Intralot - The gamble at 88
All,
Please find an updated version of our analysis here.
So we’ve learned nothing. Until Q118 brought to light what was really going on underneath Intralot's consolidated financials, the market had been all too happy closing its eyes fast and for as long as it could. That Turkey, Bulgaria, and Argentina were only ~50% owned and Azerbaijan twice removed, had not been difficult to see. With the experience of the ordeal that followed, one might be tempted to conclude that investors have learned their lesson. So just what are we doing inside 10% yield then?
66%:
- Yes, Turkey and Argentina are less important now than they were (hence the trouble) and Azerbaijan / Bulgaria are sold/closed altogether, but the prized Inc. had to be shared with the 21s, who are now structurally sr. with a large stub too. So once again, the biggest earning asset is not fully owned (66%) and the consolidated financials again grossly understate the relevant leverage.
License renewal:
- Malta holds its auction on October 8th and the winner may be announced as soon as early November. So the budgeted CapEx could be required as soon as H122.
- Intralot cannot afford to lose yet another contract and Malta is one of the largest it still holds. That the company will bid aggressively for the renewal is almost guaranteed, so we are reducing our EBITDA expectations for Malta going forward.
License CapEx:
- Baskets are exhausted (if that is even the right word) and assuming a minimum of €25m of operating cash, liquidity at Global Holdings is looking tight when accounting for the €46m of extra CapEx the company budgeted for Malta (expensive lottery management) and Oz in 2022.
- 2020 had been an exceptional year with no major license expiring/requiring hefty renewal CapEx.
Not enough cash:
- Growth rates have been spectacular, particularly anywhere outside of Europe. So that the continent should grow back as well seems only reasonable. But even if, the business is now barely able to serve its interest. And that is before license CapEx is due.
- To spend the required CapEx on the Malta contract, Intralot likely has too little liquidity and needs it sooner than it’s reopening growth can generate it (barely breaking even anyway).
Asset Sales:
- Further asset sales seem the only feasible option. Management on the Q2 call seemed open to the idea of further selling down equity in the US asset. Note that this will re-leverage the 24s as the proceeds would not be spent to buy back bonds, but to fund CapEx highly dilutive CapEx.
- Intralot have assets in less strategic geographies that should fetch enough cash for the purpose. But whichever asset Kokkalis wishes to sell, he has to do it soon enough if he can hold on to Malta.
- Given the significant number of international assets spread across the globe, Intralot are likely to find a buyer for something or another. So the risk is somewhat contained.
Investment Rationale:
- We remain long the 24s for 6% of NAV. The new price of 88, however, doesn’t reflect the risk of either losing Malta, or the need for near-term asset sales to fund Malta.
- We will assess in the next few days what the upside/downside is of the Malta scenarios, and decide on our position accordingly.
Happy to take your views,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk