|Shares Out. (in M):||210||P/E||n/m||14.5|
|Market Cap (in M):||6,100||P/FCF||n/m||12.7|
|Net Debt (in M):||3,000||EBIT||0||680|
Note Regarding Previous Write-up
Amaya was written up this year in May (congrats to tyler939--up 4x since then!). We would not normally submit a re-writeup within a year of another post. However, Amaya is a completely different company now versus then, having closed on a then-unannounced acquisition that increases run-rate revenue and EBITDA by roughly ten-fold (10X) over 2013. While some aspects of the new company were covered by tyler939, avahaz, and others in the message board, we feel the new company merits its own write-up. Additionally, the shares have come down recently on what we believe to be two immaterial issues: (1) correlation with the overall oil-heavy Canadian market; and (2) an unusual trading activity inquiry that was sensationalized in the press.
In what amounted to a back-door IPO for the dominant global player in online poker, The Rational Group—owner of PokerStars and FullTilt Poker—was acquired (closed August 1st, 2014) by Amaya, a B2B gaming solutions provider one-tenth its size. While the headline EBITDA multiple appears reasonable given online gaming comps, the true proforma profitability of the business is not widely understood: minimal taxes and CapEx means that virtually all of the EBITDA not consumed by interest becomes free cash flow. Given this, Amaya’s current $28 share price implies a 13x multiple on our estimates of 2015E FCF, which we view as very cheap for a company that dominates its global market (>60% of online cash poker games) and has been growing rapidly (PF 20% 3-yr revenue CAGR & PF 42% 3-year EBITDA CAGR). Moreover, we expect strong FCF growth to continue over the next several years through: (1) the addition of online casino games and sports betting to its poker brands; (2) organic growth of their existing offerings in this rapidly growing market; (3) balance-sheet deleveraging; and (4) expansion of their online poker brands into the US.
Amaya (pre-acquisition) is a provider of B2B online gaming services with US$54M in 2013 adjusted EBITDA. This piece of Amaya was covered thoroughly in a prior VIC writeup. The Rational Group is the owner of PokerStars and FullTilt Poker, which combined are the dominant global sites for online poker, with 85M registered players, >10x the player traffic of the next-biggest site, and US$420M in 2013 adjusted EBITDA (note: PokerStars is the main brand/asset here, as it is 10x the size of FullTilt).
The first thing to understand with regards to online poker is the strong network effects. This is summarized on pokerscout.com, which tracks the number of cash games taking place on each site in real-time: “Why do [players] care which are the biggest poker sites? For any serious player, the amount of traffic a poker site gets is one of the most important factors in choosing where to play. The sites with the most players offer the best game selection, allowing the player to hunt for the best game conditions 24 hours a day. The largest poker sites are also immensely profitable and (for the most part) smoothly run, reducing concerns about stability and viability. For the tournament enthusiast, the biggest poker sites offer satellites to major land-based events, sit-and-go tournaments starting regularly at any time of day, and large multi-table tournaments with big payouts. PokerStars, the world’s biggest poker site, offers weekly tournaments with prize pools over one million dollars, and sends over 1,000 players each year to the Main Event of the World Series of Poker.”
These network effects alone provide a significant moat, but PokerStars has taken advantage of its dominant position to further strengthen it. It has the most robust software and can handle 600k simultaneous players (versus ~30k average daily peak and ~250k record peak). In a business peppered with shady operators, PokerStars has built a reputation as the most trustworthy with respect to account protections and game fairness (see notes on the FullTilt acquisition, below). Finally, they take advantage of their scale to offer net rakes (fees) that are lower than their competitors, further enhancing their competitive position.
The economics of online poker and online gaming are very attractive: PokerStars earns revenue by collecting a “rake” on every pot played. In individual games, this rake can vary from 4.5% to <1%, though a significant fraction of this goes back to players in the form of rakebacks, bonuses, and loyalty rewards. For tournaments they collect a 5-10% fee (7.5% for their “Sunday Millions” tournament). Jurisdiction-relevant gaming duties are “above-the-line” (they are not treated as corporate taxes, and they fall between revenue and EBITDA). Online poker (and online gaming generally) features very high margins and returns on capital in the high double digits. Adjusted EBITDA margins in Q3 2014 for Amaya (PF consolidated) were 45.2%. CapEx is minimal. Corporate-level taxes are also minimal, as the company is domiciled on the Isle of Man. Also, no working capital is required to grow—in principle, the company can run on negative working capital due to customer accounts. In summary, online gaming is an extremely attractive business, and Amaya is now the leader with a substantial moat.
