INLOT.AT - Intralot

[ContrarianNick]

Hey guys, Q2 results are out and overall they do not look that bad although some chronic problems seem to persist:

 

• Revenues and EBITDA grew nicely with organic growth rates well in double digit range and accelerating in Q2 vs Q1.

 

• Cash generation, however, was once again the missing element as net debt crept up to Eur510mln from Eur480 in Q1. There were around Eur30mln of outflows to minorities (of which 10mln one-off distribution to Gamenet) making the full year guidance of Eur30mln outflows in dividends to minorities highly doubtful.

 

• Management is however accelerating the disposal process of several stakes (Perù and Australia apparently are up next) but is difficult to estimate how much cash they will fetch (management did say that Perù will be sold at about 7x EV/EBITDA without giving an EBITDA figure). According to my estimates  they should fetch between Eur 25/50mln from 80% of Perù (but please remember that these are just educated guesses).

 

• Debt refinancing continues to be mentioned but with no real updates on the matter. I think that they could probably refinance the 9% 2018 bond at around 5/6% just by looking at where the 2021 bond is trading (that would probably increase FCF generation of about Eur 10mln).

 

• I still believe that the equity is likely to be worth more than today’s prices but it is very difficult to understand by how much given the role that minorities have played historically on the cash generation potential of the company. What is clearly a positive is the willingness by owners and management  to simplify the company’s structure and monetize some of their participations, however it is unclear, at this point, how lengthy the process will be.

 

[ContrarianNick]

The company announced this morning the early call on the 9.75% 2018 Bonds and the issue of a new 5YR bond (I expect it to come out around 6%). This should definetely help the cash generation of the company going forward. Good News

[tombgrt]

Thank god. Thank you for the posts ContrarianNick, appreciate it!

[tombgrt]

Packer, what is your current take on the minorities given the fact that payouts to them doesn't go down as expected? One important aspect of the thesis was payouts to minorities going down to 20-25Mln and the opposite seems to be happening.

[ContrarianNick]

So the new bond came out at 6.75% which implies a decrease of around Eur 7mln in interest payments. However, this year they will have a non recurring premium payment on the 9.75% bond of 4.8% (Eur 12mln) while also having already paid more than half of the 9.75% coupon, so total cash generation will actually go down this year. Personally I expected a lower cost of debt on the new issue (5/6%) and I believe that current market volatility did not help the company in that sense. While staying positive on the long term return potential on the equity side of the equation, I believe the new bond offers an interesting investment proposition  especially considering the cash flow they will receive from selling Peru by year end.

[tombgrt]

Thank you Nick. I'm disappointed as well but at least they did it. :x

 

It's interesting to see the classic COBF-effect at work here once again. No one gives a shit anymore and suddenly the stock jumps up 50-60% again.

 

Hope management is happy with the buyback rule where they can't buy under 1EUR. Any specific reason that they had to do that? The higher it goes, the more they start buying!

[racemize]

I think they were just waiting for me to capitulate.  Sold at the bottom to switch into JPM warrants at the bottom.  Not sure who's winning at the moment though.

[investor-man]

I think they were just waiting for me to capitulate.  Sold at the bottom to switch into JPM warrants at the bottom.  Not sure who's winning at the moment though.

 

heh same except JPM

[tombgrt]

Can I ask why you guys sold? You might be right regardless as this kind of low liquidity stock could be back at 0.80EUR in a few weeks!

 

Investor-man, did you also sell Emeco? That topic is dead as well!

[Packer16]

Even after this rally, Intralot would have to double to have the same multiple as IGT.  Perhaps EM is tailwind versus a headwind in the past.  We will see.

 

I still hold Emeco but have added Swick which is a much better company.  The restructure looks like a good deal & a way to consolidate the business & remove the debt theat.  Also a way to right-size the business for the lower level of demand.

 

Packer

[investor-man]

Can I ask why you guys sold? You might be right regardless as this kind of low liquidity stock could be back at 0.80EUR in a few weeks!

 

Investor-man, did you also sell Emeco? That topic is dead as well!

 

I sold maybe a month or two ago, and not really for any concrete reason related to the company. I had been holding for maybe 2+ years, and all it had done is lose money for me. GNCMA had made some money for me in the past, and it's gotten cheap again while its story has gotten better, so I shifted the money over there. That's the only trade I've made since January or February when I bought a bunch of oil companies. This tilts my portfolio quite heavily toward oil/commodities (GNCMA being in Alaska too). I hope I don't regret that.

[racemize]

I sold because the minority payments kept staying high, the margins of the business they are in appear to be shrinking, the silly buy back rule, the catalysts we all hoped for weren't materializing after 2.5 years, and while I understand Packers approach, it is just kind of hard to own something that seems to make no money and not do much about it.

 

Also, I was very confident that JPM warrants at 14.5 were going to do something, whereas this thing I just couldn't feel good about.

[tombgrt]

Even after this rally, Intralot would have to double to have the same multiple as IGT.  Perhaps EM is tailwind versus a headwind in the past.  We will see.

 

I still hold Emeco but have added Swick which is a much better company.  The restructure looks like a good deal & a way to consolidate the business & remove the debt theat.  Also a way to right-size the business for the lower level of demand.

 

Packer

 

Sure Intralot market cap would have to double but would you say they are both of equal quality? IGT seems to be the higher quality business here with serious economies of scale that Intralot can hardly compete against no?

