november 30th, 2018 - alpha challenge
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November 30th, 2018
Students: Athena Xie, Helen Xu, Allison Zhao Long: Six Flags Entertainment (NYSE: SIX) Target Price: $74, 29% Total Return
Stock Price Performance
SIX stock price had strong historical performance, recent pullback presents a compelling buy opportunity
Source: CapIQ
$59.8
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40
50
60
70
80
May-11-2010 May-11-2011 May-11-2012 May-11-2013 May-11-2014 May-11-2015 May-11-2016 May-11-2017 May-11-2018
Company Overview
STRONG BUSINESS FUNDAMENTALS
FINANCIALS
VALUATION OVERVIEW
• Six flags operate as “regional monopoly” with high barrier to entry
• Local customer focus • Limited overlap with other regional
parks • High margin business with high
return on invested capital
Six Flags Entertainment is a leading amusement park operator owns 25 regional amusement parks in the US, Canada, and Mexico. It has license agreements with 11 international parks in China, Dubai, and Saudi Arabia.
Valuation EV/EBITDA Target Price
Upside/
Downside
Total Return
(inc. Div)
2020E EBITDA
Current 12.0x
Base Case 13.0x $73.83 23% 29%
Bull Case 14.0x $81.80 37% 42%
Bear Case 10.5x $48.54 -19% -13%
Share Price $60 Market Cap $5,047
52-Week High $73 Enterprise Value $7,555
52-Week Low $52 Short Interest % 7%
Shares Out. 84.4 Dividend Yield 5.5%
Revenue $1,359
EBIT $466 EBIT Margin 34%
EBITDA $578 EBITDA Margin 43%
Net Income $274 Net Margin 20%
CapEx $135 CapEx as % of Revenue 10%
Trading Stats
2017 Financials
Financial Overview
REVENUE BREAKDOWN
High margin business with consistent growth in revenue and ROIC
FINANCIAL PROFILE
55% 39%
6% Theme park admissions
Theme park food, merchandise and other
Sponsorship, licensing and other fees, accomodations
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
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35.0%
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45.0%
2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017A
Revenue EBITDA margin
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-10%
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CapEx ROIC
ROIC AND CAPEX HISTORY
✘ Slowdown in attendance growth signals business fundamentals deterioration
✘ International expansion strategy is at risk
✘ Cyclical business with recession risk
Investment Thesis
Shift to membership model improves business quality with high recurring revenue and customer lifetime value
International growth opportunity in China is underappreciated
Defensive business with high barrier
to entry and resilient during potential downturn
OUR VIEW CONSENSUS VIEW
Investment Thesis #1
Source: Company website, transcript, IR.
• Members are more engaged and spend more money in park
• Average duration of members is 3 years vs. seasonable pass holder of 1.3 years
• Customer life value of membership holders is more than 7x the value of single pass holders
• Tiered membership and loyalty program (introduced in Apr 18) should improve customer engagement
Single pass
Seasonal
pass Gold Platinum Diamond
Diamond
Elite
Visits per year 1 3 4 4 4 4
Ticket price per year $47.99 $74.99 $85.20 $109.20 $145.20 $217.20
Admission per capita $47.99 $25.00 $21.30 $27.30 $36.30 $54.30
Food per capita $25.00 $15.00 $20.00 $20.00 $20.00 $20.00
Revenue per capita $72.99 $40.00 $41.30 $47.30 $56.30 $74.30
Revenue per year $72.99 $119.99 $165.20 $189.20 $225.20 $297.20
Avg duration 1 1.3 3 3 3 3
Churn rate 100% 75% 33% 33% 33% 33%
Life time value 73 160 496 568 676 892
Life time value (discounted @ 10%) 73 226 452 518 616 813
EBITDA (40% margin) 29 90 181 207 246 325
Life time value vs. single pass holder 2.2X 6.8X 7.8X 9.3X 12.2X
Membership
Shift to membership model improves business quality with high recurring revenue and customer lifetime value
Lifetime Value of Seasonal Pass and Membership vs. Single Pass
2X
7X 8X
9X
12X
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Seasonal pass Gold Platinum Diamond Diamond Elite
Investment Thesis #1
Source: Company transcript, IR. Note: active pass base includes both seasonal pass holder and members. Customer mix estimated based on public disclosures.
