Gamehost Inc

Gamehost Inc (TSX: GH) is a Canada based company, which operates hospitality and gaming properties in Alberta. The group operates through three segments viz. gaming or casinos, hotel and food & beverages.

Q2FY20 Financial Highlights: Gamehost announced its second quarter results, wherein the company posted operating revenue of CAD 1.8 million, significantly down from CAD 16.8 million recorded in the previous corresponding period (pcp). The decline was primarily attributable to a temporary suspension of gaming activities during the second quarter of FY20 on account of COVID-19 pandemic. Loss from operating activities stood to CAD 1.8 million, as compared to a profit of CAD 5.3 million in the previous corresponding quarter, due to lower revenue and lower gross profit. Net loss stood at CAD 1.6 million, as compared to a profit of CAD 4.8 million in the previous corresponding quarter. At the end of the quarter, the company reported a slight increase in its total debt to CAD 47.2 million, as compared to CAD 45.6 million in Q2FY19. Cash balance, at the end of the quarter, stood at CAD 12.3 million, while total assets were reported at CAD 169.9 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The business might witness lower traffic as people are likely to follow social distancing measures, which might cause a slide in the income and the cash flows of the Company. Further, a change in the consumer spending pattern might affect the group's performance.

Valuation Methodology: EV to EBITDA Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of GHC corrected 32% so far this year, due to a temporary closure of the gaming activities and casinos. The company opened all its casinos but running at a reduced slot machine and ~50% of food and beverage seating capacities. The current stage of relaunch does not allow table games and limits large gathering sizes which continues to curb any live entertainment at the casinos.  The government has not provided any timing for when these remaining restrictions will be lifted. Thus, the reduced operations are likely to take a toll on the company’s top-line in the near term. The group took prudent measures and reduced its total employee strength and focusing on running the business at a very low cash level. The company witnessed demand pickup as its Cash Play per machine grew by 44%, as compared to pre-COVID averages, but on 22% fewer slot machines. The company also suspended its director and executive management compensation, which also supported the overall liquidity. We have valued the stock using EV/EBITDA based relative valuation method and have arrived at a double-digit downside (in percentage terms). For the said purposes, we have considered industry (Hotel & Entertainment Services) median on NTM basis. Hence, considering the above facts, we recommend a 'Watch' stance on the stock at the closing market price of CAD 5.76 on September 4, 2020.

GHC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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