INLOT.AT - Intralot

[Packer16]

A lottery equipment manufacturer and operator.  One of the competitive advantages in Greece is gaming.  They have the largest % of GDP spent on gaming than any other country on the planet (like 2% of GDP).  So Intralot is their national champion and is selling at an EBITDA multiple of 3.6x.  Most other operators (SGMS, GTech, IGT, Bally and MGAM) are selling at 6 to 10x EBITDA.  At 9x EBITDA the company is a 4.5x bagger.  Most of their business is not in Greece (95%) but the US and Europe.  Their debt is selling at a premium to par and could probably be refied to generate more FCF.  The level of FCF assuming Euro25m of maintenance cap-ex is Euro71m.  All for an equity value of Euro284m. 

 

Packer 

[hyten1]

packer question

 

what ebitda # are you using to get the 9x which translate to 4.5x bagger?

 

if i use the 23.795 (last quarter) or 42.673 (last9mo) i can't seem to get to your values? i am using 284 market cap.

 

hy

 

A lottery equipment manufacturer and operator.  One of the competitive advantages in Greece is gaming.  They have the largest % of GDP spent on gaming than any other country on the planet (like 2% of GDP).  So Intralot is their national champion and is selling at an EBITDA multiple of 3.6x.  Most other operators (SGMS, GTech, IGT, Bally and MGAM) are selling at 6 to 10x EBITDA.  At 9x EBITDA the company is a 4.5x bagger.  Most of their business is not in Greece (95%) but the US and Europe.  Their debt is selling at a premium to par and could probably be refied to generate more FCF.  The level of FCF assuming Euro25m of maintenance cap-ex is Euro71m.  All for an equity value of Euro284m. 

 

Packer

[Packer16]

The TTM EBITDA is Euro 172m (2012) less Euro 117m plus Euro 143m = Euro 198m based upon consolidated group data.

 

Packer

[hyten1]

packer sorry i am confused

 

177m (ttm) - 117m (first 9 mo of 2012) + 143m (first 9 mo of 2013) = 203m (EBITDA)

 

203m * 9 = 1827m

 

1827m is 6.5x of 284m?

 

am i missing something? just trying to understand, not trying to nitpick (i know there are approximations)

 

hy

 

 

 

The TTM EBITDA is Euro 172m (2012) less Euro 117m plus Euro 143m = Euro 198m based upon consolidated group data.

 

Packer

[tombgrt]

packer sorry i am confused

 

177m (ttm) - 117m (first 9 mo of 2012) + 143m (first 9 mo of 2013) = 203m (EBITDA)

 

203m * 9 = 1827m

 

1827m is 6.5x of 284m?

 

am i missing something? just trying to understand, not trying to nitpick (i know there are approximations)

 

hy

 

 

 

The TTM EBITDA is Euro 172m (2012) less Euro 117m plus Euro 143m = Euro 198m based upon consolidated group data.

 

Packer

 

Hi hyten. You still need to account for the debt after you get to the 1827 number.

[hyten1]

tombgrt, is that implied in packers statement somehow?

 

because when i usually say so and so is trading at a multiple of ebitda, i literally mean ebidta * multiple = market cap

 

i guess that is now how you guys do it?

 

for example

 

SGMS, EBITDA=176m, market cap 1.44bil, which is 8.1x

IGT, EBITDA=805m, market cap 4.4bil, which is 5.4x

 

hy

 

packer sorry i am confused

 

177m (ttm) - 117m (first 9 mo of 2012) + 143m (first 9 mo of 2013) = 203m (EBITDA)

 

203m * 9 = 1827m

 

1827m is 6.5x of 284m?

 

am i missing something? just trying to understand, not trying to nitpick (i know there are approximations)

 

hy

 

 

 

The TTM EBITDA is Euro 172m (2012) less Euro 117m plus Euro 143m = Euro 198m based upon consolidated group data.

 

Packer

 

Hi hyten. You still need to account for the debt after you get to the 1827 number.