• Current membership pass holders only account for 12% of unique visitors:
• 3% “up-sell” translates to 13% improvement in customer lifetime value
Shift to membership model improves business quality with high recurring revenue and customer lifetime value
DISCLOSED ACTIVE PASS BASE AS % OF TOTAL ATTENDANCE
63.0%
0%
10%
20%
30%
40%
50%
60%
70%
ILLUSTRATIVE IMPROVEMENT OF CUSTOMER LIFETIME VALUE
Customer Lifetime
Value
Current Customer
Mix Year 1 Year 2 Year 3 Year 4
Single pass 1 70% 64% 58% 52% 46%
Seasonal Pass Holders 2X 18% 21% 24% 27% 30%
Membership 9X 12% 15% 18% 21% 24%
Customer Lifetime Value 2.2X 2.5X 2.7X 3.0X 3.3X
Improvement 13% 11% 10% 9%
• Active pass base as percentage of total attendance has improved 5% p.a. since 2010
Investment Thesis #1
Source: Company filings
Case study: Vail Resorts
• Vail resorts has been successful at transforming its seasonal ski resorts business to membership model with introduction of “Epic pass”
• Focus on increasing engagement with its loyal customers through omni channel marketing and increasing footprints through intelligent acquisitions
• Acquired 5 parks at very attractive valuation this year (3x EBITDA ) with the goal to expand footprint
• Potential for multiple expansion as the business becomes more stable
• Net pricing per customer segment increases 3-5% per year
SIX FLAGS VAIL
Investment Thesis #2
Source: AECOM, proprietary survey of 200 Chinese consumers.
International growth opportunity in China is underappreciated
• China will be a key driver of international growth:
• Supportive government policy
• Increasing disposable income
• Preference for foreign parks with strong IP
• Current market value implies 5x EV/EBITDA for its international licensing business
• China will become the largest theme park market in 2020 with 220 million visitors, 13% CAGR since 2008
• Top theme parks in China experience strong growth
• Top 3 theme parks operators had 20% attendance growth in 2017
Yes No
Do you prefer foreign parks 85% 15%
Would you visit Six Flags China 72% 28%
Would you pay more than $40 for admission 66% 34%
SURVEY RESULTS
PER CAPITA VISITS TO THEME PARKS
Investment Thesis #2
Source: AECOM, theme park database. Six Flags Great Adventure has 10% penetration of target population (within 100 miles of park)
Six Flags Bishan (Chongqing)
Based on proprietary analysis of competing theme parks in the target regions and across China, we conclude SIX can achieve $20mn EBITDA PER PARK based on conservative assumptions (high end of management guidance)
ESTIMATED EBITDA OF SIX FLAGS BISHAN
UNIT ECONOMICS OF COMPETING THEME PARKS IN CHINA
% Penetration of population within same province
1.6% 1.9% 2.2% 2.6% 2.9%
$30 $12 $14 $17 $19 $22
Ticket $35 $14 $17 $20 $22 $25
Price $40 $16 $19 $22 $26 $29
$45 $18 $22 $25 $29 $32
$50 $20 $24 $28 $32 $36
Ticket Price
Attendance
(mn) Cost ($mn)
Attendance /
sqm (mn) Cost / Sqm IRR
Shanghai/Zhejiang/Nanjing Region $44.4 4.1 $1,157 6.1 $1,502 17%
Chongqing $35.3 2.2 $314 1.2 $130 9%
Large theme parks in China $43.2 4.8 $1,316 17.4 $2,870 20%
Average $41.0 3.7 $929 8.2 $1,501 15%
Investment Thesis #2
Source: AECOM
