INLOT.AT - Intralot

[Haasje]

Since the story surfaced INLOT may have tampered with the Dutch State Lottery I've been following this story with extra interest. I posted before but didn't see any new stories surfacing on the news or in papers I read. It is actually somewhat odd that the affair is not receiving a little bit more attention from media but perhaps journalists don't care that much if gamblers get defrauded.

 

When I see the INLOT thread pop-up I sometimes do a Google search and now I came across a more in depth article from September to see if I can find anything helpful in Dutch. I'll post a translation of some of the passages which I would find concerning as a shareholder. I don't have a position either way btw. I left out some important bits that I already posted about before on this thread:

 

Link to the article https://blendle.nl/i/de-volkskrant/schatkist-staatsloterij-zit-niet-op-slot/bnl-vkn-20140920-3545720

 

PriceWaterHouseCoopers concluded in a confidential report from 2011 there are several things amiss with the security of the State Lottery Intralot systems. A number of third party employees (Intralot) can access the system without proper authorization.

 

A former Intralot employee: "I have always been thinking: these guys are criminals. I'm working with a gang."

 

Stamatina Marmara, apparently won several large prizes in the Greek Lottery wile married to a former-board member of Intralot. (I also came across a source stating she spent more on tickets than she won in prizes; http://www.balkanalysis.com/blog/2005/11/14/state-lottery-sports-fraud-aiding-drug-money-launderers-in-greece/)

 

According to the U.S. consultancy firm Kroll there are a large number of investigations into Intralot regarding money laundering, fraud, bribery, espionage, misdirection and embezzlement. None of which resulted in a conviction. Kroll investigated at the request of the State of Illinois which wanted to outsource its lottery. Based on the report Illinois decided not to go with Intralot.

 

Joost den Heijer COO, Dutch State Lottery, stated in a trade publication called IT-auditor, 2011: Intralot is not used to getting audited like this.

 

Ex-Intralot employee: after the critical report by PWC Intralot told us to lie to auditors*. A second employee confirms: We were told to fabricate documents to satisfy the auditors*. Not participating was not an option, it was made clear by the Greeks. 

 

Another Ex-Intralot employee: Intralot organized videoconferences with the State Lottery where they talked about the systems, security and supposed problems. We were not allowed to say anything but it was all a big lie.

 

According to 4 ex-employees Intralot has a culture of intimidation.

 

According to a confidential 2012 report of the Nederlands Meet Instituut (NMI), (Dutch Institute for Measurements) http://www.nmi.nl/about-nmi/nmi/organisation/ the machine used to perform drawings can be tampered with. According to the State Lottery this is only possible if seals are broken. A notary is overseeing the process and making sure that doesn't happen.

 

*the Dutch word used is "controleur" which literally translates as controller. I used auditor because the Dutch term indicates an outsider (not a company controller).

 

I'm not a certified translator but if you need one I might be able to put you in touch with one although Elance may be able to help you out as well. The source is an important Dutch paper.

 

 

[yadayada]

Yeah I think there is certainly some dirt here. But the thesis is that between their lottery, their sport book and some of their gambling sites, they generate between 40-80m on a <200m market cap. And pay dividends. Im certainly not banking on this getting a 10x multiple though.

 

A lot of this stuff goes 10-15 years back though. It is interesting indeed that people seem to care so little about this.

[tombgrt]

It's also worth noting that the 'Nederlandse Staatsloterij', a private company as well, hasn't exactly got a clean sheet itself.

 

Question is also how much is related to industry tactics and politics, past and present. And why exactly is it so hard to convict him or the company of anything if it is so obvious? Doesn't seem easy to do for 15+ years? But I'm sure at least some things are (partly) true. It's not exactly a clean sector to begin with and any company with the same profile would have a hard time avoiding some dirt.

 

What worries me more is margin contraction as they are now a smaller player going against the big guys. Won't get easier to secure profitable LT contracts?

