INLOT.AT - Intralot

[jeremykgold]

Updated FCF calculation after reading a few analyst reports I found:

 

EBITDA: 195

Taxes: ~25

Interest: ~40 (based on 3Q numbers)

Cap-ex: ~50

maintenance cap-ex: ~25

minority payments: ~20-25 (based on Fitch indication of 20m and prior reports where it was around 20-23% of EBIT)

 

GFCF: 55

P/GFCF: 5.3

 

FCF: 80

P/FCF: 3.65

 

Please criticize. 

 

It looks like going forward interest would be closer to 55 and interest income closer to 18-20?

 

Therefore giving, if using expected 2015 EBITDA of 225M

 

EBITDA: 225

Taxes: ~25

Interest: ~55

Interest Income ~ 18-20

Cap-ex: ~50

minority payments: ~25

 

FCF ~ 90 for a yield on current mkt cap of ~ 30%.

 

Is this reasonable?

 

[Packer16]

I calc IR expense closer to 48 based upon 325m * 9.75% + 236m * 6.8% = 47.4.

 

Packer

[jeremykgold]

I calc IR expense closer to 48 based upon 325m * 9.75% + 236m * 6.8% = 47.4.

 

Packer

 

Ok I need to look at the debt report more I think but for getting a very rough range for 2015 wouldn't we want to assume a refinancing of the 236 or somewhere around that number closer to 7.5?

[original mungerville]

This was also my question. How is this a 4.5x bagger? If they are at 3.6X and you are talking a target of 9x, that is a gain of 2.5x no? Still a great potential gain but not 4.5x or are we misreading something?

 

Well, Packer was listing the potential upside on a EV/EBITDA basis, so it would look like this:

 

current EBITDA of ~200 * 9 = 1800 - debt of (486+75) - minority interest of 75 + 150 cash = 1314 equity value.

Current market cap is 292.5. 

 

1314/292.5 = 4.5x

 

However, it seems unlikely it will get that multiplier.  5-7 range makes more sense, which results in equity value of 514-914 equity value, implying upside of 1.75x and 3x, respectively.

 

Similarly, if we gave it a P/FCF of 10x would give equity value of 810, which is a 2.76x.

 

Other than the minority accounting issue, seems very cheap.

 

Thanks Racemize. That makes sense.

[original mungerville]

The 4.5x (it is closer to 4.3x) is based upon a 9x EBITDA multiple with about 500 million of net debt including MIs.  So EBITDA of Euro196 x 9.0 = 1.764 b less .5b = Euro1.264b or about Euro 8 per share.    The FCF multiple will be higher but the firm is still growing (12% annually).  That is why I am using an EBITDA multiple.  I would use FCF once the firm has more normalized growth (in a few years). 

 

I agree it will not get a 9x multiple on normalized EBITDA but Intralot is expected to have Euro226 million EBITDA by 2015 a 15% growth from the current level of EBITDA.  In either case, at this price, Intralot has a nice margin of safety.

 

Packer

 

Thanks Packer.

[original mungerville]

Yadayada,

 

"If lets say they own 60% of some company, shouldnt they put 60% of the receivables number on the cash flow statement owed instead of 100%? Because it all has to balance out on the balance sheet?"

 

No, the way it usually works (under US GAAP) is if it is consolidated because they own 60% of it, then you put 100% of the receivables on the balance sheet and in the cash flow statement. Under IFRS, however, you can get pro-rata consolidation in certain cases. So it comes down to how it is consolidated. If a subsidiary was pro-rata consolidated, however, you would not get a minority interest on the balance sheet for the subsidiary.

 

So I think if you guys are dealing with a minority interest from that subsidiary, then it is fully consolidated which means 100% of the receivables should be on-balance sheet and on the cash flow statement (even if they only own 60%).

 

This is also why adding minority interest to the debt (as Packer has suggested) is the easiest thing to do (and it makes sense) when calculating EV/EBITDA (ie he is taking in all the cash flows and income on a fully consolidated basis, so he needs to account for the MI not owned by adding that to the EV, similar to the treatment for debt). Now, its not the only way to do it, but surely its the easiest and it does make sense. In certain cases, tweaking this approach may be warranted, however.

 

I hope this helps.

thanks for the explanation. So with GAAP principles, receivables would basicly build up? And what would be a way to figure out what % of receivables will get paid to intralot now?

 

With GAAP where the subsidiaries are fully (ie not pro-rata) consolidated (as seems to be the case here as we have minority interests), the consolidated statements of the parent would include all the receivables for every subsidiary which is fully consolidated with the parent for accounting purposes.

 

This is the accounting which is very different from what actually legally happens:

 

The parent only receives receivables payable to that legal entity (ie the parent company). All the other receivables would be received by each subsidiary - none of those go to the parent directly. However, if the parent owns 80% of a subsidiary, eventually 80% of that cash net of expenses, taxes, etc could be paid to the parent via dividends, etc. (because it owns 80 of the common). So the receivables are due to each legal entity which is serving a particular client.

 

 

 

 

 

 

 

 

[original mungerville]

More specifically, in Malta and following an international tender, the Company won again a 10-year

license, this time, for the operation of the national lottery, maintaining in this way its presence in

one of its most important markets.

