Steve Gorelik of Firebird Management presented his in-depth investment thesis on Olympic Entertainment (TSE: OEG1T) and AMC Entertainment (NYSE: AMC) at Best Ideas 2018.
Olympic Entertainment is one of the largest casino operators in Eastern Europe. Operating in six countries, including Latvia, Estonia, and Slovakia, the company differentiates itself as a provider of higher-quality gambling experiences. Olympic’s spacious halls, attractive bar areas, and modern slot machines give revelers a reason to spend more time at the establishments, resulting in higher gross gaming revenue and profitability. Since 2010, Olympic has been growing revenue and EBITDA at 11% and 17% per annum, and ROIC on new investments (organic and M&A) usually ranges between 40 and 60%. Despite strong growth and profitability, the company trades at 5.5x EV/EBITDA and a 5.5% dividend yield. The attractive valuation is explained by the relatively low liquidity of the Tallinn stock exchange and some regulatory concerns. A number of significant recent investments have started bearing fruit, with nine-month 2017 EBITDA increasing 26% over last year; it should continue to drive near-term profit growth. Olympic trades near the bottom of its historical EV/EBITDA trading range and should generate mid-30s IRR over a two- to three-year holding period.
AMC Entertainment is the largest owner of movie theaters in North America and Western Europe. AMC shares were down 50+% in 2017 as the market became concerned about weak theater attendance data, relatively high leverage, and the possibility of changes to the 90-day exclusivity window enjoyed by theaters. Steve believes the market has overreacted to the challenges and is overlooking the fact that movie theaters have pricing power, as demonstrated through steady 3-4% growth in average ticket prices. Margins are improving steadily as a more significant proportion of revenue comes from higher-margin concession sales. AMC generates about $400 million of free cash flow (as compared to a $2 billion market cap), with most of the spare cash deployed into high-ROIC projects designed to improve customer experience. AMC’s operating cash flow before working capital changes is up 60% since 2013 because of these investments. An improving movie slate in 2018 and spending on customer experience improvements at newly acquired chains should lead to positive re-rating of AMC shares within 12 to 18 months. The multiples paid by Cineworld for close comparable Regal suggest 60 to 70% upside in the private market.
About the instructor:
Steve Gorelik is the Fund Manager of Firebird U.S. Value Fund as well as portfolio manager of Firebird’s Eastern Europe and Russia Funds. He joined Firebird in 2005 from Columbia University Graduate School of Business while completing education from a highly selective Value Investing Program. Prior to business school, Steve was an operational strategy consultant at Deloitte working with companies in various industries including banking, healthcare, and retail. He holds a BS degree from Carnegie Mellon University as well as a CFA (chartered financial analyst) charter and a membership in Beta Gamma Sigma honor society. Steve serves on the boards of Teliani Valley (Georgia), Arco Vara (Estonia), and Pharmsynthez (Russia). He speaks Russian, English and his native Belarussian.
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