Post of the Day
March 06, 1998

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Trump Hotel/Casino Resort Board

Subject:It Won't Be Sold
Author: JDavid38

I've had some time to go over DJT's 4Q results, and I listened on the investor conference call. This is definitely a company that needs a quick turnaround on its operations or it risks defaulting on its debt over the next 2 years. The stock price of $10 5/8 is completely baffling to me, and I can only guess there is still hope out there that a suitor will emerge to take the equity holders out of their misery. That won't happen, and eventually the stock will sink closer to its underlying value. In the meantime, some observations:

First, the fourth quarter was definitely a glass half-empty/half-full affair. On the half-empty side, each of the four Trump properties had declining revenues. To a small degree, declining hold % had something to do with this, particularly at the Taj. Keep in mind, however, that the Taj still achieved a 16% hold, which is above its historical average.

More important, cash flow is becoming an issue for these guys. Interest expense for the year was $211 million, and that figure will likely rise in 1998 as DJT sold $100 million of additional debt in the fourth quarter of 1997. Most critically, the company's EBITDA in 1997 was $246 million, for an EBITDA/INTEREST coverage ratio of just 1.17 times EBITDA. If we add the $40 million in cap ex they have, DJT becomes cash flow negative, which is a stunningly dangerous condition for a highly leveraged gaming company to be in (maybe that's the real reason DJT had to sell another $100 million of high-cost debt late last year).

On the plus side, the company did a good job of getting expenses in line. The EBITDA improvement in the 4th quarter was purely a function of lower expenses which demonstrates that management is serious about running the properties for profit. Of course, one can improve margins just so much. At the end of the day, revenue growth has to be there too.

Any investor holding out hope for a sale of the company would have been dissapointed by the conference call. CEO Nick Ribis said the offering memorandum to sell DJT (or to sell Donald Trump's stake) went out TODAY to Trump investment bank (and creditor to the tune of $40 million) DLJ and Bear Stearns. That means the marketing of DJT hasn't even begun, and there are no discussions with potential suitors as of now. At the same time, Mr. Ribis said Merrill Lynch is still trying to sell the Trump Plaza, which seems absurdly inefficient. DJT now has retained three investment banks to sell a piece of itself. I guess that's the best way to silence the analysts!

Ribis also said that he thinks the Company can raise its corporate EBITDA from $245 million to $285 million. He wasn't very specific about how he plans to accomplish this feat. He said he could get further cost savings at the Taj and the Plaza and that Gary could generate $25 million - which would be a 9% boost over 1997, even while the property is showing negative monthly comps! In the same breath, Ribis said 1998 was tough so far and that March would be tough too because of rain and because last year the Taj had a great 1st quarter (it turns out, the Taj's Feb. revenues will be down in the mid-teens on a percentage basis in Feb. and AC will be up only 1%. Will Brigam be posting these numbers soon?) In other words, the Taj revenues are falling and EBITDA will rise? I won't hold my breath.

Here's why I think DJT is in for a world of hurt in 1998.

Asia - Asian gamblers aren't coming, which will hurt the Taj - which accounted for $127 million of EBITDA in 1997.

Caesars - Caesars opened new suites last quarter. Ask any high roller - they're better thant he Taj's, and gamblers will gravitate toward the newer nicer rooms. Also, Caesars will expand its casino in the 2nd quarter, which fill further eat into Trump Plaza's market share.

Wild West - It was open for only 1/2 year in 1997. It will be open for a full year in 1998, which will sap the Plaza's growth.

Foxwood - This Connecticutt behemoth expanded its rooms and casino floor in the 2nd half of 1997. It in now marketing in NYC, and is going after AC's customers.

What about a sale? It won't happen at anything close to 8 times EBITDA. Keep in mind that it would cost roughly $250 million - or a full year's worth of EBITDA - to refinance DJT's debt by an investment grade company. So 8 times becomes 9 times, etc.

DJT won't be bought by a REIT - it already is one! (it doesn't pay taxes.)

My view is that DJT's EBITDA will be flat to down this year. Assuming DJT can do $250 million in EBITDA, and assume a 7.5 times multiple (generous considering its high cost of debt), and you have a company with an Enterprise Value of $1.875 billion. WIth debt of $1.75 billion, that leaves an equity value of $100 million, or roughly $3 per share.

This is the most hyped stock I've ever seen. Trump has said he will sell the Plaza for $1 billion, and the Wall Street Journal - Trump lackey - quoted someone "close to Trump" who said he could sell the company for $28. It can't happen and it won't happen. I wouldn't want to own this thing.

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