Why is malta the most important market? I get that alot of gambling is head quartered there, but the island is tiny with only 400k inhabitants.

/ .

 

Malta is a tax haven so this may be one reason...

[Packer16]

The refi will most likely stay the same or go lower because the cash flows should be increasing, the debt is senior to the sub debt and the sub debt is now yielding 7.5%.

 

I think maintenance cap-ex will vary by firm and mix of business.  I know Gtech is also a part of complete state privatization of lotteries that may be more capital intensive than Intralot's model.  I also have an estimate of SGMS's maintenance cap ex at around 2% of sales from Value Line.

 

Packer

 

 

[prevalou]

Thanks Packer. But does maintenance cap ex include licenses and intangibles renewals or do we have to consider Intralot like a run off with 25 m$ maintenance cap ex ?

[wknecht]

Packer, you mentioned you use fidelity - their 1% FX conversion fee is a little tough to swallow. Is there some other way to reduce transaction costs, or did you just bite the bullet when you bought Intralot?

 

Maybe a topic for a different thread, but is this consistent for other US based folks using different brokers?

[Packer16]

Yes it does include tangible and intangibles.

 

As to Fidelity and there fees, I just had to swallow hard and ensure that what I was buying was significantly undervalued more so than US firms that I could purchase with lower fees.

 

Packer

[motownsf]

Packer,

 

Interesting idea-thanks for sharing.

 

Any references to what the maintenance and growth capex will be going forward? I know you mentioned around 25m in maintenance capex. Where did you hear/see that number?

 

Just curious as I'm having a hard time understanding how they will cut capex so significantly and keep their business growing.

 

Thanks again.

[yadayada]

The refi will most likely stay the same or go lower because the cash flows should be increasing, the debt is senior to the sub debt and the sub debt is now yielding 7.5%.

 

I think maintenance cap-ex will vary by firm and mix of business.  I know Gtech is also a part of complete state privatization of lotteries that may be more capital intensive than Intralot's model.  I also have an estimate of SGMS's maintenance cap ex at around 2% of sales from Value Line.

 

Packer

Alot of important contracts are open ended or only last 4-5 years. How do you know they wont require significant investments by then? The longer contracts are usually in countries like jamaica, which probably adds next to nothing to revenue. if you count on 60 million in FCF , that is 5x60 = current market cap. Another thing I dont like is that they  took out a bunch of debt just to pay dividends. Seems kinda like destroying shareholder value to me.

 

Also I dug up a list of websites and searched them on Alexa.com, and they dont get much traffic:

(these 2 are bench marks:)

http://www.alexa.com/siteinfo/bwin.com

 

http://www.alexa.com/siteinfo/888.com

 

The few I could find.

http://www.alexa.com/siteinfo/intralot.it

http://www.alexa.com/siteinfo/oddset.de

http://www.alexa.com/siteinfo/toto-mix.pl

http://www.alexa.com/siteinfo/deepstackcasino.net  (this one is truly awefull, and looks like a scam)

http://www.alexa.com/siteinfo/starcasino.it  (this one is the largest, allthough still small, but its actually operated by betsson, so they only get a small % I think)

http://www.alexa.com/siteinfo/lazyland.net

http://www.alexa.com/siteinfo/intralot.com.pe

http://www.alexa.com/siteinfo/lotterywest.wa.gov.au

 

Probaly missed a few, but I used to play poker for a living, and I have never heard from Intralot before. And their footprint in the poker market is close to zero.

 

Also, I dont know much about sportsbetting, but they claim 45% of revenue comes from sportsbetting right? From that presentation. With a 4.5 billion euro sportsbook, that is a 15% edge. Which seems pretty high. Ladbrokes has 7%. And again, I dont know much about sportsbetting at all, but could this edge come down, and how would it affect the bottom line? Generally bookies have a 5-15% edge, so 15% really is on the high side here.

 

And also where does the sportsbetting revenue come from? From retail? Because it cant come from their online activities. No way they get even close to 4.5 billion in bets from the above websites. I cant find anything about intralot running a large sportsbook for a big online name.

 

It looks interesting, but there are alot of htings to get comfortable here for me.

 

 

[Packer16]

The maintainance cap-ex is based upon analysts estimates and market data.  Do you have any data to say that it would be different?  My understanding is the debt is used fund cap-ex for new contracts not to pay dividends.  The dividends only show up because in some the ventures they have they are creating cash flow and the MI portion shows up as dividends from that venture. 

 

From what I have seen I don't think they have claimed to be an online poker or gaming company or had material revenues from that segment.  As to the sportsbetting business, the revenue comes from either running the games and getting a cut or providing the technology and getting a cut.  As to getting comfortable, each us has to get comfortable with each name we invest in.  Intralot has major countries and US states as customers so I would think if it is a fraud they would not be able to get and retain all of the contracts or team with other major players in the space for contracts (which they have).  Just my 2 cents.

 

Packer

[prevalou]

I took a look at Scientific Games. They estimate their  normalized cap ex at 14,5% of sales.it is far from intralot.

