Here's Why I'm Crazy Bullish on Alberta

We missed last week because I had to work one of my 2-3 weekends a year, but we’re back this weekend with your usual dose of Uproar Capital in your inbox.

My day job often takes me to small communities throughout Alberta, places like Hinton, Fox Creek, or Grande Prairie. These are places that only exist because of their proximity to natural resource deposits. When a community depends on oil reserves to employ the majority of their working age men, you can imagine what happens to it when these reserves are abandoned during periods of low prices. It’s devastating.

The good news is $90+ per barrel oil is changing things in Alberta, albeit much more slowly than many folks would like. Many small-to-medium sized oil producers simply don’t have the cash to spend aggressively on capex, but they do what they can, and it helps the overall economy. Nervous bankers who still remember negative oil prices (and who are hampered by ESG concerns) aren’t about to start lending huge swaths of money. The big producers are spending on capex, but they’re also very concerned with returning capital back to long-suffering shareholders. Most businesses are also suffering from labour shortages. So things are improving, but at a slower rate than many would like.

Alberta doesn’t just have an improving economy going for it. Both Calgary and Edmonton have very affordable real estate. In Edmonton, you can buy a reasonable property for $300,000 and a really nice one for $500,000. Calgary is a little more expensive, but still quite cheap when compared to places like Vancouver, Toronto, or Montreal. Hell, Calgary is very reasonable compared to places like Windsor, Guelph, or Laval, the subpar places folks end up in order to afford a home.

$92 oil is also a huge boon to the Alberta provincial government, which gets a big whack of its revenue from resource royalties. Pundits are predicting a budget surplus this year of up to $4 billion, a huge improvement compared to the $5.8 billion deficit called for in 2021. Alberta will be in a position to increase spending as every other province will be looking to slash budgets and impose some sort of fiscal restraint after spending so lavishly on COVID stimulus over the last couple years.

Another reason I’m bullish is Alberta’s attitude towards COVID. Whether you love or hate the protests in Ottawa and Coutts, it’s obvious Jason Kenney has gotten the message. Alberta’s Premier has vowed to fight the trucker vaccine and will announce a date later on this week when Alberta will drop all COVID restrictions. Alberta has also consistently been early to drop COVID restrictions throughout the various waves of the pandemic. Whether you agree with the attitude or not, the fact remains there are many people across the country who look at Alberta with a sense of admiration towards its COVID policy.

Put it all together and it’s easy to see why I’m wildly bullish for Alberta. This feels a lot like 2001 again, which marked the beginning of a massive decade. The Alberta government truly fucked up that decade to turn that windfall into a Norway-inspired wealth fund, but we don’t care about that. We investors can take advantage and buy solid Alberta companies at very attractive prices that happen to have huge tailwinds helping with the push forward.

Some might think we’ve already missed the boat. Major oil producers are up 3-5x off their recent lows, and I personally wouldn’t touch small producers. Large landlords like Boardwalk (TSX:BEI.UN) or Mainstreet (TSX:MEQ) have already moved up bigly. And most Alberta-based stocks that don’t have direct exposure to the price of oil (like Canadian Western Bank, Canadian Utilities, Enbridge, or TC Energy) have held up pretty well. So what’s an investor to do?

I have just the idea, a small-cap stock that should benefit both in the short-term from Alberta reopening and in the long-term as the economy heats up. Let’s take a closer look.

Enter Gamehost

Gamehost (TSX:GH) is an incredibly simple stock to understand. It owns three casinos (and the underlying real estate) in Calgary, Grande Prairie, and Fort McMurray. It also owns a couple hotels either attached to or right next to the Calgary and Grande Prairie locations, as well as another hotel in Grande Prairie. It also owns a small strip mall in GP.

That’s it. That’s the whole company.

Also, can we talk about what a terrible logo that is? It looks like somebody was given a 20 minute deadline and Microsoft Paint. Yikes.