Case study: Disney Shanghai
Disney Shanghai breakeven within first year of opening, contrary to local park operators’ comments that the park won’t breakeven until 10 – 20 years
• Attendance hit 11 million during the first year
Riverside (SIX Chinese partner) has strong development track record and government relationship:
• Invest $30bn for the development complex (10x the development cost for Disney Shanghai)
• No upfront investment needed from SIX
Investment Thesis #3
Source: Harvard business school case study (H partners and Six Flags)
Defensive business with high barrier to entry and resilient during potential downturn
• SIX is in a much better financial position today compared to last recession:
• 3.7x vs. 12x debt/EBITDA pre-recession
• Able to withstand 30% EBITDA decline (similar to last recession)
• Mismanaged by prior management leading to bankruptcy
• Defensive business with high barrier to entry:
• Lowest admission per cap vs. peers
• Local focus (~80% of guests within 150 miles of each park)
• Nearly zero successful major regional theme park entrance over the last 3 decades (new park ROIC is low given high land cost and zoning restrictions)
0%
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25%
30%
35%
40%
45%
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4.0X
6.0X
8.0X
10.0X
12.0X
14.0X
2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E
Debt / EBITDA EBITDA Margin 9.8x
4.3x
Weather volatility
Risks mitigations
Already baked into market expectation
Street is concerned about two new parks impacting revenues at Six Flags Great Adventures (NJ) – this is an over-reaction given different target customer segments
Business model improvement with recurring revenue stream
International strategy
execution issues
Competitive threat
Slowing attendance
growth
• Focus should be continued revenue growth
Revenue stream will be more stable with shift to membership model
Bear case $49
Methodology 10.5X 2020E
Cons. EBITDA
Total Return -13%
Base case $74
Methodology 13X 2020E
EBITDA
Total Return 29%
Valuation
BULL CASE BASE CASE BEAR CASE
Bull case $82
Methodology 14X 2020E
EBITDA
Total Return 42%
Risk / Reward is attractive at 1:2
Strong free cash flow generation provides valuation support
Appendix
Management and Incentives
Source: Proxy
Jim Reid-Anderson was named Chairman, President and Chief Executive Officer of Six Flags Entertainment Corporation in July 2017. From February 2016 to July 2017 he served as Executive Chairman of the company and from August 2010 to February 2016, Mr. Reid-Anderson served as Chairman, President and Chief Executive Officer of Six Flags. Under his leadership the company set a new strategic direction and achieved all-time high guest and employee satisfaction ratings, significant operational improvements and a ten-times return on investment for the company’s shareholders.
Year Salary ($) Bonus ($) Stock Awards ($) Option Awards ($) Non-Equity Incentive
Plan Compensation ($) All Other
Compensation ($) Total ($)
2017 1,366,154 - 9,152,421 3,162,453 868,136 125,084 14,674,248
2016 1,065,385 - 970,094 1,500,006 1,020,940 201,807 4,758,232
