Deutsche Bank initiated coverage of Bally’s Corp. yesterday, placing a “Hold” rating on the stock (ticker symbol BALY) and a price target of $23 a share.
Currently, Bally’s shares trade around $22.60, suggesting that analyst Carlo Santarelli doesn’t expect the stock to go anywhere soon. Still, he liked the diversity of Bally’s asset portfolio, both in terms of geographic distribution and differentiation of market niches. Thus, Bally’s is “relatively well positioned within the peer group for whichever economic environment emerges in gaming over the near to medium term.”
Santarelli also called the company “one of the better growth stories in the regional gaming sector,” both in terms of brick-and-mortar development and enlargement of its North American interactive product offerings.
“That said, we believe the financial leverage, the current financing environment as it pertains to the development pipeline, and execution risk in both the Casino and North American Interactive segments, in the current market climate, make for a challenging risk-reward,” Santarelli cautioned. He added that 2023 and 2024 Wall Street-consensus forecasts were perilous and “negative revisions” could be coming in the near to medium term.
Looking at the glass half-full, Santarelli was upbeat on a stream of terrestrial projects that had “manageable” return on investment, as well as on Bally’s $1.7 billion Chicago megaresort. He also lauded the aggression and value-focused nature of Bally’s merger-and-acquisition history, an environment that “could again heat up,” not to mention Bally’s remaining real-estate portfolio “that could provide an opportunity for value creation,” he wrote, hinting at more asset sales to REITs.
Still, he believes that consensus forecasts on the stock “appear high in light of a seemingly topped-out gaming consumer,” as well as a tough battle for igaming market share, which accounts for only two percent of Bally’s domestic revenue. Santarelli also factored in Bally’s high leverage, as well as ongoing uncertainty in the United Kingdom over how online gambling will be regulated by Prime Minister Liz Truss’ new administration, including the possibility of new lower betting limits, slower pace of play, and loss limits. Bally’s-owned Gamesys is one of the leading purveyors of British igaming and bingo, responsible for £728 million in 2020 revenue.
The International Interactive segment of Bally’s business is responsible for fully 45 percent of company revenue, with U.S. casinos making up the remaining 53 percent. The latter consists of 15 casinos in 10 states and one horse track. Bally’s still owns six of these outright (with two more to come) and leases the majority back from various REITs, mainly Gaming & Leisure Partners, Inc.
On the always-concerning issue of sports betting, Santarelli assures investors, “Bally’s has been relatively reserved in its customer acquisition efforts, focusing more on the icasino business in New Jersey, its 3Q22 launch in Ontario, and the upcoming launch in Pennsylvania.”
Bally’s is providing sports betting in only six states so far: Arizona, Colorado, Indiana, Iowa, New York, and Virginia. The company expects a $60 million negative return on investment from its interactive domestic operations this year. Santarelli advised a “tread-lightly” approach to this sector until 2024, when losses will “curb meaningfully.”
If Santarelli exuded caution about international and domestic digital prospects, he was relatively enthusiastic about the Chicago casino, which he said “could prove to be transformative” and when completed an enticing prospect to dangle before REITs, which “should firm up corporate liquidity.” He tempered his enthusiasm with an observation that Bally’s $400-win-per-slot-per-day projection is “aggressive.”
If ratcheted down to $350 per slot per day, that would generate $434 million a year from 3,400 slots, “nicely ahead of Encore Boston Harbor and Rivers Des Plaines, but below MGM National Harbor, which has far less competition in the local area” of Washington, D.C. As for Bally’s daily per-table win of $4,250, Santarelli called it conservative. Throwing in retail, entertainment, food and beverage, as well as hotel revenue, Santarelli assumes annual net revenue of $745 million, with cash flow of $208 million, for a return on investment of 12 percent.
“While there are notable risks associated with the project,” Santarelli concluded, “if successful, we believe the scope and brand equity associated with the development, as well as the growth it would potentially drive for BALY, is difficult to understate.”