 

Also: http://www.intralot.com/content/3237/announcement

 

 

[Packer16]

The market is caring a whole lot about this that is why it is priced where it is.  The question is it more than reflected in the price.  There have been many investigations but no convictions (not enough evidence to prove charges) and I am sure that are some folks with less than pristine reputations running state lotteries and sports books.  As to former employees statements, there was no context to what they were speaking of.  Was it a judgement call the ex-employee disagreed with or a line the company stepped across.  For example was the fabrication just a calculation performed after the fact based upon an estimate at the time or were there numbers made up to satisfy Grant Thornton?  If GT signed off on the statements then I think the issues have been resolved to there satisfaction.  I have worked with GT and they are as if not more thorough than the other Big 4 in our reviews.  Also, is this a few bad apples (which can happen anywhere) or deliberate attempt by Intralot to defraud the lottery (I think not). 

 

Packer 

[Haasje]

I agree the numbers are very attractive. I merely posted because I was worried this stuff which is not even that prominently featured within the Dutch news (I haven't seen it surface in the financial paper) may not have been fully priced in.

 

[tombgrt]

Good points Packer. It seems particulary silly to focus on  testimonies of a few disgruntled ex-employees if there is little else to go on. Especially when it's unclear who would be at fault (if anyone!) and whether or not Intralot gave a helping hand.

 

It does make me wonder what it will take to let the market value this more fairly. And it's not as if any competitor is going to bid 7-8x EBITDA now from the current low prices.

[Packer16]

Haasje - Appreciate the information and would be interested in any more background that could be provided.  From my understanding, this company has a pretty bad reputation amongst most analysts and in combination with being domiciled in Greece has turned off many investors.  The new CEO, formerly CFO of Intralot and CEO of Hellas Online, sold a majority of Hellas to a strategic so it will be interesting to see what he will do here. 

 

Packer

[frommi]

I don`t know if this was posted already and i can`t really see if this has a material impact on 2015 EBITDA or if these losses were mainly in 2007/2008 but when they win the lawsuit it could be a little windfall.

 

http://www.heraldsun.com.au/news/victoria-state-election-2014/gaming-giant-intralot-quits-victoria-after-63m-losses-over-deal-largely-struck-by-labor-leader-daniel-andrews/story-fnocxssc-1227101737045

 

Though when i read it again it sounds like it had an impact, so ~17 million more EBITDA going forward?

[yadayada]

There are a few things I don't like though.

 

-Wife of Chairman I think (or at least someone high up) wins a large sum in lottery (that is really conspicious.)

-Guy at OPAP gets fired for corruption in money laundering scandal for laundering drugs and rigging results in greece, then gets hired by Intralot

-The dutch article is sort of damning. It says that people who were not authorized, walked in and out of the server room that held all the final results of the lottery. And when they said that was not allowed they were told to shut up, and threatened.

-There seem to be a lot of charges pressed against kokkalis (the guy who owns 20% of Intralot), and he is a very shady individual. Seen hanging out with other crooks. And it seems he must certainly be guilty of something. Innocent people dont hang out with crooks and get charged that many times.

 

That said, if this would affect contracts for lottery business, it would have done so already. Some of this information is 10+ years old. And Kokkalis is still not succesfully indicted for something. Allthough you have to agree that this company will never deserve a full multiple. Im curious to see what Q4 brings, and if they make true on their promises of harvesting cash. It seems Q4 is usuallyt he quarter when most of the cash is generated.

 

It does seem that kokkalis guy is some sort of sociopath though. I wonder how much influence he has on intralot?

 

This is the dutch article:

http://www.stopdebankiers.nl/staatsloterij-een-web-van-intimidatie-manupilatie-en-fraude/

The website is stop the bankers though. Not sure how biased or correct that information is though.

 

http://www.sj-r.com/article/20101118/News/311189935/?Start=1

But that was in 2010, and they won a lot of new contracts since then...

 

http://www.balkanalysis.com/blog/2005/11/14/state-lottery-sports-fraud-aiding-drug-money-launderers-in-greece/

 

Im still holding. If they pay out most of the FCF, you get your money back within a few years at this point...

[Haasje]

I'm not trying to talk anyone out of their position but if I come across pertinent material in Dutch I'll post a recap or summary.