Amaya/PokerStars also has a long runway of growth ahead of it. First, online gaming is a rapidly growing market. From the EU website: “Online gambling is the fastest growing service activity in this sector in the EU, with annual growth rates of almost 15%. Annual revenues in 2015 are expected to be €13 billion, compared to €9.3 billion in 2011. There is a wide offer and take-up of online gambling services in the EU, with 6.8 million consumers currently participating in online gambling.”
Second, prior to this summer, PokerStars was a poker-only company—it did not offer online slots, table games, or sports betting. This is a critically important point because poker is actually a small portion of the online gaming market. According to management (and corroborated by various other sources), the online poker market generates $4B in annual revenue, versus $17B for online sports betting and $8B for other online gaming. Moreover, online casino and sports are much more profitable than online poker. 888 and BPTY—comps whose revenue includes a substantial poker component—have EBITDA margins much lower than similar-sized peers with minimal poker exposure (18.3% avg. for 888 & BPTY vs. 25.4% avg. for Betfair, Unibet, and Betsson in 2013). Further, BPTY broke out its 2013 EBITDA margins by segment: 22.8% for sports betting and 20.9% for casino versus 6.7% for poker. PokerStars is just starting to roll out casino games and a sportsbook on its platform. They began the roll out by testing the strategy on the (much smaller) FullTilt platform and on PokerStars.es, and they have reported double-digit cross-sell rates in those tests already. These substantial incremental revenues will come in at extremely high incremental margins, giving PokerStars the opportunity to increase earnings several-fold over the next couple of years without entering new jurisdictions. We tend towards being highly conservative in modeling growth and skeptical of management growth claims, but this is amongst the lowest-hanging fruit we have seen.
A (very abridged) paragraph on the history of PokerStars and online gaming: online poker burst onto the scene in the mid-2000s; PokerStars-sponsored Chris Moneymaker’s 2003 World Series of Poker win is commonly cited as the pivotal event. The dominant site was PartyPoker (now BPTY) at the time. In 2006, then-President Bush signed the UIGEA, which banned online gaming in the US and led the owner of PartyPoker to discontinue offering their products in the US. This opened the door for then-private PokerStars, arguing that poker is a game of skill and therefore not gambling (and therefore not subject to the UIGEA). Authorities in the US initially did not enforce the UIGEA, and this led to PokerStars’s becoming the dominant global online poker site, a position that it has held onto firmly since, even after it was finally ejected from the US in 2011. Poker players refer to the April 15th, 2011 ejection of PokerStars from the US as “Black Friday;” on this day, the Department of Justice seized the domain names for PokerStars and FullTilt and indicted both companies and their principals for bank fraud and money laundering. PokerStars promptly refunded all US accounts and later purchased the assets of then-rival FullTilt through a settlement with the DOJ (player balances at FillTilt disappeared on Black Friday, presumably stolen by FullTilt management). In addition to paying a fine as part of this settlement, PokerStars also voluntarily refunded all of the accounts of former FullTilt players, further enhancing its brand image in the global poker community. All of PokerStars/FullTilt’s revenue currently comes from outside the United States, with the majority from Europe. This history with the US DOJ explains why PokerStars has not been able to get a license to operate in New Jersey, Delaware, or Nevada (the three states that have legalized online gaming), though it is expected that the transfer of ownership of PokerStars from its founders will clear the way for regulatory approvals in the US.
The various jurisdictions (countries) around the world can be classified into three buckets by their regulatory status: regulated, grey-market, and black-market, though the lines can be blurry due to ongoing legal challenges and/or ambiguities. The majority of Amaya’s revenue comes from regulated jurisdictions in the EU, while the remainder comes from various grey-market areas. PokerStars does not operate in black markets like the US, though it does operate in some markets that may be considered “very dark-grey.” While we do not like the grey market exposure, slow progress is being made toward regulation in many of these areas, and we take additional comfort in the fact that none of these jurisdictions account for more than 10% of revenues, and lawmakers across these counties generally do not act in concert.