[rayfinkle]

tombgrt, is that implied in packers statement somehow?

 

because when i usually say so and so is trading at a multiple of ebitda, i literally mean ebidta * multiple = market cap

 

i guess that is now how you guys do it?

 

for example

 

SGMS, EBITDA=176m, market cap 1.44bil, which is 8.1x

IGT, EBITDA=805m, market cap 4.4bil, which is 5.4x

 

hy

 

packer sorry i am confused

 

177m (ttm) - 117m (first 9 mo of 2012) + 143m (first 9 mo of 2013) = 203m (EBITDA)

 

203m * 9 = 1827m

 

1827m is 6.5x of 284m?

 

am i missing something? just trying to understand, not trying to nitpick (i know there are approximations)

 

hy

 

 

 

The TTM EBITDA is Euro 172m (2012) less Euro 117m plus Euro 143m = Euro 198m based upon consolidated group data.

 

Packer

 

Hi hyten. You still need to account for the debt after you get to the 1827 number.

 

Ebitda multiples represent value to the firm not just the equity. Therefore you compare ebitda (used as a cap structure neutral cf proxy) to enterprise value (equity value plus net debt). Long way of saying yes, it is implied.

 

If you net out other cf items to get to funds to equity, then you can compare to market cap. NYu professor aswath damodaran has great papers on how this logic flows through to FCC.

[gary17]

is this available through interactive brokers?

 

i typed in INLOT and says its available but dosen't give me the full company name.  says available on FWB2 exchange.  I'm too cheap to pay for the premium IB services .....    thanks.......

[frommi]

Are they impacted by a possible next bond haircut?

[Phaceliacapital]

Hi Packer,

 

I've been invested in GTECH (previously known as Lottomatica) for quite some time and I rode OPAP along throughout 2013. For all those interested in the lottery space, here is what the typical value chain looks like:

 

http://i40.tinypic.com/2cz692q.png

 

My preference for GTECH stems from the fact that they are this fully vertically integrated full service lottery group (I know, a lot of words) which I think will be increasingly important as a lot of goverments/states are counting on gambling tax revenues to decrease their deficits. For instance, the potential in the US, where states are opening their state lotteries to players like GTECH ( who have the expertise to increase the revenues significantly) is quite significant and it is my belief that these states/governments have a preference for those players that can provide the entire "package" (and which have a good track record in doing so).

 

Other interesting GTECH facts:

 

-  Contract portfolio where 70% of revenues is under contract for the next 7 years

-  Barriers to entry as we see that renewal rates are around 80-90%

-  EBITDA margins at 33%

 

Coming back to Intralot, I took a quick look back in the day but was more convinced by the GTECH business model, but kind of lost track since then.

 

I did however think that they had a much larger exposure (aren't they the main supplier for OPAP?) to Greece?

 

I'll have to take a closer look, feel free for any questions in the lottery space.

[Packer16]

In comparison to GTech I think the capabilities are comparable at least from Intralot's corporate presentation on their website.  They appear to do system implementation and support, have gaming modules and develop interactive gaming.  They also operate lotteries.  There EBITDA margins (adjusted for net vs. gross payout - see presentation) are comparable to GTech's.  In terms of revenue concentration, Intralot has only 5% in Greece and GTech has 20% in Italy.  Intralot also has high recurring revenue with 80% renewals rates and going forward has contracted revenue to 2018 at 90% of the 2012 levels.  I think many of the favorable characteristics the GTech has are available to other market participants who have similar customers (Intralot and SGMS).  Intralot does partner with other firms but this appears to be an industry practice.  Intralot has 14 state lotteries at this point so there appears to be demand for there approach to providing there services.  Am I missing something?  GTech is reasonably priced but not as cheap as Intralot.  I also own some OPAP.

 

Packer

[yadayada]

ok so greek stocks dont show up on google ? I thought they were all delisted or something because of the crisis haha. Im so dumb sometimes.