It hasn’t really been a good decade for Gamehost. After enjoying boom times for years, oil’s demise in 2014 and 2015 impacted the bottom line. The business stabilized for a couple years and then the Fort McMurray wildfires threatened that location. The casino managed to avoid the flames, but it still was closed for months before reopening. And then COVID hit, and we all know what happened after that.

All three locations are open today to fully vaccinated patrons, but it’s still tough sledding. Many people feel unsafe spending large amounts of time among the unwashed masses. And some 20% of Albertans are unvaccinated, with areas like Grande Prairie and Fort McMurray overrepresented in those overall stats. It’s hard to run a business with those headwinds.

All these factors have impacted earnings significantly. At its peak, Gamehost earned around $0.90 per share. Over the last year, the company only managed to earn $0.25 per share.

You can see the problem. But I also think the worst is behind the stock, and it can — at a minimum — get back to previous highs.

The opportunity

What exactly is Gamehost worth when the company is really humming? Let’s take a look at historical prices to come up with some sort of idea:

The stock peaked at over $16 per share right as Alberta was really booming. I think that’s a reasonable price target for the next boom.

Pent up demand should help earnings power, as we saw in the third quarter. In the quarter that ended on September 30th, the company earned $0.23 per share. In just one quarter. That didn’t really start until July 6th because of construction in Fort McMurray. It’s telling of total earning power because that was during Alberta’s open for summer campaign where there were no restrictions.

Both the Calgary and Fort McMurray locations have been working on expansions, including building new onsite restaurants and expanding gaming areas. Some of these improvements have already opened with the rest scheduled to open soon (as per the last quarterly earnings report). These should also help the bottom line.

The company has also been using some of its cash hoard to buy back what management thinks are undervalued shares. A couple years ago the company had 24.2 million shares outstanding. That number is closer to 22.5 million today, depending on the buyback during November and December.

The hotel operations are quietly improving as well. Through the first nine months of 2021, occupancy was just 34.7%. That improved significantly in the third quarter, increasing to 56.4%. That translated into a 75% increase in room revenue compared to the year before. And the hotels have quietly grown to be around 25% of Gamehost’s total revenue, meaning an increase in results from that part of the business have the ability to grow the total bottom line.

Put it all together and this analyst thinks Gamehost could easily earn $1 per share in 2022 or 2023. Put a 12x multiple on that — which is very reasonable — and we’re looking at 50%+ upside. A 15x multiple would represent close to 100% upside from today’s levels.

Remember, Gamehost has big depreciation expenses, which will increase over the next couple years as they start to write down the millions spent on these expansion projects. Free cash flow could easily approach $1.20 or $1.30 per share annually, which is all the more attractive for investors who prefer to look at that metric.

Yet another upcoming catalyst

For years, Gamehost was a consistent dividend payer that offered generous yields. I think the company will reinstitute the dividend as quickly as possible in an attempt to win back those investors.

This could happen much sooner than you think. All it really needs is another quarter of solid earnings — which it should announce in March — and reassurance from the Alberta government that restrictions are gone for good.

I’d also speculate this is a main reason for buying back shares. If they buyback 2 million shares and the company ends up paying a $0.50 per share annual dividend, that’s $1 million annually saved.

The share buyback also increases the ownership stake of the Will brothers, who essentially control the company. As of the most recent information I could find, the Wills have increased their ownership stake in the company from 32.1% to 32.8% of the company thanks mostly to the share buyback. They also bought some shares in 2020.

To be completely honest, there are a few too many related party transactions for my comfort with Gamehost, including hiring the COO’s company to be the general contractor for the recent Calgary casino expansion. But I’m willing to suck these feelings up because the stock is so cheap.

The bottom line

There are numerous catalysts that could shoot Gamehost shares higher. Put them all together and I’m wildly bullish on both this reopening stock and Alberta in general.

I’ve had shares for a while now, and already added in accounts I control for a 3-5 year time frame.