Full House Resorts: Slow Initial Scaling At Chamonix (NASDAQ:FLL)

gorodenkoff/iStock via Getty Images Full House Resorts, Inc. (NASDAQ:FLL), the casino developer and operator, has now opened the Chamonix several months ago, showing constant development in the casino’s offering and performance. Still, the revenues have so far come in at a slightly underwhelming pace. The American Place has also shown development, together putting Full House Resorts at an interesting point in time amid the company’s overlevered balance sheet but growing earnings. The most recently reported Q2 results missed Wall Street estimates with slower casino scaling than expected, but the operational scaling has still been on a fairly good level. In my previous article on the stock, “Full House Resorts: Anticipating The Chamonix Earnings”, I initiated the stock at a Hold rating with the then very recently opened Chamonix casino story developing. The stock has returned 10% compared to the S&P 500’s return of 18% since the article was published on the 18th of January. My Rating History on FLL (Seeking Alpha) Chamonix Location Continues Scaling After the Chamonix casino opened on the 27th of December, the casino’s scaling has been the most notable development in Full House Resorts’ story. In the first quarter of 2024, with the initial casino, meeting space, and a third of guestrooms being opened, the integrated Bronco Billy’s/Chamonix contributed $3.6 million of revenue growth, still being quite small compared to the quarter’s total revenues of $69.9 million. In the more recently reported Q2 results, with new openings of a steakhouse, a partial opening of a spa, and guestroom scaling, Full House Resorts’ West segment’s revenues grew by 87.3% year-on-year into $15.2 million, and well sequentially from the $13.0 million West segment revenues in Q1. Yet, the total growth has been quite slow with just a $7.1 million year-on-year improvement in Q2 after the casino has been open for around half a year. With the quite slow traffic development, Wall Street’s revenue estimates have been missed by a clear margin in both Q2 and Q1 – with large capital expenditures behind, but excessive debt still on Full House Resorts’ balance sheet, better traffic in Chamonix is clearly needed with the first half of 2024 hopefully only showing the start of a longer runway of growth. FLL July 2024 Investor Presentation Chamonix should still likely have good scaling ahead. Traffic is constantly improving through launched mail promotion and the operational scaling – guest sign-ups have started scaling well, especially during June, potentially driving an accelerated Q3 performance already. In January, Chamonix sold 2100 guest rooms, but already has sold 6500 rooms in July as told in the Q2 earnings call. The location’s offering is also still being developed and refined. The core Chamonix development is expected to finish at the end of Q3 with the opening of a jewelry store, but improving penetration into table games and other services still seems to add longer-term potential – currently, table games only account for only 5-6% of casino revenues with expansion into 20% or higher being targeted. Improving table game penetration could cannibalize other casino revenues, but should still improve the total revenues considerably as well. Summing up, in my opinion, the Chamonix launch does seem somewhat underwhelming so far compared to the large investments made to develop the location. Final conclusions of the location’s success can’t yet be made with the continuing operational scaling, with table games penetration and other continuous developments still likely pushing revenues up very considerably in addition to scaling marketing efforts. The location has illustratively flopped a straight draw, not yet living up to the Full House Resorts name. The Temporary American Place Location Is Maturing Ahead of Permanent Location Construction Open for over a year now, Full House Resorts’ American Place has matured its revenues well. The American Place generated $27.2 million of revenues in Q2, still up quite well from $25.8 million in Q1 and up notably from $20.3 million in Q2/2023, being American Place’s first full quarter of operations. Adjusted EBITDA for the location continued to scale by an impressive 83.5% year-on-year into $7.6 million in Q2, now showing stabilizing margins. FLL July 2024 Investor Presentation The American Place is still Full House Resorts’ temporary location, with permission to run the location until August 2027. Full House Resorts plans to start investing in a permanent American Place casino soon, communicating to “break ground” in around a year in the Q2 earnings call. The permanent