2015 1,546,154 - 955,604 2,174,000 3,232,800 160,502 8,069,060
Compensation Objective 2017
Adjusted EBITDA 50.0%
Net Debt Level 25.0%
Guest Satisfaction Scores 12.5%
Success in fostering and maintaining a safe park environment 12.5%
Total 100%
Appendix
Ownership Summary
Source: Company filings
Name Number of Shares
Beneficially Owned Percentage
James Reid-Anderson 3,774,567 4.5%
Marshall Barber 111,415 *
Lance C. Balk 192,488 *
Brett Petit 173,441 *
Catherine Aslin 16,763 *
John M. Duffey 932,664 1.1%
Kurt M. Cellar 73,364 *
Nancy A. Krejsa 186,996 *
Jon L. Luther 53,511 *
Stephen D. Owens 24,159 *
Richard W. Roedel 53,065 *
Capital Research Global Investors 8,935,558 10.6%
H Partners, LP 7,851,794 9.3%
BlackRock, Inc. 6,178,687 7.3%
The Vanguard Group 5,813,487 6.9%
William Blair Investment Management, LLC 4,510,495 5.3%
All current directors and executive officers as a group 4,679,061 5.5%
Appendix
Source: H Partner and Six Flags case, theme park consultants
New competitions are not real threat
Function Theme Park Size (acres)
Attractions (rides)
Distance from NYC
Target Customers
Cost Construction Period
Six Flags Great Adventure & Safari / Hurricane Harbor
Theme park, safari, waterpark
2200 58 rides 60 miles Roller coaster lovers and Six Flags loyalists
$600mn 2
American Dream Meadowland
Multi-purpose mall and entertainment center
8 2 indoor roller coasters
10 miles Mall visitors and family entertainment seeker
$5bn 16
Lego Land Outdoor theme park
150 50 rides and attractions
60 miles Families with kids less than 10 years old
$500mn 3
Peer Comparison
VALUE FOR EXPERIENCE
$24.4
$28.5
$37.2
$17.2
$47.3
$24.0
SIX FUN SEAS
Admission per capita In-park spending per capita
LIMITED OVERLAP WITH CEDAR FAIR
EV/EBITDA PE Gross Margin
Ticker Name Price Market Cap EV Revenue EBITDA FY CY+1 CY+2 FY CY+1 CY+2
NYSE:SIX Six Flags Entertainment Corporation 59.84 5,051.7 7,559.6 1,451.0 536.1 14.2x 13.6x 12.6x 33.9x 22.8x 20.6x
NYSE:SEAS SeaWorld Entertainment, Inc. 24.84 2,180.5 3,567.8 1,357.8 330.6 10.9x 9.2x 8.6x NM 34.8x 21.5x
NYSE:FUN Cedar Fair, L.P. 53.36 3,011.7 4,481.9 1,326.9 447.6 11.4x 9.6x 9.2x 24.4x 17.5x 16.0x
NYSE:MTN Vail Resorts, Inc. 268.54 10,877.6 12,194.4 2,011.6 615.5 19.6x 17.8x 15.6x 28.3x 37.3x 32.8x
Peer Average 14.0x 12.2x 11.1x 26.3x 29.8x 23.4x
Valuation
Stock trading at low end of historical EV/EBITDA multiple, creates attractive entry point
0.0
5.0
10.0
15.0
20.0
25.0 SIX SEAS VAIL FUN
Appendix
Financial Summary
2015 2016 2017 2018E 2019E 2020E 15 - 17 17 - 20E
Total Revenues 1264 1319 1359 1491 1612 1746 4% 9%
growth 4% 3% 10% 8% 8%
EBIT 346 320 466 438 475 530 16% 4%
margin % 27.4% 24.2% 34.3% 29.4% 29.5% 30.4%
EBITDA 453 427 578 556 608 672 13% 5%
margin % 35.9% 32.3% 42.5% 37.3% 37.7% 38.5%
Net Income 155 118 274 223 248 290 33% 2%
EPS $1.58 $1.25 $3.09 $2.61 $2.90 $3.41 3%
growth -21% 147% -16% 11% 18%
Consensus EPS $2.62 $2.90 $3.22
EPS vs. consensus 0% 0% 6%
Consensus EBITDA 556 590 629
EBITDA vs. consensus 0% 3% 7%
FCF 359 334 310 339 383 414
FCF yield 5% 4% 4% 4% 5% 5%
Appendix
Income Statement
2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E
Revenue:
Theme park admissions 602 642 688 715 741 815 878 935