[BG2008]

Packer,

 

I was at an invest in Greece conference about a week ago.  Intralot presented there and basically said that they were forced to issue debt at 9.75% rate because the debt market wouldn't touch anything associated with Greece.  At first I was really excited, but I can't get comfortable with their EBITDA figures.  It seems like they are constantly investing in Cap Ex and their cashflow available for debt service covers the interest by only 2x.  Cash does not accrue on the balance sheet and the cap ex has not resulted in revenue growth.  What am I missing?

 

 

[Packer16]

As to debt, the debt is trading a premium to par yielding closer to 7.5% so in the aftermarket it appears the sentiment has changed at least for Greece.  Their cap-ex is required for new contracts so as they add new contracts they incur cap-ex.  From what I have seen maintenance levels are closer to Euro25 million.  Given the about Euro200 m EBITDA gives a nice FCF.  The revenue has grown at 15% per year over the past 3 years (2009 to 2012) thus the higher cap-ex.  If they decided to stop growing the FCF would be very high given the locked-in revenue over the next few years. 

 

Where there any good questions asked at the conference? 

 

Packer

[phil_Buffett]

As to debt, the debt is trading a premium to par yielding closer to 7.5% so in the aftermarket it appears the sentiment has changed at least for Greece.  Their cap-ex is required for new contracts so as they add new contracts they incur cap-ex.  From what I have seen maintenance levels are closer to Euro25 million.  Given the about Euro200 m EBITDA gives a nice FCF.  The revenue has grown at 15% per year over the past 3 years (2009 to 2012) thus the higher cap-ex.  If they decided to stop growing the FCF would be very high given the locked-in revenue over the next few years. 

 

Where there any good questions asked at the conference? 

 

Packer

 

and at their Investor presentation they stated that they will reduce capex, because they have make good Progress in buildung a Fundament for the future. so the fcf will be nice over time  :)

[BG2008]

As to debt, the debt is trading a premium to par yielding closer to 7.5% so in the aftermarket it appears the sentiment has changed at least for Greece.  Their cap-ex is required for new contracts so as they add new contracts they incur cap-ex.  From what I have seen maintenance levels are closer to Euro25 million.  Given the about Euro200 m EBITDA gives a nice FCF.  The revenue has grown at 15% per year over the past 3 years (2009 to 2012) thus the higher cap-ex.  If they decided to stop growing the FCF would be very high given the locked-in revenue over the next few years. 

 

Where there any good questions asked at the conference? 

 

Packer

 

Don't recall any really good questions asked at the conference.  Half of the conference consist of Greek officials trying, I mean begging, the NYC finance community to invest in Greece.  When Intralot talked about their debt deal experience and that half of their revenue is outside of Europe and growing, I knew I had to dig in deeper.  There was a panel of distressed investors as well.  It's a bit comical to see the Greek officials pleading and the distressed guys are kind of just like "well, we don't need a 5-10 horizon, we're here for the restructuring and we'll be gone in 2-3 years."   

[Packer16]

Where there any other interesting Greek names that you found interesting?  TIA

 

Packer

 

 

[BG2008]

Nothing that stood out like Intralot (I like it mostly for the revenue mix outside of Greece).  Did talk to a guy who mentioned that buying real estate in Crete is likely a good idea.  The northern Europeans love to summer on the Island of Crete and you can generally trust the people that you're doing business with.  He couldn't give me a cap rate or revenue multiple, but he said it was compelling and getting muddle all together with the Greek crisis. 

 

Maybe a vacation home for you Packer?

[Packer16]

Maybe I will look into that.  There is a way to invest in resort Greek property via firm called Dolphin Capital Investors in the UK.  It is run a former GS real estate guy.  It sells at an about 50% discount from NAV.  I can't invest due to a conflict but I thought I would let others know about it.  There are also about a half a dozen of other publicly traded Greek RE companies like - Eurobank Holdings (FFH has a stake), Trastor REIC (Chou has a stake), MIG Real Estate, Lamda Development and REDS.