 

Quick comment @ Yadayada, the dutch article on stopdebankiers.nl (stopthebankers) is actually a Volkskrant article (which can be accessed through Blendle) or the Volkkrant archive. At the bottom of the stopthebankers article it also states: Source:Volkskrant.

[investor-man]

Greek premier calls snap presidential election

 

http://www.ft.com/cms/s/0/747cdf0c-7f09-11e4-bd75-00144feabdc0.html#axzz3LL8ESQjD

 

This is certainly an exciting stock to own, if nothing else :)

[tombgrt]

Ha, unbelievable. Not that an extra 2 months would help a lot. So I guess it is very likely we will see Syriza in power in a few months. Unbelievable how people are willing to dig their own grave. Go democracy!  ::)

 

On top of that, INLOT is the shitiest stock of the index as usual, which is telling... And why is a stock like OPAP only down 3%? Isn't the risk for both nationalisation and currency (back to drachma)  much higher here? Sorry, had to vent!  ;)

 

edit: oh nevermind on the OPAP think, market wisening up.

[Phaceliacapital]

Hey Phaceliacapital. Any chance we can get the same of Q3? :) TIA!

 

Was again shocked to see day volume of barely 50,000€ yesterday for a day after earnings. Might as well skip the stock's listing.  :D

 

DN000000002180408120.pdf

[tombgrt]

Thanks Phacelia! Shit this management stinks..

 

On buybacks:

 

Unidentified Participant

Okay. And do you think -- is there a reason you've been excluded from this consolidation or you have actively wanted

to be excluded from it?

 

Constantinos Antonopoulos, Group Chief Executive Officer

We do not seen much of synergies between the casinos and the lotteries.

 

Unidentified Participant

Okay. And so, in the recent months, we've seen a huge volatility in your stock price due to, it seems just being included

on the exchange in Greece. And so it seems like that volatility just provides you with a real opportunity to buy back

your stock at really great returns, given that you guys do seem bullish on it over the long-term and in that next year it

seems like the cash flow generation should improve. So, either this volatility just giving you an opportunity to buy back

your stock at a cheap level?

 

Constantinos Antonopoulos, Group Chief Executive Officer

What the management has decided not to be is traders. So, I cannot see very much of a reason to buy the stock of the

company or to have a decision at Board level and the next day that tries to go further down and make losses that it is

attributed to a decision that it was not sophisticated not much on a very volatile stock exchange which is driven not by

the stock or the performance of the company, but maybe the country. So, this is the answer we have given in the last

years on the stock which is -- in the American Stock Exchange.

 

Unidentified Participant

Sir, I'm not saying to trade it, I'm saying to when the market gives you an opportunity, it's coming at you every day and

giving you a price on your company. One week it's 40% lower than it was the week before; you're not trading at that

point, you're just taking this volatility and using that to your advantage to buy back your stock at a cheap level. I'm not

saying to trade the stock, I'm saying to view it opportunistically. So, you know the internal level or some level that your

company has worsened and the market is coming to you with a greatly reduced price, that provides you with an

opportunity to buy back your stock. And it seems like that rate of return is much higher than compared to debt, let's say

or even the return on capital of the business right now.

 

Constantinos Antonopoulos, Group Chief Executive Officer

Do you say (inaudible) to buy stocks and to keep them or sell them again?

 

Antonios Kerastaris, Group Chief Financial Officer

This cannot be more than 10% according to the Greek law, first of all and --

 

Unidentified Participant

I'm suggesting you just buy back stock and cancel the shares. It seems like a way to increase the cash flow per share

without any operational risk. It's almost one of the easiest ways to increase the value per share when your company is

undervalued, which it seems like you guys fall into that latter category right now.

 

Constantinos Antonopoulos, Group Chief Executive Officer

This cannot be more than 10% a quantity to Greek law, first of all and --

 

Unidentified Participant

10% would be a great amount though I think. I think --

 

Constantinos Antonopoulos, Group Chief Executive Officer

Ad hoc, 10% per year or 10% for -- it's maximum 10% which may be the drop of the next day or may be the increase of

one day. So, this is a very volatile stock exchange, and I don't, -- anybody can blame, anybody has the decision, but has

not been a wise decision. I understand to your points, but it's not been shared by the Board.

