITDA= 8.554 + 1.016 g(rev) - .150 (Tax rate) -.0664 (Debt/Capital) -0.0188 Reinvestment Rate (R 2 =38.0 %) Based on this equation TER’s EV/EBITDA multiple is 8.5x, resulting in a stock price of $15.30.
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