[racemize]

I took a look at Scientific Games. They estimate their  normalized cap ex at 14,5% of sales.it is far from intralot.

 

They may define sales differently--that's some of the issue with intralot's numbers, and why they focus on "gross win" right?

[prevalou]

IGT games is at more than 10% with a sligthly declining business. Is it just a difference in revenue accounting  ? I am not an expert on greek accounting and can't reconcile the dots

[prevalou]

If I take normalized cap ex % Ebita, there are differences too between Intralot and competitors. For Intralot, it would represent 12% and for competitors 30% to 40%

[jeremykgold]

Has anyone seen or read what they would use the increased discretionary cash flow for? Also, where did the capex in the peak expansionary phase of 2009-2010 go? What was it used for?

[jeremykgold]

Also, something I'm curious about more so because I don't understand it rather than thinking something is wrong but:

 

~ 90% of revenue is contracted until 2018 yet the bulk of revenue comes from Licensed Operations which operate without contracts. How can they give these exact numbers out until 2018 using 2012 revenue when the majority is open ended?

[Packer16]

The maintenance cap-ex is influenced by 2 items.  First, Intralot's revenue is gross and both Gtech and  SGSM are net.  So to convert Intralot to a net #, the conversion factor per the investor presentation is 12.9%/34.3% = .38 or Euro 516 for 2012.  So the Euro25 million is about 5% of net revenues.

 

For SGMS, the cap-ex in there presentation includes both SGMS legacy (the comparable to Intralot) and the acquired WMS (which is more capital intensive).  WMS's cap-ex is $178m, so legacy SGMS cap-ex is $75m = $253 - $178m.  The resulting cap-ex to sales for legacy SGMS (including growth) is about 8%.  So the 5% is not to far from the 8% (because you need to remove some for growth).

 

As for Gtech, I calculated total cap-ex in 2012 as Euro256 and revenues of Euro3076 so cap-ex to sales of 7.8% (including growth) and for 2013 7.4% (see Gtech 2013 company presentation for details).  How did you arrive at 14.5%?

 

Packer

[prevalou]

I arrive at 14,5% for scientific games, not gtech. 238/1600 (14,8%  actually)

[prevalou]

So, if free cash flow is 71 m with 25 m cap ex, with 5% of revenue, it will be around 35 m (71-5%1500+25) and the price will be 8 times free cash flows

[xtreeq]

Found this two year old article while searching the web for some info about management

http://www.maltatoday.com.mt/en/newsdetails/news/national/Maltco-blocks-lotto-tender

 

A probity investigation led by Kroll Associates Inc. - a reputed Chicago-based investigation firm - has uncovered numerous criminal indictments brought against Intralot SA, the world's second-biggest gambling services provider, and mother company of Malta-based operator Maltco Lotteries Ltd.

 

Headquartered in Athens, Greece, Intralot has faced a string of investigations over money-laundering, fraud, embezzlement, bribery, misleading investors and espionage, coupled with its loss of licenses in Bulgaria and South Africa and its dismal performance record in Australia.

 

Kokkalis was indicted at least four times by Greek prosecutors for money-laundering, fraud, embezzlement, bribery, misleading investors and espionage, the report said.

 

The Athens prosecutor also alleged Kokkalis used offshore companies in tax havens such as Cyprus, Switzerland and Ireland to launder income from Russian lottery contracts. Kokkalis bribed members of the Russian Olympic Committee to win a contract for Lotto-Million, a national lottery benefitting the Olympic Committee and the City of Moscow. Kokkalis was ultimately acquitted

 

Also in 2002, another Greek prosecutor charged Kokkalis with defrauding investors who bought US$628 million worth of stock in three of his companies (Intrasoft, Intralot and Intracom). Kokkalis was accused of failing to invest the money in his companies as required by Greek law. Again, he was acquitted.

 

A year earlier, Kokkalis, together with his son and seven other Intralot directors, were indicted in Greece for embezzlement and breach of duty, while aiding and abetting the Greek government owned lottery organisation OPAP.

 

Christos Salales, OPAP's managing director, was fired in the wake of the indictment, and was soon hired by Kokkalis to work in his company.

 

Kroll investigators go on to reveal that since its inception, Intralot has been embroiled in numerous controversies, both in Greece and abroad. Many of the controversies involve allegations that Intralot and Kokkalis engaged in corruption to obtain lottery contracts.

[Packer16]

So, if free cash flow is 71 m with 25 m cap ex, with 5% of revenue, it will be around 35 m (71-5%1500+25) and the price will be 8 times free cash flows

 

For Intralot, you have to use on net sales not gross to calculate cap-ex if you are using 5% of sales (net sales).  IGT is similar to WMS and thus in the more capital intensive casino gaming machine market.  Thus arriving at Euro 25m of net sales. So

 

EBITDA                                  196

Less: Interest exp (net)        35

Less: Taxes                            25

Less: Maintenance cap-ex      25 (5% of Intralot's net revenues)

Less: MIs                                25

Free cash flow                        86

 

Mkt Cap                                  311

FCF Multiple/Yield                    3.6 or yield of 28%

 

Packer