Year-over-year % change 4.4% 6.5% 7.2% 4.0% 3.6% 9.9% 7.8% 6.5%
Theme park food, merchandise and other 449 460 500 521 525 557 591 625
Year-over-year % change 2.6% 2.6% 8.7% 4.2% 0.7% 6.2% 6.1% 5.7%
Sponsorship, licensing and other fees 42 57 59 66 89 119 142 185
Year-over-year % change 5.5% 35.7% 3.3% 12.2% 34.3% 33.4% 19.8% 30.2%
Total Revenues $1,110 $1,176 $1,264 $1,319 $1,359 $1,491 $1,612 $1,746
Year-over-year % change 3.7% 5.9% 7.5% 4.4% 3.0% 9.7% 8.1% 8.3%
Expenses:
Operating expenses 417 437 465 489 511 573 615 657
Year-over-year % change 1.4% 4.8% 6.4% 5.2% 4.4% 12.2% 7.3% 6.9%
SG&A (ex stock-based compensation) 162 171 179 175 181 196 210 225
Year-over-year % change -0.5% 5.4% 4.5% -1.7% 3.4% 8.0% 7.2% 7.4%
Stock-based compensation 27 140 56 116 (23) 45 49 52
Year-over-year % change -57.0% 418.0% -59.8% 106.9% -119.5% 299.2% 8.7% 5.4%
Cost of products sold 87 91 101 110 110 122 131 139
Year-over-year % change 8.1% 4.4% 11.3% 8.8% 0.7% 10.6% 7.2% 6.4%
Depreciation 114 105 105 104 109 115 130 139
Year-over-year % change -14.1% -7.2% -0.6% -0.5% 4.7% 5.7% 12.6% 7.3%
Amortization 14 3 3 3 2 2 3 3
Year-over-year % change -8.0% -81.5% -1.3% -0.8% -5.3% 1.0% 5.2% 0.0%
Operating income $280 $233 $346 $320 $466 $438 $475 $530
Year-over-year % change 6.1% -16.8% 48.5% -7.6% 45.8% -6.1% 8.5% 11.6%
Net Income (loss) $118 $75 $155 $118 $274 $223 $248 $290
Year-over-year % change -66.0% -36.0% 104.9% -23.5% 131.9% -18.8% 11.5% 16.7%
Earnings per share $1.18 $0.77 $1.58 $1.25 $3.09 $2.61 $2.90 $3.41
Year-over-year % change -62.4% -34.6% 105.3% -20.6% 146.8% -15.6% 11.2% 17.7%
Dividends per share $1.82 $1.95 $2.15 $2.39 $2.62 $3.14 $3.28 $3.44
EBITDA $408 $341 $453 $427 $578 $556 $608 $672
Year-over-year % change -0.9% -16.4% 32.9% -5.9% 35.4% -3.8% 9.3% 10.7%
Appendix
Balance Sheet
2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E
ASSETS
Current assets
Cash and cash equivalents 169 74 100 137 77 74 131 164
Accounts receivable, net 52 59 64 69 73 84 91 103
Inventories 22 21 22 24 25 28 30 33
Prepaid expenses and other current assets 39 45 43 48 46 52 54 59
Total Current Assets 354 301 228 279 221 238 306 358
Property and equipment, net 1,232 1,218 1,198 1,211 1,238 1,262 1,279 1,293
Debt issuance costs 24 19 5 4 3 2 2 2
Restricted-use investment securities 2 2 3 0 0 0 0 0
Deposits and other assets 4 5 7 9 13 12 12 12
Goodwill 630 630 630 630 630 659 659 659
Intangible assets, net 362 359 356 354 352 349 346 344
TOTAL ASSETS $2,608 $2,535 $2,428 $2,488 $2,457 $2,522 $2,605 $2,669
LIABILITIES
Current liabilities
Accounts payable 24 19 26 26 29 33 35 39
Accrued compensation, payroll taxes and benefits 29 37 47 31 27 29 32 34
Accrued insurance reserves 51 41 41 42 39 41 41 41
Accrued interest payable 20 20 20 28 26 21 21 21
Other accrued liabilities 26 36 35 35 35 37 37 38
Deferred income 60 72 97 124 142 167 188 213
Current portion of long-term debt 6 6 8 29 0 0 0 0
Total Current Liabilities 217 232 272 316 298 328 354 385
Long-term debt 1,394 1,389 1,498 1,624 2,021 2,028 2,062 2,062
Other long-term liabilities 40 65 58 49 41 42 42 44
Deferred income taxes 146 187 140 199 107 154 199 228
