INLOT.AT - Intralot

[LongHaul]

I looked at Intralot and here is what I didn't like.

 

1.  The minority interest seems to have a big claim on the earnings of some subsidiaries which seems to suck out almost all the NI (after interest expense which must be at holdco).

 

2.  DA appears to approximate maintenance capex.  In almost all businesses this is the case.  See Buffett's writeup on this.

The Maint capex that a lot of mgmt teams use tends to be garbage.  Often the level assumes a liquidating business. 

[investor-man]

Ιntralot extends its online contract in New Mexico

 

http://english.capital.gr/News.asp?id=1962269

[investor-man]

Intralot becomes technology vendor of the national lottery of Ireland

 

http://english.capital.gr/News.asp?id=1979013

[jhcap]

Wyoming selects Intralot as state lottery vendor:

 

http://www.jhnewsandguide.com/jackson_hole_daily/state_and_regional/wyoming-lottery-commission-selects-vendor/article_01bcc026-4610-5042-a301-55b59792eeb1.html

[investor-man]

heh, I guess their capex isn't going down any time soon -- good problem to have, I suppose.

[racemize]

Full Year out.  Still digesting.

 

http://www.intralot.com/sites/default/files/INTRALOT%20FY2013%20Results%20Press%20Release.pdf

 

Packer, we would of course appreciate any thoughts.

[skanjete]

I'm really having difficulty getting my head around this.

 

The overall company is one thing, but the minority interest have a disproportionate influence here.

I can't evaluate what economic profit accrues to the equity holders or estimate the value or value range of the equity.

 

Is there somebody here with a clearer view that can help me out somewhat?

[Packer16]

The easiest way to deal with MI's is to add them in as debt in your EV calculation.  This still results in an EV/EBITDA of 4.3x with GTECH and SGMS @ 6.1x and 6.4x EBITDA respectively.  They also seem to be gaining new business in Ireland and Wyoming.  A really cheap equity that is growing.  Sounds good to me.

 

Packer

[hardcorevalue]

Packer what broker have you been using? Internactive Brokers Canada doesn't offer stocks in Athens.

[investor-man]

Packer what broker have you been using? Internactive Brokers Canada doesn't offer stocks in Athens.

 

Fidelity

[cubsfan]

Packer what broker have you been using? Internactive Brokers Canada doesn't offer stocks in Athens.

 

Yes - I got my Intralot via Fidelity as well.

[Packer16]

Yes it was Fidelity (both times).  Look for the high price paid for the day and I was there.

 

Packer

[argonaut]

Hi Packer,

 

Just out of curiosity - when you write both you were there did you mean back in December or today you added?

 

I purchased December and Jan - found Fidelity very easy to use for Inlot as well as LRE.

 

Cheers,

 

Marc

[Packer16]

I have added in the past.  I am up to my "limit" on Intralot.

 

Packer

[Green King]

I have added in the past.  I am up to my "limit" on Intralot.

 

Packer

 

How do you determine a limt?

Been having problems with it.

[skanjete]

The easiest way to deal with MI's is to add them in as debt in your EV calculation.  This still results in an EV/EBITDA of 4.3x with GTECH and SGMS @ 6.1x and 6.4x EBITDA respectively.  They also seem to be gaining new business in Ireland and Wyoming.  A really cheap equity that is growing.  Sounds good to me.

 

Packer

 

Packer,

 

Thank you for the answer.

 

Indeed, if one considers the complete company, one can add the MI as debt. That's quite a straightforward way. No problems with that.

 

But I was trying to figure out what economic profit accrues to the equity holders. That doesn't seem to be so simple. More so because a disproportionate part of the cash flow/profits seem to go to the MI.

I don't know if E.V./EBITDA is the correct parameter to use if the biggest part of the EBITDA goes to a small part of E.V. (minorities) in which equity holders have no interest.

More so because, it's not that the minorities are like debt in that they can be bought out by the equity holders at will with the generated EBITDA.

 

[Packer16]

Most of the cash flows (EBITDA) goes to the Intralot shareholders but the accounting earnings may not.  The reported MI in the income statement is based upon accounting earnings allocation not EBITDA.  The MI is quite volatile and depends upon accounting earnings allocated to the MIs and Intralot.  Not enough detail is provided about the profitability of each JV to build up accounting earnings allocation.  Analysts just add the MI at FV to determine the value of the company.  Also if you look at CFO the MI's portion of the cash flow is removed.

 

Packer   

[original mungerville]

Most of the cash flows (EBITDA) goes to the Intralot shareholders but the accounting earnings may not. 

