Evergreen Gaming

I’ve been meaning to really look at Evergreen Gaming for a while. It looked cheap enough superficially, but between a few other opportunities, and the gradual deleveraging I’ve been trying to do, I hadn’t felt the need to do a very deep dive on Evergreen (TNA).

But a reader asked me about it, and it snowed approximately a foot here last weekend, so I had some time and finally got around to looking closer.


Evergreen Gaming Corporation operates four casinos in Washington state. The casinos seem to only offer card tables and pull-tabs, which appear to be the same thing as the lottery tickets of the same name. So the casinos can’t quite be compared apples to apples with casinos which have slot machines.


Evergreen is quite profitable. Through nine months of 2017, Evergreen had earnings of $2 million. Annualized, these results would equal about 2.1 cents per share, meaning Evergreen is trading at just 8x P/E. Both revenue and earnings are up year over year, despite having shut down a casino in February 2017.

Palace Tukwila

The company just recently completed the sale of a full casino, The Palace Tukwila, which was realized to be either unprofitable or untenable in some way. According to the Q3 MD&A:

The Company did operate a fifth casino, the Palace Casino in Tukwila, but that property was closed on February 4, 2017. The Company has entered into an agreement to sell the real property where Palace Tukwila was located for $1,950,000. The buyer has made a $50,000 earnest money deposit and the sale is supposed to close on or before November 30, 2017.

The property was sold for almost $900,000 more than the mortgage balance and $515,816 over its value on the balance sheet. This indicates to me that we can consider the rest of the balance sheet conservative.

Excluding goodwill completely (not necessarily fair, but works as a margin of safety) and including the Tukwila sale, book value is $0.08 per share. On book value then it doesn’t look cheap. But there’s almost $0.06 of unrestricted cash on the balance sheet (there is also restricted cash, which is held in case of a large jackpot).

It’s clear to me that there’s no business reason to be holding this much cash, so it ought to be returned to shareholders in some way. If this guy is to be believed, the chairman’s preference is paying down debt with the possibility of a share buyback in the future. The debt is low interest, with a favourable maturity schedule, so my preference would be the buyback.


I really can’t claim to have any idea of the future prospects of Evergreen, there’s a few balls up in the air and I don’t have a firm grasp in what direction the company will be steered.

As an example of “balls up in the air”, Washington is in the process of increasing its minimum wage significantly in the next few years. The company issued a prediction of how it will affect profitability:

The present minimum wage increased from $9.47 in 2016 to $11.00 in January 2017, and in future years
the wage increases to $11.50 in 2018, $12.00 in 2019 and $13.50/hour in the year 2020. The increases
to the minimum wage will also impact hourly wage rates for employees with greater experience and
responsibility. The cumulative effect on wages, including payroll taxes over the four year period is
projected to be $1,394,000, $2,041,000, $2,690,000, and $4,327,000 respectively.

This is obviously a large hit to a company with less than $3 million of earnings. The good news is that in 2017 the increased earnings already reflect the increased labour costs. It’s more of an economic debate whether the increased minimum wage will lead to higher revenues. For the time being, the company has managed to navigate this hurdle, but it’s an undesirable headwind.

A tailwind that will partly offset the wage hikes will be the corporate tax cut implemented in the US. Through nine months of 2017, the company had set aside 35% of earnings, over $1 million, for income tax. In 2018 the company stands to save ~$400,000 in taxes.

Those don’t quite balance out (the business earns less than if neither happened).  Another thing that has me hesitant on Evergreen is the end game. There are a few paths forward from here that I can see.


I’m not sure how likely Evergreen pursuing a growth strategy is. Dawn Mangano has been the CEO since June, and she has grown a chain of casinos in the past. I also can’t make any guesses at the growth prospects, how many small casinos are available to be acquired or built, or how profitable they would be. For significant market expansion though, this is the path Evergreen will need to take. I don’t want to pretend I know what this growth would look like, or how it would affect the target price of Evergreen, so I’ll just ignore the possibility. Keep in mind that Mangano, may choose to grow the business, and that could offer significant upside.


Insiders own 78% of the stock and I believe the most likely end game for Evergreen is a buyout so the insiders can get their liquidity event. If I were going to buy into Evergreen, it would be in the hope of Evergreen being taken over.

For a rough guess at a buyout multiple, let’s say Evergreen can improve earnings to $3 million annually, which should be close to $4 million EBITDA. I’ll also assume that half of the debt is paid down, and there’s $6 million net cash on the balance sheet. For a sleepy little company like this, I would consider 10x EV/EBITDA to be a fair multiple. A buyout under these circumstances would come to $0.34, 100% upside to today’s price. While the stars look aligned for a buyout offer to come, I don’t want to invest/speculate on it.

Steady As She Goes

There’s also the possibility that Evergreen continues business as usual. I believe the new leadership can extract a lot of value in the short term, hence my prediction that $3 million in earnings isn’t that far down the road. But without any new levers to pull, the growth is capped at a certain point. I’m not sure that Evergreen deserves much more than a 10x P/E multiple once growth slows down; n two years, earning $3 million and growing 5% per year, this would equate to a $0.24 target price.