Total Liabilities 1,797 1,873 1,969 2,188 2,467 2,552 2,657 2,720
STOCKHOLDERS' EQUITY
Preferred equity 0 0 0 0 0 0 0 0
Common equity 2 2 2 2 2 2 2 2
Additional Paid-in Capital 842 983 1,042 1,116 1,086 1,178 1,184 1,182
Retained earnings / deficit (439) (702) (953) (1,238) (1,530) (1,636) (1,663) (1,661)
Accumulated other comprehensive loss, net (33) (60) (67) (67) (64) (69) (69) (69)
Total stockholders' equity 373 224 24 (186) (505) (524) (546) (545)
Noncontrolling interests 438 438 436 486 494 494 494 494
Total Shareholders' Equity 811 661 460 299 (11) (30) (52) (51)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,608 $2,535 $2,428 $2,488 $2,457 $2,522 $2,605 $2,669
Net Debt / EBITDA 3.0X 3.9X 3.1X 3.6X 3.4X 3.5X 3.2X 2.8X
Total Debt / EBITDA 3.4X 4.1X 3.3X 3.9X 3.5X 3.7X 3.4X 3.1X
Appendix
Cash Flow Statement
2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E
Operating Activities
Net Income $157 $114 $193 $157 $313 $263 $289 $331
Depreciation and amortization 128 108 107 107 112 118 133 142
Share-based compensation 27 140 56 116 (23) 45 49 52
Interest accretion on notes payable 1 1 1 0 1 1 0 0
Reorganization items, net (0) 0 0 0 0 0 0 0
Loss on debt extinguishment 1 0 7 3 37 0 0 0
Amortization of debt issuance costs 4 5 5 5 4 3 0 0
Deferred income taxes 35 33 54 63 (2) 45 44 30
Other, including loss on disposal of assets 10 2 17 1 7 6 0 0
Accounts receivable (22) (8) (6) (6) (3) (7) (7) (12)
Inventories, prepaid expenses and other current assets (2) (6) 0 (5) (2) (2) (5) (8)
Deposits and other assets 0 (0) (2) (2) (4) 1 0 0
Accounts payable, deferred income, accrued liabilities and other long-term liabilities12 13 42 16 5 9 26 34
Accrued interest payable 17 (0) 0 8 (1) (5) 0 0
Net Cash From Operating Activities $369 $402 $474 $463 $445 $477 $530 $568
Investing Activities
Additions to property and equipment (102) (109) (114) (129) (135) (138) (147) (154)
Other (0) 10 5 2 5 (19) 0 0
Net Cash From Investing Activities ($103) ($98) ($110) ($128) ($130) ($157) ($147) ($154)
FCF $267 $294 $359 $334 $310 $339 $383 $414
Financing Activities
Repayment of borrowings (6) (6) (711) (333) (949) (291) (150) (140)
Proceeds from borrowings 0 0 834 481 1,313 296 184 140
Payment of debt issuance costs (12) 0 (12) (6) (37) (1) 0 0
Payment of cash dividends (176) (184) (201) (220) (227) (264) (276) (287)
Proceeds from issuance of common stock 31 39 41 37 63 67 67 67
Stock repurchases (524) (195) (245) (212) (499) (91) (110) (120)
Distributions to noncontrolling interests (37) (38) (38) (38) (39) (40) (40) (41)
Net Cash From Financing Activities ($725) ($395) ($333) ($293) ($377) ($325) ($326) ($381)
Net Increase (Decrease) in Cash (460) (95) 26 38 (60) (4) 57 33
Cash at Beginning of Period $629 $169 $73 $99 $137 $77 $73 $130
Cash at End of Period $169 $73 $99 $137 $77 $73 $130 $163
Appendix
Resources
Helpful Resources
SIX Investor Relations
FUN Investor Relations
SIX customers
Theme Park Industry Consultant (ex. Six Flags employee)
Chinese Theme Park Industry Consultant
Sell-side Analysts
Professor on Amusement Park Industry
Surveys
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