There is additional opportunity for Amaya with black-market jurisdictions that are becoming regulated (most notably the states of New Jersey and California), though we do not incorporate this possibility into our base-case model. Nevertheless, much of the press around Amaya/PokerStars focuses on whether the Amaya transaction constitutes sufficient cleansing for PokerStars to be allowed in these states.
Management & Owners
Amaya founder, President and CEO David Baazov has led Amaya since 2006; he is currently 34. He has an impressive track record in growing Amaya from nothing. While his age is a red flag, our conversations with him have left us impressed. His recent profile on Forbes is an informative introduction. He has a large stake in Amaya (he was flirting with billionaire status when the stock was at its recent highs). GSO (Blackstone) served as the primary advisor on the deal, and they hold a significant stake through warrants and the preferred shares. Blackrock was also a participant.
What is it worth?
PF 2013 revenue for the combined company would be $1278M (20.4% 3-year CAGR), and adjusted EBITDA would be $474M (42.5% 3-year CAGR). PF 2015E adjusted FCF projects to be ~US$420M on US$600M-640M guided EBITDA. A 20x multiple implies a C$46.00 share price (using a conservative share count pro forma for full dilution from the preferred shares converted at C$20). Even a 20x multiple may be conservative, given the business’s dominant position, operating leverage, and strong growth prospects. Note the increased benefits of deleveraging, given that the interest payments provide little tax shield.
Why is it undervalued?
· No existing investor constituency—Rational was a private company with no debt. There is no pre-existing group of investors familiar with the company and there are no comparable companies that trade in North America.
· Minnow-swallows-whale dynamic obscures financials of the proforma combined business—backwards-looking SEDAR filings on Amaya are irrelevant to evaluating the business.
· Limited financial information on the Rational Group—As a privately-held business with a checkered past, there is very limited information available on the quality, size, profitability, and growth prospects of the Rational Group. Only the October BAR filing and the Q3 results begin to reveal the profitability here.
· Price anchoring—Shares are up 5x on the year and 50% from the secondary offering to fund the deal. This backwards-looking perspective ignores the massive growth opportunity that PokerStars has through the roll out of casino and sportsbook.
· Pre-deal price action inquiry—Shares climbed >50% in the month prior to the deal announcement, with a rumor of the deal having been reported on CalvinAyre.com several weeks before the announcement. Canadian authorities are investigating this per standard practice, but the initial media report by Forbes (December 12th) mischaracterized the document transfer as a raid (later retracted), while other media outlets ran with the “raid” story.
· Regulatory change outside the US— Regulatory disruptions are an ongoing risk in all markets, though PokerStars is reasonably well diversified and now gets a majority of its revenue from regulated markets.
· Regulators keep PokerStars out of the US—This transaction was structured in a way to make PokerStars more palatable to US regulators, and some have already made positive comments with regards to the deal, but this is an uncertain process. Moreover, we believe that Amaya shares are cheap without PokerStars in the US, though the US-related news may dominate the headlines.
· Additional M&A—As the Forbes profile makes clear, Baazov has even grander ambitions. While his track record speaks for itself, additional large transactions may not be viewed favorably by the market, as there are few assets out there of comparable quality.
1. The company reports a clean quarter (and year) of their combined results, giving the market a clearer picture of their size, profitability, and growth. 2015 guidance is also anticipated when they report Q4 2014 results.
2. The addition of other gambling verticals to the PokerStars and FullTilt brands starts driving substantial additional, high-margin revenue.
3. Amaya gains a primary listing in London (where most other online gaming companies are listed). A primary listing in NY is also possible; management has committed to greater visibility through one or the other by October 2015.
