Sterne Agee initiates with a buy and $18 price target:
ASIA ENTERTAINMENT & RESOURCES LTD. (NNM: AERL) RATING: BUY
Price: $7.96
Price Target: $18.00
Analysts: David Bain /
INITIATING WITH A BUY RATING; $18 TARGET; MACAU VIP PURE PLAY WHICH SHOULD OUTPACE MARKET GROWTH FOR MULTIPLE YEARS
??We are initiating coverage of AERL with a Buy rating and an $18.00 target price (126% upside from current levels based on ~10x our CY11 ests.). AERL trades at 4.5x/3.9x our CY11/CY12 EPS estimates. In our view, its valuation in tandem with our CY11 -- CY15 growth outlook for Macau gaming, yields NT/LT outsized return potential from current share levels.
??AERL net income grew ~138% in CY10 (free cash flow grew ~144%) versus Macau VIP gaming revenue growth of ~70% and Macau market-wide growth of ~57%. We project Macau VIP gaming to grow 45%/17% in CY11/CY12, and forecast AERL net income growth of 83%/28% in CY11/CY12. Longer-term, we forecast Macau gaming growth at 15% - 20% per year, with AERL earnings growth continuing to outpace the market. AERL net income margins are ~30% versus Macau casino operator VIP casino gaming EBITDA margins at ~13 -- 16%.
??According to sources, the Macau Government is currently limiting new VIP gaming room promoter licenses (which AERL possesses), creating additional barriers to entry within its niche. Given this, and its strategic sophistication level and commitment to build cage capital relative to its competitors, we believe AERL will increase its market share dramatically over the next three years.
??AERL will begin to pay cash dividends beginning next month (semi-annual). We estimate its dividend yield is ~3.5%. The Company initiated a 2m share buyback program, which also goes into effect next month. AERL has received $42.5m in loans from Galaxy and LVS (Buy, $44.57) that bear no interest and have no expiration, and which are personally guaranteed by AERL's Chairman and its CEO. AERL management has also loaned the Company ~$60m in a 3-year, no interest convertible ($20 strike, callable by AERL at $20 if stock trades over $25 for 10 consecutive days). We estimate AERL currently has close to ~$200m+ in cash and cage capital.
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