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Analysts issue first report, name MGM a top pick

13 July 2009

Las Vegas Sun

LAS VEGAS, Nevada -- A new gaming industry analysis group issued its first public research today, with Las Vegas-based MGM Mirage and Bally Technologies among its top picks.

Union Gaming Research, a subsidiary of Union Gaming Group of Las Vegas, announced today the formal launch of coverage on 17 gaming companies.

"As the only sell-side research team in Las Vegas, we now provide unparalleled access and comprehensive insight into the global gaming market, giving our clients a truly robust view of this challenging industry," said Bill Lerner, principal and senior analyst at Union Gaming Research and a former analyst for Deutsche Bank.

Union said it will not use traditional ratings and price targets, focusing instead on client-specific information.

"Given the complexities of markets today, investors require tailored service and deep industry expertise, rather than the traditional 'one size fits all' model," said Lerner.

Analysts associated with securities firms that raise capital for the gaming industry, and manage investors' holdings in gaming securities, routinely disclose potential conflicts of interest.

Union Gaming did the same today.

"Union Gaming does and seeks to do business with companies and governments covered in its research reports. While Union Gaming makes every effort to provide objective reports and analysis, investors should be aware that the relationships maintained by the firm may have an inadvertent affect on the objectivity of any report," the company disclosed.

In its initial coverage today, Union Gaming Research said the gaming industry faces a fundamental shift because of the recession.

"Valuations have climbed from their March 2009 lows to near their historical averages demonstrating that the specter of bankruptcy for major public gaming companies is in the rearview mirror. However, the consumer-led recession has likely instilled a permanent valuation change for casino operators as the business is more cyclical that had previously been thought," Union Gaming said. "The stocks are now trading more like traditionally cyclical businesses ... We believe it will be many years (if at all) before the lofty valuations seen in 2004-2007 return."

As for specific companies, MGM Mirage, Bally Technologies and Macau casino operators Galaxy Entertainment and SJM Holdings were singled out as top picks.

"MGM is our top Las Vegas Strip idea. A lot has changed since early March when many considered the equity to be a 'zero shot.' The bankruptcy trade is now off the table following a $2.5 billion capital raise in May 2009," Union said.

Union Gaming said concerns about the growing over-supply of hotel rooms in Las Vegas are already factored into MGM Mirage's stock price and that the company should do well with its CityCenter development that starts opening later this year.

"We believe that CityCenter is poised to outperform the conservative expectations investors have established upon its phased opening beginning later this year," Union Gaming said, adding that as the largest operator in Las Vegas, MGM Mirage has the most to gain from a recovery on the Strip.

"Although it is too early to call a trend, numerous variables suggest a bottom is near: May 2009 revenues were down only 6.4 percent; average daily room rates are moving higher at certain properties without sacrificing occupancy; convention bookings have re-accelerated and (second quarter) airlift at McCarran improved sequentially," Union Gaming said.

Lerner also said MGM Mirage is poised to benefit from an overall improvement in the economy. With huge fixed costs, even slight increases in revenue quickly work their way to its bottom profit line, he said.

Also praised in the report is Bally Technologies, which Union Gaming said is poised to benefit from what it calls the first-ever "dual cycle" in which existing casinos will accelerate the replacement of old machines while global gaming growth will drive new international gaming machine sales.

"It has been nine years since the beginning of the ticket-in-ticket-out cycle, rendering significant numbers of games as stale and in dire need of replacement," Union Gaming said, adding cash-strapped governments at local, state and federal levels worldwide are now more inclined to allow gambling to beef up their budgets.

Bally's "video product mix and penetration opportunity in the upcoming dual cycle, coupled with industry-leading operating margins, suggest notable earnings inflection to the upside," Union Gaming said.

Union Gaming also initiated coverage on Ameristar Casinos, Boyd Gaming, Harrah's Entertainment, International Game Technology, Isle of Capri, Las Vegas Sands, Melco-Crown, Penn National Gaming, Pinnacle Entertainment, Shuffle Master, Station Casinos, WMS Industries and Wynn Resorts.

Among the big Las Vegas operators, Union Gaming projects Las Vegas Sands' revenue to soar from $4.531 billion in 2009 to $6.387 billion in 2010. The company is preparing to open a megaresort in Singapore and has discussed resurrecting idled projects in Macau. EBITDA -- earnings before interest, taxes, depreciation and amortization -- is projected by Union to grow from $969 million to $1.452 billion.

Other projections for 2009 and 2010 include:

--Boyd Gaming, revenue $1.686 billion to grow to $1.720 billion, EBITDA to rise from $403 million to $421 million.

--Harrah's, revenue to grow from $9.169 billion to $9.19 billion, EBITDA to rise from $2.011 billion to $2.068 billion.

--MGM Mirage, revenue to fall from $5.852 billion to $5.631 billion and EBITDA to grow from $1.268 billion to $1.270 billion. (The revenue number does not include contributions from the CityCenter joint venture. It reflects the sale of Treasure Island and some expected cannibalization of other MGM Mirage properties by CityCenter. The EBITDA number does include the CityCenter contribution).

--Station Casinos, revenue to grow from $1.114 billion to $1.139 billion, EBITDA to grow from $364 million to $379 million.

--Wynn Resorts, revenue to rise from $3.043 billion to $3.429 billion, EBITDA to grow from $656 million to $731 million.

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