Maintenance vs. Growth Capex - Casinos
Hello,
I am currently modelling out FCF for a casino. I am doing my Fixed Assets forecast and have come to an interesting situation with regards to capital expenditures.
Basically management has stated that "Capital expenditures relate to expenditures necessary to keep our existing properties at their
current levels and are typically replacement items due to the normal wear and tear of our properties and equipment as a result of use and age." leading me to believe the entire capex they specify is maintenance.
This was fine until i realized that my capex is marginally higher than my depreciation (34M vs 29M) leading me to believe that there is some growth capex there. When reading the 10-k and 10-qs i have read that they are doing renovations on their casinos/hotels and I am wondering if this would be maintenance capex or growth. They arent expanding tables or slots (that number has been decreasing) or hotel rooms (decreasing as well).
I guess the real question is whether or not a renovation (that makes things slightly more appealing than the previous due to it being newer which will bring in more people and contribute to increased sales ) is growth or maintenance capex?
TLDR;
1. slots/rooms/tables have been decreasing
2. sales have increased (due to higher utilization/pricing)
3. capex is higher than depreciation
4. capex is related to renovations
Is capex growth or maintenance?
Thank you everyone.
Not a casino expert. But when I think about it, renovation should be part of maintenance capex because it is replacing items due to the normal wear and tear of your properties and equipment as a result of use and age, fits company's own definition perfectly.
Growth capex is mainly, I think, talking about expansions of casino sites.
Okay great, thats exactly what I was thinking. I just wasn't sure if it would be considered growth because they are obviously going to replace it with newer, better things that would add to revenue as a casino is an entertainment destination and entertainment destinations compete on flash.
Thanks
Your assumption that there is some growth capex is dangerous.
If you renovated rooms using the same original features (i.e., no improvement in quality, just replacing items from wear and tear), I would expect that capex to maintain the properties will be higher than depreciation nearly 100% of the time assuming all other inputs are constant. The reason? Inflation compounds over the assets useful life.
Does anyone even consider inflation in their model?
In what model and from whose perspective? In some instances, the impact can be de minimis, but, over long time periods, inflation is an especially powerful force.
Even in a 12 month cash flow projection, a CFO for an asset heavy business needs to account for the impact of inflation where it matters. Inflation is incorporated indirectly when you see that the cost to replace a truck (with a new one) will be higher than accumulated depreciation of that same truck in the forecast I reference above. In some instances, you'll ignore it... For example, you could inflate the company's prices and costs by .0001% per day over the NTM period to reflect an assumed annual inflation rate, but I doubt that will make an impact on cash flow / valuation at the end of the day.
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