 

Capex remains higher than anticipated and MI's remain a previous highs so we'll see. I wouldn't feel bad about selling some before even getting close to IV.

 

Thanks for the light on Emeco as well.

 

I sold because the minority payments kept staying high, the margins of the business they are in appear to be shrinking, the silly buy back rule, the catalysts we all hoped for weren't materializing after 2.5 years, and while I understand Packers approach, it is just kind of hard to own something that seems to make no money and not do much about it.

 

Also, I was very confident that JPM warrants at 14.5 were going to do something, whereas this thing I just couldn't feel good about.

 

Can I ask why you guys sold? You might be right regardless as this kind of low liquidity stock could be back at 0.80EUR in a few weeks!

 

Investor-man, did you also sell Emeco? That topic is dead as well!

 

I sold maybe a month or two ago, and not really for any concrete reason related to the company. I had been holding for maybe 2+ years, and all it had done is lose money for me. GNCMA had made some money for me in the past, and it's gotten cheap again while its story has gotten better, so I shifted the money over there. That's the only trade I've made since January or February when I bought a bunch of oil companies. This tilts my portfolio quite heavily toward oil/commodities (GNCMA being in Alaska too). I hope I don't regret that.

 

Thank you both for your comments, appreciated.

 

 

I'm also looking into rolling some in other names and understand the sentiment...

 

 

[tombgrt]

http://www.intralot.com/content/3765/announcement

 

68.7mln USD for 80% of around 10-11mln EUR EBITDA/year. Seems ok to me but don't know much about the specific market. Strong current USD/EUR is a nice bonus.

 

Any specific comments on valuation of the sale?

 

 

 

[Packer16]

It looks like it validates about a 7 to 7.5x EBITDA valuation for these types of firms.  This is about IGT's multiple also.  So from a 7.1x multiple I get an equity value of Euro 2.7 per share.  Management finally seems to be moving in the direction of value creation with this sale, the debt re-fi and the daily share repurchases.

 

Packer

[tombgrt]

Yes, what I figured as well re valuation, thx. Not so sure on quality of Peru versus the rest of the business, ebitda margins etc in line.

 

The repurchases aren't impactful though, volume is way too low. I'd love to see some more sales for some debt reduction.

[tombgrt]

http://www.intralot.com/sites/default/files/Press%20Release%209M16_ENG%20(FINAL)_0.pdf

 

Q3. Did anyone listen to CC or got a transcript? Confused on a few points tbh.

[Phaceliacapital]

The conf call is at 16 today.

[tombgrt]

My bad. Misread it as yesterday. ;)

[Phaceliacapital]

Intralot: Q3 and 9M/16 earnings review: weak third quarter

"Hold" the notes

Yesterday, Intralot released Q3 and 9M/16 earnings, with an analyst call scheduled for later today. Q3 EBITDA was very weak, dropping c. 14% y-o-y to EUR 35 mn, while margins deteriorated almost 400 bps. This was mostly due to FX, with constant currency EBITDA down only 1.8% y-o-y. The main driver was higher spend at Intralot S.A towards securing new projects (away from its EUR base currency), product development and timing effects. That said, the top line registered 16.2% growth, thanks to increased sports betting revenues in Bulgaria and the consolidation of Eurobet's activities in the country. During the 9M/16 period revenues and EBITDA amounted to EUR 958 mn and EUR 124 mn, up 7% and 2.4%, respectively, driven by a solid H1/16.

In terms of business segments, for the 9M period all divisions registered growth, with management contracts growing almost 20% y-o-y. Regionally, revenue growth was only positive in Europe due to new products and contracts, with all other regions being lower y-o-y. That said, higher initial costs and regulatory pressures caused European gross profits to weaken compared to the Americas and RoW, which exhibited positive gross profit trajectories y-o-y.

Working capital in Q3 and the 9M/16 period remained ahead of last year, while capex was lower y-o-y. Nevertheless, organic FCF was likely negative, since net debt increased by EUR 23 mn due to dividend distributions to JV partners, M&A and negative FX. The company recently successfully completed a refinancing, which did not materially extend its existing maturity profile but yielded substantial interest cost savings. PF net leverage (as per company) was 2.9x.

In our view, Intralot's results reflected the company's aggressive moves to secure new contracts in growth regions. Liquidity remains ample for now, but we remain cautious on cash burn. We will comment in further detail following the conference call.

 

[Phaceliacapital]

Mittleman:

 

https://www.docdroid.net/f4vwgUD/mittleman-brothers-2016-annual-review.pdf.html#page=3

 

Fair value: 3

[tombgrt]

IGT has tanked lately and is at a 52 week low. Also a Mittleman holding at 9%. I believe they had fair value at $30-35 at least. 

[racemize]

How's this thing doing?  Have there been any meaningful improvements, or still the same old?

[investor-man]

I noticed it tick up a bit too. Autohellas is on a tear as well, and it looks like a general uplift in the Athens index. I'm unaware of any news that would make INLOT a good bet aside from it's general undervaluation.

[ContrarianNick]

Hey guys just wanted to highlight that Gamenet is planning to list in Q4 and, given that Intralot holds 20% of the company, this could create a catalyst for the stock. By my count, very much back of the envelope, Gamenet does 80mln of ebitda which at 6x minus the debt (178mln) implies around 60mln for Intralot in terms of the value of the stake. I have no idea how much gamenet contributes to the bottomline (so it's very difficult to do a dilution analysis if they decide to sell the stake and payback debt/ do buybacks) but I would consider this as a positive for the story.