 

Unidentified Participant

Okay. So, I guess the fear that it may become even cheaper due to being on the Greek Exchange, but say so when it

comes to me and offers me a $1 for $0.75, I'll buy it for $0.75. If they offered to the next person for $0.50, I still made a good decision buying the $1 at $0.75, even though it was cheaper for the next person. And I feel like this is the

situation you guys are in. It's still the right decision to buy back the stock now, although I do understand your fear

about it being cheaper, but it seems like it is the right decision to still buy it cheap when you can.

 

Constantinos Antonopoulos, Group Chief Executive Officer

I have no (inaudible) that I have done already.

 

Unidentified Participant

Okay. All right. Well, thanks for taking my call.

[yadayada]

That was painfull to read. But I am encouraged by the fact that they will focus on working capital and more cash flow now. That means thes tock is likely very v ery cheap.

[matjone]

What in the hell is Antonopoulos talking about?    This leaves me wondering if he is really this dumb or if something else is wrong here.

 

 

[yadayada]

Also what are minority interest dividends?

http://www.intralot.com/sites/default/files/INTRALOT%20(Fin.%20Stat.%20-%20Full%20Notes)_1.pdf

 

The 19.5 mililon is not for minorities is it? It is for intralot shareholders? Or do I have this wrong? If they are to minorities, im not very hopefull on this company.

[tombgrt]

Also what are minority interest dividends?

http://www.intralot.com/sites/default/files/INTRALOT%20(Fin.%20Stat.%20-%20Full%20Notes)_1.pdf

 

The 19.5 mililon is not for minorities is it? It is for intralot shareholders? Or do I have this wrong? If they are to minorities, im not very hopefull on this company.

 

You are wrong and I was wondering why you were always referring to the dividends that the company pays to shareholders.. ;)

[yadayada]

yeah this whole company is fking confusing to me. Glad it is only a small position. Normally it says 'dividend to minority shareholders' in the cash flow statement :/ . Why do they not make the distinction here?

[phil_Buffett]

stunning how stupid These idiots are  >:(

[yadayada]

So last year CFO was about 81 million. But this year Ebitda is lower. But they did have lower CFO due negative working capital. so maybe this year it will be 90m? Capex of 50m? Minority dividends of like 20-25m?

 

Then they receive about 13-14m from minority interests. So 90-50-25+14. So about 30m in FCF then this year?

[racemize]

didn't like this part:

 

Antonios Kerastaris, Group Chief Financial Officer

Unfortunately, the high yielding contracts in this industry are becoming scarce, few and far between. So, you need to

manage your business with smaller margins and from a larger operation in general. We don't see that only in our

business, we see that in the sector as a whole, and we are adjusting our operation in that new modus operandi. So, it is

an industry trend. You will see that in our competitors as well.

But, it's not an easy transition, like you will see if you're following the industry in general, you will see that most of our

competitors have a hard time adjusting to an operation with a lower operating margin. So, going from lucrative

contracts, say Italy for example for our competitors, et cetera, is not going to be an easy exercise. I think we're a bit

more flexible and a bit more agile in adjusting our operation to a lower margin, that looks a bit like the dot-com world,

and is a completely different ball game. And I think part of our success or less success in that field will be how fast we

can adjust our operations.

[tombgrt]

Officially a penny stock! Up to 0.6€ and below!

[maybe4less]

They actually did a share buyback today.

 

It's small, but actually a fairly large percentage of the daily volume.

[tombgrt]

http://www.intralot.com/content/3253/announcement-share-back

 

Woehoe! Now I won't feel as compelled to buy more of the stock myself! (It is quite a big position, thus the frustration).

 

This is interesting because the old CEO said he would never buy back stock. The new CEO (ex-CFO) is in for less than a month and he does it. Hoping for more.

 

Does anyone know if they are limited to buy based on daily volume by Greek law?