4. Major sell-side firms pick up coverage, increasing visibility
5. PokerStars begins to earn regulatory approvals to enter US states (NJ anticipated soon).
6. Unusual trading inquiry scare fades
|Subject||Re: Secular outlook for poker|
|Entry||12/17/2014 11:53 AM|
not one that is meaningful. I think Pokerstars entry into the U.S., especially California if it happens. will jump start ipoker due to the significantly more enjoyable player experience and promotional effort they will bring.
|Subject||Re: Re: Secular outlook for poker|
|Entry||12/17/2014 12:27 PM|
Sorry, didn't realize there was a new writeup
|Subject||Re: Secular outlook for poker|
|Entry||12/17/2014 06:39 PM|
@urban--global online poker growth has stalled in the last couple of years against a backdrop of a still-growing online gaming market (though poker on the Rational Group platforms has continued growing). This is generally attributed to several factors: (1) the bulk of the online poker market is in Europe, which is struggling economically; (2) jurisdictional ring-fencing and high gaming duties in some regulated markets (e.g., France) is driving out players and harming overall liquidity; and (3) online rooms have become overpopulated with "sharks," making the experience less enjoyable for the "fish" (i.e., the casual players that are net depositers). On point #3, PokerStars has recently introduced a number of changes that should be favorable to the more casual player. They have also demonstrated how game innovation (such as Spin-n-Go poker) can grow the market--the launch of S-n-G in Spain saw a 14% uplift in registrations and a 30% uplift in reactivations. On point #2, I think that the very-long term trend will be towards liquidity pooling and a rationalization of gaming duties, but there will be substantial hiccups along the way.
The more important point is that global online gaming overall continues to grow rapidly (15% revenue CAGR according to the European Commission). Amaya is now the best-positioned company to capture this growth across gaming verticals.
So, low double-digit market CAGR where incremental revenue comes in at extremely high margins should lead to very attractive bottom-line growth rates for years to come.
|Entry||12/17/2014 07:30 PM|
@shaqtastic: Great question--pre-deal Amaya had an EV of ~$1bn and the Rational Group was purchased for ~$5bn (raised through debt and equity offerings--the exact structure is laid out in the PR: http://www.amaya.com/2014/06/amaya-agrees-to-acquire-rational-group-owner-of-pokerstars-and-full-tilt-poker-for-4-9-billion/), and I am arguing that the combined company is worth an EV of >$11bn. Where did the extra $5bn+ of value come from?
1) offering other gaming verticals on the PS platform will result in massive growth in FCF (this roll out should lead to a doubling of EBITDA). Why did the Scheinbergs not do this? I have heard some hand-waiving arguments about committment to the purity of the game (which may hold some truth), but I think the biggest reason is the United States. PS continued operating in the US from 2006-2011, arguing that poker was not banned by the UIGEA because poker--online casino games--is a game of skill and not of pure chance. Even after being booted from the US, offering casino games would have compromised their position (and they tried VERY HARD over the past several years to get back in). Which brings us to:
2) this transaction opens up the possibility of PokerStars reentry into the US, which would be the largest poker market in the world. Recall that the indictment against the previous owner and founder Isai Scheinberg is still outstanding, and PS would never be allowed back in the US while he was still involved. That's why the transaction needed to be structured such that the previous owners were left with no residual stake.
3) the LBO-type structure to this deal also created some value
4) CAD/USD exchange rate is up ~10% since the deal was announced
|Entry||12/17/2014 07:51 PM|
5) I think Amaya got a really good deal here even without the above. Why? Again, it comes down to the US--the fear of being excluded from a regulated US market made the Scheinbergs willing sellers. There were no other buyers because large public companies with US gaming operations could not take the risk that the purchase might cause their US licenses to be suspended. Baazov-founded upstart Amaya and GSO had much less to lose and could thus take this risk.
|Subject||Re: Key Risk & Upside|
|Entry||12/17/2014 07:59 PM|
@avahaz: looks like I should read all the messages before responding; could have saved myself some time, thanks!
We absolutely agree with you on the bull case, too.
|Subject||Re: Legacy Amaya|
|Entry||12/17/2014 08:07 PM|
@LimitedDownside: You are right in that Baazov built this business through the roll-up of assets of progressively increasing quality--a strong testament to his vision and capabilities.