If I were just looking to buy a basket of undervalued stocks, Evergreen would certainly be in the basket. I’m tempted to buy TNA, as I see the downside as very low. I imagine the customers are pretty sticky, and with the current valuation I’m not sure the share price can reasonably go down much. But I also don’t believe that just because a stock is cheap compared to other stocks that the share price deserves to increase. Evergreen’s business should command a below market multiple, in the absence of any changes (growth strategy, dividend/share buyback, etc). Maybe in today’s market that could be a 12x P/E, indicating more upside, but the margin of safety isn’t enough for me. If I had to bet on the most likely return for shareholders going forward, it would be 5%-10% if a buyout doesn’t happen. I’ll be keeping my eye on TNA, as I have been for a while. I’d probably jump all over it at $0.12, and would maybe start a small position at $0.15.

Disclosure: No position in Evergreen Gaming (TNA)

Ergoresearch Going Private at $0.30

The news comes as bitter sweet. Ergoresearch is being taken private for just a 20% premium over my purchase price.

When I first bought ERG, I expected so much more. The company had discontinued an unprofitable line of business, which made revenue look bad but improved free cash flow. Ergoresearch was also starting up new clinics, moving into sleep apnea treatments, and had at least mentioned returning to its acquisitive ways. The bitter part of the deal is because my investment in Ergoresearch could have been so much more.

Then the company sort of went dark. One day I noticed that I hadn’t seen a news release about earnings, so I went looking and found that there wasn’t a press release, the financial statements were simply put on SEDAR. And the numbers were only put on SEDAR in French. I thought this was a little curious, it was a bit annoying but thought it may provide value investors more opportunity to buy while ERG was unfound.

Then this news of the privatization came out not long after. The sweet part is that Ergoresearch shares were unlikely to move higher anytime soon. By not announcing earnings, and by only releasing numbers in French, it effectively hides the company from a large percentage of the investment community. I’m fully aware that the business is improving, and this is an excellent deal for Sylvain Boucher and Walter Capital. They are acquiring a business with growing free cash flow and exciting initiatives that should grow the business in the future. For small shareholders like me, we’re provided an out for our shares that were probably still going to be in the $0.20-$0.25 range for  year or more.

I’m mildly disappointed in this investment. I think the prospects of ERG deserve a higher premium, but I doubt anyone who has been holding their shares is patient enough to demand it or want to keep the company public. I sold my share at $0.295 and have moved on.


Integrated Asset Management – Follow Up

Nine months ago I wrote my thesis on Integrated Asset Management, which I thought should be trading at $1.49 on September 30th (end of fiscal 2017). I’m not usually anywhere close to this right, but IAM was $1.54 on September 29th.

Since then however, IAM has traded down to its current $1.38. I made a number of assumptions coming to my 2017 target, as well as my 2018 target of $1.76, with the share price lingering I decided I ought to take another look at these assumptions and make some new targets. Continue reading “Integrated Asset Management – Follow Up”

Spectra Inc.

Trucking is pretty damn dangerous. Anyone in Ontario will likely recall this accident, which killed three and closed the 400 highway southbound lane for over a day. Some of you reading this may have heard of Operation Air Brake, which involve “blitzes” of commercial vehicle inspections, and always ends up taking hundreds or thousands of trucks off the road for brake related violations.

In Toronto, there is a small (and I mean small) company making products that would help prevent many of these violations, which means the truck keeps rolling, the freight gets where it’s going, etc. The value proposition is pretty clear for Spectra Inc.

Luckily for me, Spectra offers an excellent investment opportunity.

spectra inc ssa
Source: http://www.spectraproducts.ca/

Continue reading “Spectra Inc.”

Atlas Engineered Products – Getting in on the Ground Floor

There is not much to read out there about Atlas Engineered Products. The company doesn’t even have a website (EDIT – now there is a website). But in that lack of information lies an opportunity for investors to get in on the ground floor of what should be a very successful capital compounding story.

atlas engineered products
Source: atlasengineeredproducts.com

Continue reading “Atlas Engineered Products – Getting in on the Ground Floor”

Portfolio Update – December 2017

It’s been a long time since I’ve gotten on here to write about my stocks. No real excuses, just prioritized some other things. I’m sure nobody was really calling the police wondering what happened to me, so I’ll just jump right into this. Let’s start with one where I was very wrong. Continue reading “Portfolio Update – December 2017”

Ergoresearch Ltd. – Another Diamond in the Quebec Rough

If you have been so kind as to have read some of what I’ve written on this blog, you may remember that I had a chance to invest in a Quebec microcap trading at just two times earnings. Alas, for reasons I either can’t or don’t want to remember, I passed on buying PCI. If I had bought when I originally found the company, I’d be looking at almost a 300% return in under a year. If I had bought it when I had wrote about missing the opportunity, I’d still be looking at over a double.

I don’t intend to make the same mistake again.  Continue reading “Ergoresearch Ltd. – Another Diamond in the Quebec Rough”

What is Diversified Royalty Corp. Worth?

Diversified Royalty Corp. got their start in late 2014 by buying a royalty on the sales of Franworks restaurants, with the goal of acquiring a diverse portfolio of royalties from multi-location businesses across North America. Diversified was a misnomer until June of 2015, when the company acquired a royalty from Sutton Group Realty. And then in August of that year, the royalty for Mr. Lube Canada was acquired.

At that time the story seemed to be on track. Continue reading “What is Diversified Royalty Corp. Worth?”