SeaWorld Entertainment (NYSE:SEAS) has done well to reduce its cash burn amidst the effects of the pandemic and to ensure that it has sufficient liquidity in the meantime. That being said, I don’t see much upside for its stock at the moment. SeaWorld traded at around $35 per share prior to the pandemic, and its net debt is expected to increase (compared to the end of 2019) by over $5 per share by the end of the pandemic. As well, SeaWorld’s new debt is high-interest debt that will add considerably to its interest expense. As a result, I believe that SeaWorld is worth around $25 if it can get back to 2019-level results by the second half of 2021.

Pandemic Situation

The COVID-19 situation in the US is poor at the moment, with hospitalizations doubling over the last month and new infections still appearing to increase. This will likely reduce SeaWorld’s traffic below what it was modeling in early November, when new cases and hospitalizations were increasing, but not as sharply as they started increasing later in November.

The longer-term outlook is more positive, with herd immunity possible in the US by Q2 2021. This is based on a combination of vaccinations and immunity gained from infections. Reaching herd immunity in Q2 2021 should result in a sharp decline in new cases in the second half of 2021 and a return to normal behavior for the US.

Cash Burn Outlook

SeaWorld reduced its cash burn (excluding the payment of previously deferred vendor payments) to $2 million per month in Q3 2020. This was achieved via strong cost management along with improving traffic trends as parks reopened. Monthly attendance on a consolidated basis went from -89% in July (compared to July 2019) to -61% in September and further improved to -50% in October.

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Attendance July Aug Sept Oct
Y/Y change -89% -80% -61% -50%

However, cash burn is expected to increase somewhat in future months. SeaWorld mentioned $20 million to $25 million per month in cash burn over the next couple quarters. This does include $70 million in catch up on deferred vendor payments, so without that, its expected cash burn would be around $10 million per month.

Q3 is typically SeaWorld’s strongest quarter, so its cash flow would normally be weaker in Q4 and Q1 anyway. One thing to note is that SeaWorld’s cash burn estimates were made in early November, and the COVID-19 situation has gotten considerably worse since then. In early November, there were around 50,000 people hospitalized with COVID-19. This has doubled to over 100,000 in early December. Thus it seems likely that traffic could end up below SeaWorld’s projections for the next couple quarters due to increased concern about the virus as well as tightening governmental restrictions.

I think that modeling $30 million to $35 million per month in cash burn (including catch up in deferred vendor payments) may be more accurate.

SeaWorld had a $227 million working capital surplus (excluding current maturities of long-term debt) at the end of Q3 2020. With the cash burn over the next couple quarters, this could be reduced to a $70 million working capital surplus at the end of Q1 2021.

Debt And Valuation

SeaWorld had $1.726 billion in net debt at the end of 2019. This is based on its $1.558 billion in long-term debt and a $168 million working capital deficit. I project that SeaWorld will have $2.154 billion in net debt at the end of Q2 2021. Thus its net debt will have increased by $428 million (over $5 per share) due to the pandemic.

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SeaWorld traded for approximately $35 per share prior to the pandemic. Thus if it could get back to its pre-pandemic results by 2H 2021, its increased debt alone would push down its value to around $29 to $30 per share.

The debt that SeaWorld took on to bolster its liquidity is high interest debt though. It issued $227.5 million in 8.75% first-priority secured notes due 2025 in Q2 2020, and then issued $500 million in 9.5% second-priority notes due 2025 in Q3 2020. These notes add $67 million to SeaWorld’s annual interest costs. Decreased LIBOR rates for its Term B-5 Loans help offset some of this increase in interest costs, but it still looks like SeaWorld’s interest expense could be around $130 million per year going forward compared to $84 million in 2019.

If SeaWorld is able to replicate the rest of its 2019 results, its increased interest costs would push down its diluted earnings per share down to around $0.73, a roughly 34% reduction compared to 2019.

The increased interest costs may push SeaWorld’s value down to around $25 in a reasonably positive scenario where results get back on track for 2H 2021.

Conclusion

While SeaWorld has done well to manage its cash burn and liquidity through the pandemic-induced challenges, there will be some lasting effects. SeaWorld’s net debt (inclusive of working capital deficits or surpluses) is expected to increase by over $400 million by the time the pandemic is over.

The additional debt it has taken on is high-interest debt that could add around $46 million to its interest costs compared to 2019 despite a decrease in interest costs for its LIBOR-based term loans. This is a significant impact for a company that reported $153 million in free cash flow in 2019 and $114 million in free cash flow in 2018. Thus I believe that SeaWorld’s stock would be more fairly valued at around $25.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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