location is expected to cost around $325 million, of which the CapEx will be timed primarily to 2026 and 2027, likely boosting revenues afterward with a better final location. Financing for the investment is still being looked for. I believe that the good revenue level in the location provides a good foundation to build the permanent American Place location on, making the risk level for construction lower than for Chamonix. Still, the investment looks extremely expensive for Full House Resorts considering the current balance sheet. Full House Resorts’ Other Casinos Are Performing Stably Full House Resorts’ other locations are performing quite stably. Total revenues of $73.5 million in Q2 grew by 23.8% or $14.1 million, primarily driven by the Chamonix and American Place locations’ revenue growth. Midwest & South showed around a -$1.3 million year-on-year revenue performance excluding American Place’s growth, and West revenues seem to have been very stable excluding Chamonix’s revenue growth. Caesars Entertainment (CZR) has shown some weakness in regional casinos in Q2, as I wrote in my article on the company, in my opinion making the decline in Midwest & South understandable amid mixed consumer confidence – over the longer term, Full House Resorts’ mature casinos look to perform largely in line with peers. Adjusted EBITDA came in at $14.1 million in Q2 at a healthy and scaling margin of 19.2% as Chamonix is continuing to scale profitability. Updated FLL Valuation: Still Fair and Volatile With American Place’s permanent location’s investment schedule being pushed into 2026-2027 now, and with Chamonix’s initial revenue showcasing, I have updated my discounted cash flow (DCF) model considerably to determine a fair value estimate. For revenue growth, I estimate slower Chamonix scaling than previously – I now estimate Full House Resorts’ revenues to scale into $378.7 million in 2027, down from an estimated $407.1 million previously. From 2028 to 2030 though, I now estimate elevated growth from the permanent American Place’s better revenues. I now estimate margins with an adjusted EBITDA margin, representing the company’s underlying profitability the best. With the estimated traffic scaling, I estimate the margin to expand to 23.5% eventually from 20.1% achieved in 2023. The American Place’s investment phase now looks to push cash flows down primarily in 2026 and 2027, but after 2027, I estimate quite a good conversion from adjusted EBITDA with lower investing requirements. DCF Model (Author’s Calculation) The estimates put Full House Resorts’ fair value estimate at $5.75, 13% above the stock price at the time of writing. The valuation is still extremely volatile due to uncertainties around Chamonix scaling and American Place’s permanent location’s investments and success, leveraged extremely highly by the remaining debt. The valuation still seems fair overall. The fair value estimate is similar to the $5.79 estimate previously. While the overall cash flow estimates are higher than previously, Full House Resorts’ higher interest rate pushes the fair value down. CAPM A weighted average cost of capital of 7.97% is used in the DCF model, up from 7.25% previously. The used WACC is derived from a capital asset pricing model: CAPM (Author’s Calculation) I now estimate Full House Resorts’ 8.25% interest rate for the 2028 secured notes, being the company’s most notable long-term debt, as the long-term interest rate. The interest rate has risen considerably from Q1/2024 forward due to the new notes’ larger interest rate. I again estimate a 275% long-term debt-to-equity ratio, near Full House Resorts’ current ratio with the market’s valuation of equity. To estimate the cost of equity, I use the 10-year bond yield of 3.88% as the risk-free rate. The equity risk premium of 4.11% is Professor Aswath Damodaran’s estimate for the US, updated in July. Seeking Alpha now estimates Full House Resorts’ beta at 1.70. With an ESG addon of 1.5% and a liquidity premium of 0.5%, the cost of equity stands at 12.87% and the WACC at 7.97%. Takeaway Full House Resorts’ Chamonix location has started showing a slightly slower-than-anticipated performance amid the casino’s continuing development, but I believe that the performance can’t be fully judged yet with continuous operational improvements still being made. The American Place is nearing better maturation, showing stabilization at a healthy level ahead of investments to a permanent location. The company’s other, mature casinos have performed stably. With the valuation still seeming fair, but extremely turbulent, I remain at a Hold rating for Full House Resorts.

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