Operation Halted, Cash Flow to Suffer: Great Canadian Gaming Corporation (TSX: GC) is a gaming, entertainment, and hospitality Company and operates across Canada and the United States. The company operates through 16,000 slot machines, 575 table games, 71 dining amenities and across more than 500 hotel rooms. The business operates through three segments which are gaming, hospitality and Racetrack, lease & other revenues. The gaming facilities are closed from March 16, 2020, as per the instructions from the Government. The shut-down is expected to hurt the company’s financials.

Q1FY20 Financial Highlights: For the period ended March 31, 2020, GC reported lower revenues of CAD 273.9 million, down 10% on y-o-y basis. The decline was primarily attributed to the closure of all gaming facilities from mid of March 2020 due to COVID 19 pandemic. Adjusted EBITDA declined by 6% on y-o-y basis to CAD 103 million due to lower revenue, partially offset by decline in human resource and property, marketing and administration expenses. Despite lower EBITDA, EBITDA margins improved to 37.6%, as compared to 36.1% on account of lower costs. Net earnings from the continuing operations fell 29% from Q1FY20 at CAD 28.5 million, on account of higher business acquisition, restructuring and other expense, higher amortization costs and higher interest and financing costs, net.

Q1FY20 Income Statement Highlight (Source: Company Reports)

Stock Recommendation: GC stock witnessed a sharp decline of ~42% and ~35%, in the last one year and three months, respectively. Recent restrictions on the ‘non-essential’ products and services have acted as a major headwind for the business, resulting in a plunge in the cash flow. The Company has a healthy liquidity position which includes a cash balance of CAD 881.9 million and a credit facility of CAD 858.9 million. We believe the correction in GC stock was inevitable owing to the nature of its business. All of the company’s gaming facilities and ancillary amenities are temporarily closed following the COVID-19 pandemic. The suspension of operations is hurting the company’s business in a big way. We expect near-term challenges to act as a dampener and remain on sideline despite the decline in its stock price. We believe weak economic outlook and expected increase in unemployment rate could hurt the company’s prospects in the short-term. Hence, we recommend a ‘Watch’ stance on the stock at the closing price of CAD 25.97 as on May 05, 2020.

GC One-Year Daily Price Chart (Source: Thomson Reuters)

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