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We are initiating coverage on Enjoy with a Hold recommendation and a 2020YE TP of CLP 45, incorporating the 2Q19 results. The company has gone through some tough times, including: covenant renegotiations and debt restructuring in 2013 (after results were hit by the impact of the Tobacco Law); the acquisition of Conrad Punta del Este in 2017, which stressed its balance sheet; a capital increase in 2018 totaling ~USD 165mn that marked the entrance of Advent into Enjoy ownership (with a 34.4% stake); and a tender offer to renew licenses for three casinos (Coquimbo, Viña del Mar and Pucon) and obtain a new license (Puerto Varas) with new economic offers that will impact Enjoy’s EBITDA margin from 2020 onwards. It is hard to assess Enjoy’s valuation as the company is at a turning point, executing structural changes that affect management, decision-making processes and the entire outlook on the business. Additionally, ~20% of its 2018 EBITDA is coming from the performance of Enjoy in Uruguay (Punta del Este), a destination casino in which ~60% of the gross gaming revenue (Win) comes from table games, which have higher volatility in cash flow generation. Therefore, the possibility of not meeting covenants in 2021-2022 will, in part, depend on the results in Uruguay.
It remains a risky bet. Despite attractive upside, we are in a wait-and-see mood since our figures assume a successful implementation of the value creation plan.
New management. Over the past 18 months new senior management has been appointed: Rodrigo Larrain, CEO; Esteban Rigo-Righi, CFO; Eliseo Gracia, COO; Sebastían Truffello, CCO; Carlos Ureta HR; and Martin Mac-Clure, Chief Transformation Officer. With the entry of Advent, the level of analysis, evaluation and support has increased. Advent and management decided to establish four committees (Finance, Compliance and Auditing, Human Resources and Project Follow-up) to keep improvements in profitability on track. (See page 22 for further details.)
New customer-centric approach. Prior to 2018, the commercial division was divided into two divisions, gaming and hospitality, lacking a global framework for consumer experience at Enjoy facilities. In 1Q19, these two divisions were unified, under the leadership of Sebastian Trufello. This change seeks to reinforce a new customer-centric approach that will also be reflected in changes in the compensation scheme. Additionally, Enjoy hired a strategic consulting firm to review the company’s commercial strategy and its client value proposition.
Value creation plan. Initiatives are focused on: i) boosting revenues from gaming by improving the customer experience by expanding smoking terraces, increasing the slot machine renovation rate and enhancing the loyalty program (higher investment in Enjoy Club, redesigning the web site, creating a new application and closing new commercial alliances to improve point redemptions); ii) increasing operational efficiency; iii) enhancing business analytics and customer intelligence capabilities; iv) efficiency and optimization in procurement processes; and v) customer reinvestment. This plan aims to review the entire business proposition of the company, which implies a cultural transformation and changes in the corporate structure.
Covenants and leverage structure. In April 2019, the company placed a local bond for UF 2mn (USD ~80mn) with due date in 2028 at an interest rate of inflation plus 3.5%; proceeds were used for liability management, extending the duration of its debt. Additionally, the company announced an agreement with local bondholders of series I and J to change the covenants. Enjoy was able to raise the financial covenant for Net debt / EBITDA from 4.5x to 5.5x until 4Q20, while including 53% of the EBITDA from Mendoza Casino to calculate this figure. According to our figures, Enjoy could eventually break covenants in 2021. However, there is still room to introduce more flexibility in terms and conditions of existing debt through liability management. The company is analyzing three options: i) issuing an international bond (~USD 300mn or less), leaving the remaining debt in Chile; ii) taking advantage of lower rates in the local bond market by issuing another bond in UF; and iii) using a sales & lease option. It is possible that the company will employ a combination of the three options. Finally, the company has received the approval of the Superintendence of Gaming Casinos (SCJ) to extend by nine months the deadline to conclude the construction of the Viña del Mar project and thus the payment of the new canon (annual tax payment) for Viña del Mar.
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