 

Packer, I just wanted to point out that this statement doesn't make sense to me. As you know, a MI is a subsidiary interest held by entities other than Intralot. So cash flow would go to the parent only if the subsidiary paid dividends (or interest payments on inter-company debt of which I am assuming there is none in this case; or if there were market rate management fees between companies, etc). So I think its more correct to reverse the above statement: most of the accounting earnings go to Intralot shareholders, but the cash flows do not as the cash flows from subsidiaries are locked in those subsidiaries and eventually distributed, pro-rata, to the parent and minority interests over time in the form of dividends. That eventual distribution essentially bifurcates those cash flows such that Intralot shareholders will not receive the full benefit of the cash flows (despite the accounting earnings fully showing up on a consolidated basis).

 

I think a quick way to treat minority interests, as you say, is like debt in the EV calculation. However, it is good to keep in mind that this is a short-cut and other methods/approximations could prove useful/complimentary when a lot of the group's earnings are flowing into a subsidiary(ies) with significant minority interests.

[original mungerville]

The easiest way to deal with MI's is to add them in as debt in your EV calculation.  This still results in an EV/EBITDA of 4.3x with GTECH and SGMS @ 6.1x and 6.4x EBITDA respectively.  They also seem to be gaining new business in Ireland and Wyoming.  A really cheap equity that is growing.  Sounds good to me.

 

Packer

 

Packer,

 

Thank you for the answer.

 

Indeed, if one considers the complete company, one can add the MI as debt. That's quite a straightforward way. No problems with that.

 

But I was trying to figure out what economic profit accrues to the equity holders. That doesn't seem to be so simple. More so because a disproportionate part of the cash flow/profits seem to go to the MI.

I don't know if E.V./EBITDA is the correct parameter to use if the biggest part of the EBITDA goes to a small part of E.V. (minorities) in which equity holders have no interest.

More so because, it's not that the minorities are like debt in that they can be bought out by the equity holders at will with the generated EBITDA.

 

Your above statements are correct. Treating MI as debt is not theoretically correct - its only a short-hand estimate and may not be appropriate if MI are large in a subsidiary where most of the EBITDA is generated.

[Packer16]

You are correct about MIs, however, the MI's are recorded at "fair value" per IFRS so the actual FMV of the MI is estimated when it is put on the balance sheet.  Intralot started IFRS in 2012 so it has 2 years under the new standard.

 

Packer

[racemize]

Where are their presentations posted (e.g., there is one for 2013 FY that they discuss in the conference call)?

[racemize]

my notes from phone call:

 

wins in China/Asia could have dramatic impact on future (positive)

 

cap-ex guidance for 2014:

coming from average cap-ex over 5 year of 100m, for investment;

going forward, normalizing with no major cap-ex going forward, will capitalize from existing contracts, should show up in numbers

 

write-offs are normal course of business (either for the current quarter or going forward)

 

may do hedging in 2014 to compensate for FX

 

in final stages of refinancing debt (I think coming due in 2014), 3 year facility

 

 

[original mungerville]

You are correct about MIs, however, the MI's are recorded at "fair value" per IFRS so the actual FMV of the MI is estimated when it is put on the balance sheet.  Intralot started IFRS in 2012 so it has 2 years under the new standard.

 

Packer

 

So because its FVed, take the IFRS FMV of the MI and treat that as debt. OK, that's an improvement because if a lot of the cash flows are flowing to a particular subsidiary, the MI value of that subsidiary should rise thereby increasing the overall enterprise value of Intralot consolidated. All this assumes, however, that these accountants are doing a decent job FVing MIs. I wonder what their method is - presumably it can't be too complex - ie do they actually update the FV every quarter or year?... or do they just FV it based on the original acquisition price because the subsidiary is not traded publicly and the FV is hard to determine? If the latter, its not an improvement...

 

 

[Packer16]

From what I have seen in US GAAP these are tested every quarter for impairment if a material event occurs and every year using a DCF and multiple approaches.  I think IFRS has a similar treatment as US GAAP for MIs.

 

Packer

[Kiltacular]

my notes from phone call:

 

wins in China/Asia could have dramatic impact on future (positive)

 

cap-ex guidance for 2014:

coming from average cap-ex over 5 year of 100m, for investment;

going forward, normalizing with no major cap-ex going forward, will capitalize from existing contracts, should show up in numbers

 

write-offs are normal course of business (either for the current quarter or going forward)

 

may do hedging in 2014 to compensate for FX

 

in final stages of refinancing debt (I think coming due in 2014), 3 year facility

 

race -

Thanks for the notes!  Is this from a call to the company or a conf call?  If latter, can you send a link to details...couldn't find anything on their website.

 

Thank