 

Packer

[SwedishValue]

Thanks for the idea Packer! Have been looking through a couple of your ideas recently and I wish I was as smart as you.

 

I might be mistaken, but isn't it that they use full consolidation for quite a few of their not fully owned businesses? In that case, shouldn't we adjust the EBITDA numbers down?

 

Not trying to sound harsch/rude, I'm not a native English speaker.

[Packer16]

You are correct, however, for the only sub we have data on (Americas segment) the EBITDA is reduced by $3 million and in all the analysts reports and the Bloomberg consensus don't appear to have a materially lower EBITDA number from the consolidated number that has been reported by the company.  I will send IR a question about this and see what the response is.  Thanks.

 

Packer

[Sportgamma]

Its a very interesting idea.

 

I like the fact that its founders have a big stake in the company as well as being directors.

 

However, I´m having trouble fathoming how they record revenue and more importantly COGS. I guess tracking cash flows would be a better way of valuing the operations.

[prevalou]

I have two questions:

1) what is the cost of gaining/renewing a long term contract ?

2) what is the impact of gaming liberalization on "monopoly revenue and margins" ?

[leftcoast]

I've been invested in GTECH (previously known as Lottomatica) for quite some time and I rode OPAP along throughout 2013. For all those interested in the lottery space, here is what the typical value chain looks like:

...

My preference for GTECH stems from the fact that they are this fully vertically integrated full service lottery group (I know, a lot of words) which I think will be increasingly important as a lot of goverments/states are counting on gambling tax revenues to decrease their deficits. For instance, the potential in the US, where states are opening their state lotteries to players like GTECH ( who have the expertise to increase the revenues significantly) is quite significant and it is my belief that these states/governments have a preference for those players that can provide the entire "package" (and which have a good track record in doing so).

In comparison to GTech I think the capabilities are comparable at least from Intralot's corporate presentation on their website.  They appear to do system implementation and support, have gaming modules and develop interactive gaming.  They also operate lotteries.  There EBITDA margins (adjusted for net vs. gross payout - see presentation) are comparable to GTech's.

 

Thanks for sharing the GTech slide and info. Further to Packer's point, here's the info from Intralot's investor presentation that breaks down how much of their revenue and EBITDA come from each segment of the value chain. (See attached for the source slide.)

 

	Revenue %	EBITDA %
Technology (Infrastructure Dev + Software Dev + System Installation & Support)	16%	37%
Management Contracts (Content Dev & Market Research)	10%	23%
Licensed Operations (Gaming Operations)	74%	40%

 

This definitely doesn't jive with GTech's presentation, which shows Intralot relegated to the "bottom" of the value chain (i.e. technology development). Do you know when that slide GTech was created? Perhaps it's out of date with respect to Intralot?

[Edward]

I might be mistaken, but isn't it that they use full consolidation for quite a few of their not fully owned businesses? In that case, shouldn't we adjust the EBITDA numbers down?

First, I would like to thank Packer for the idea. We held OPAP in the past, and I find the whole gambling industry interesting.

 

As Swedish mentioned, there is an issue with EBITDA not being wholly owned by shareholders of the parent. Going over Annual reports through 2007-2012, It was interesting to discover that a large part of annual net profit is attributed to minority interest.

 

A summary of consolidated results:

 

2007 - Net profit 164M, of which 52M is attributable to minority interest.

2008 - Net profit 104M, of which 54M is attributable to minority interest.

2009 - Net profit 77M, of which 27M is attributable to minority interest.

2010 - Net profit 54M, of which 18M is attributable to minority interest.

2011 - Net profit 35M, of which 17M is attributable to minority interest.

2012 - Net profit 33M, of which 26M is attributable to minority interest.

2013 9M - Net profit 19M, of which 19M is attributable to minority interest.

 

Does the EBITDA calculation take into account that a significant portion of the consolidated business seems not to be owned by shareholders?