Intralot - not yet
All,
Please refer to our updated analysis here.
That the budget management handed down this time last year was nonsense was clear before we received it. Today we are of course still waiting for the big news, but it’s been worthwhile having the first financial statements post-restructuring, even as we are still missing Inc. data. With Malta as good as gone, Intralot have more time to market the Inc. as only a high price will go to delever the 24s. But what of the ROW business now and the new contracts Intralot won in 2020 and 2021?
Unsustainable Inc.
- H121 performance was stellar - largely during the very period in which management budgeted for little more than half of the revenue. H221 performance was predictably weaker - it always is. But it was perhaps even a little weaker than that, perhaps because of a number of one-offs that had elevated H121 even more than its already strong underlying performance suggested.
- With continued reopening in the US, H122 should beat last year’s first half, but not by a wide margin.
- The market for lottery and online gaming remains strong and M&A should resume with overall market sentiment. Until then we are not anticipating seeing a transaction closed for Intralot Inc.
- Intralot Inc.’s advertised EBITDA is not sustainable, however. It needs ongoing R&D for which it is currently not paying. Naturally this would come from Greece, but there is a risk that a future buyer will want to shift technology and procure these services elsewhere. Clearly, if feasible, that would have to be reflected in the price.
Sub-scale ROW:
- As we previously noted, the ROW business is only barely breaking even.
- We have seen no material contribution to revenues or EBITDA from the new contracts the company had been winning in the last 1.5 years. By comparison the budget still anticipated EBITDA of €12m.
- Without the additional contracts and crucially without Maltese business, ROW is too small to carry all the R&D/CapEx that is required to maintain it, support it , grow it. Greece will have to strike a more substantial service agreement with Inc. as part of a sale of the latter. While that is likely, it is currently not visible and distorts the relative financials between Inc. and Greece / leaves more cash in the US too.
24s:
- If we were to take a snapshot of the 24s now, they could look border-line attractive down here. But that would be ignoring the sheer multitude of disappointments Intralot have been delivering in Turkey, Bulgaria, Malta, etc.. Yes, Intralot have pivoted towards first-world contracts, but the odds are still stacked against any bet involving too cute calculation.
- Assigning zero value to the ROW business (probably harsh, but economically difficult to justify otherwise), The 24s economically remain a margin loan on the US Inc. For that reason alone they should perhaps not trade at 80% LTV.
Investment Considerations:
Months ago already we have exited all long and short positions we have held in the past and on current pricing we do not feel we are adequately compensated for another disappointment. As and when market sentiment improves and therefore opens the door to a highly accretive sale of the Inc, we may be inclined to place a bet on that happening, along with some contribution of those new contracts finally coming through in ROW.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003