Insofar as you are concerned with quality of some of the minor, lower-quality assets, you should take comfort in the fact that they are selling these. They shed Ongame last quarter, and they have announced that they are shopping Cadillac Jack, their biggest "other" asset (which is still well less than 10% the size of PokerStars).
|Entry||12/18/2014 03:51 PM|
Interesting write-up. I want to: 1) share with you some feedback from a fund manager I know, who I shared the idea with, and as you will see has a personal background in the industry as somewhat of a professional player and 2) ask you a number of questions. Sorry for the number of questions, please feel fee to answer as many as you would like.
Feedback I received:
“To provide some background, I played poker professionally on Full Tilt in 2009-2011. I played 16 tables or 1,000 hands/hr vs. 30 hands an hour you would play at a casino. I was good enough to make a respectable living, but far from the best. My win rate was between 3-4 bb/100 hands. Am happy to answer any questions that can be helpful as it relates to poker from a customer/pro standpoint.
A general comment from someone who played 40 hr weeks - PokerStars and Full Tilt should dominate the market over time, and I completely agree that if they get back in the US they will dominate in the US. They have by far the best software, best rewards programs, etc. There is automated software that all pros use (Pokertracker is one of them) that only interfaces really well with the top sites like Stars/FT. They are amazing businesses.”
On to my questions:
-- What is responsible for the slowing revenue growth at Oldford in 1H FY2014 of 4% vs. 16% in FY2013 and what does he see as the organic growth in poker?
-- What do you make of the news stories of "Online gambling hits wall in NJ 6 months after launch"?
-- It seems like this is really a bet on new online casino games being successful in hitting similar type numbers (or even just a fraction of) what BPTY has hit. What gives you confidence this will occur? How do you model how large this opportunity is (In other words what is the range of cross sell/market share assumptions are you making)?
-- Management said “At this time, we estimate our addressable market for casino and sportsbook would be approximately 45% to 60% of our poker market”. Do you interpret this to mean revenues in casino would be lets say 50% of poker revs? Do you have an idea of what the margins would be on casino revs if that occurs?
-- How long will it take to get into California, what is your view on the probability of success, and how large do you think it will be and why?
-- Where do you come up with your 2015 guidance for adjusted EBITDA and EPS?
-- What do you expect the non-core assets to be sold for?
-- How do you view Baazov overall? He has obviously been great previously, but also it worries me to hear him described in the Forbes article as being such an optimist. Optimists obviously are more likely to miss their projections at some point, and a lot of this thesis seems to be based on forward growth projections, which are ultimately driven by what Baazov tells investors he thinks he can do. That being said he clearly has an impressive track record.
-- Baazov talks about leveraging the 89M consumers he has to market to, any thoughts on what products he is thinking about or how large this potential opportunity is?
|Entry||12/18/2014 07:55 PM|
@bentley: thanks for the comments. Let me see if I can take on some of your questions.
1) I posted some of my thoughts on poker growth in a previous message. As far as the Oldford numbers you point to, you will want to adjust for the relaunch of the FullTilt platform to get more normalized numbers.
2) Online poker in NJ is nothing without PokerStars--New Jersey is a ring-fenced market, and there is not enough liquidity there once it is split between the operators. There *may* be enough liquidity once PS takes all the market share. Even then, the population is less than 10M (compare to ringfenced jurisdictions in Europe). That's why there is so much focus on CA--it may be the only state with sufficient liquidity in a ring-fenced environment (we believe that there will ultimately be interstate pooling). The launch of NJ online gaming has also been a disaster due to software, geolocation and payment card acceptance issues. Bwin tried hosting a big online tournament recently, but their servers crashed, and it was cancelled. That is one benefit to PS's late start in NJ--they get to see where all the landmines are.
3) We have high confidence that casino/sports will be a success. We see high cross-sell in all of their competitors. PS has data that a large proportion of their active players play casino and/or sportsbet on other sites. And they have already seen double digit conversion rates in their beta-testing on FullTilt and in PS Spain. It really will be like flipping a switch.
4) We expect EBIT will roughly double (over 2013 levels) in jurisdicitons where they roll out sports and casino. Note that they will not be rolling these out in all jurisdictions immediately (i.e., b/c there are some that allow poker but not sports).
5) Some say 2015 in CA; we think 2016 is the most likely year.
6) We used the adjusted EBITDA guidance from the company (technically, guidance is for their "first year of ownership"). Interest you can get from debt. D&A and taxes are close to nil, as you can see from the historicals. The historicals (and comps' historicals) can give you a sense of WC benefits. Management has been clear in stating that >95% of EBITDA trickles down to "E" & "I."
7) Our base case projects the Cadillac Jack proceeds to only be sufficient to cover the (significant) associated debt. Given the M&A enviroment, it is likely that they get more than that.
8) Not sure what Baazov will do next. But if the past is any indication, we are happy to be along for the ride ;o)
Hope that helps.
|Entry||12/18/2014 08:04 PM|
Have been following this since the acquisition. I really like this company and set up. Catalyst rich with attractive valuation, margins, scale, growth and negative working capital. Cross-selling and US expansion opportunities could be juicy.
|Subject||Share Repurchase Announced|
|Entry||01/12/2015 12:45 PM|
|Subject||Recent price action|
|Entry||03/10/2015 12:29 AM|
Any thoughts on recent weakness / possible impacts from insider trading probes? Or are we getting another crack at it here?
curious how fundamental view has changed, if at all, since January.
Risk/reward arguably better now then it's been anytime since last summer.
|Subject||Re: Recent price action|
|Entry||03/10/2015 08:01 PM|
No fundamental change. The volatility has decreased over the past six months, but it's still very high. Crazy that it's taking so long to settle in, but consider that it went from $36 to $23 in the first two weeks of October because the price of oil fell (which, like the trading probe, is unrelated to the business).
Earnings on the 31st. Broader (bulge-bracket) coverage--which should calm the volatility--may wait on the London listing, which should come later this year.
|Entry||05/08/2015 09:06 PM|
Your question probably directed to blaueskobalt, but I will be happy to talk about some of the regulatory stuff. Re: NJ, it was always thought that NJ would be easy; the delay ha never been explained, so the option to enter didn't just come up. I would note that Nj in an of themselves is not very profitable. I think it is more psychological. It is hard to say when, or even if California will have online poker. The Pechanga Indian tribe, generally thought powerful enough to block auhorising legislation, and a few other tribes following their lead, refuses to allow any bill to pass which would allow either PokerStars (deemed a "bad actor" for previous behavior even though they have brand new ownership) or the race tracks to participate, the latter of which have insisted that they have a seat at the table if ipoker is legalized. The governor has previously said he would not sign any bill that did not include the race tracks, so although for the first time there is a bill out of committee, the actual bill doesn't adress these issues, so while technicall progress has been made, you need major compromise from two powerful interests who are completely dug in (it is thought that if the race track issue can be resolved, the bad actor issue which concerns Amaya can be too). Most of the other tribes are ok with the tracks, but again Pechanga and a few others are powerful enough to stop any legislation. There is legislation coming out of Pennsylvania that may pass this year, so there is some consolation. Also, your question didn't mention Daily Fantasy Sports, which the company intends to have ready by football season.
|Entry||05/11/2015 12:08 PM|
The key points of the thesis have not changed, and the most significant shift has been the movement of the Euro, which moves our target down ~10% on a CAD basis. There are a number of assumptions in estimating the FX sensitivity of Amaya's bottom line, but we put the Euro sensitivity at a bit less than 1:1, now that the debt has been hedged for FX. Obviously, there are other relevant currencies that complicate that ratio. In addition to the currency noise, the divestiture of the legacy businesses creates a significant amount of noise. Pro forma and at current FX rates, we model AYA as trading around 16x 2015 EPS and 13x 2016 EPS.
We view licensure in US states as having minimal financial impact for Amaya over the next several years, though we think that licensure would generate meaningful positive sentiment for the stock. The delay in NJ has been surprising to us, as the NJ DGE made very favorable-sounding statements about PS at the time of the acquisition. We understand that there are some unique technical challenges to operating in NJ that they have needed to work through, though NJ state senator Lesniak has been vocal in claiming that the delay is political and stems from the relationship between Sheldon Adelson and Gov. Christie. On the Q4 call, Baazov committed--for the first time--to a launch date in NJ for Q3 for this year.
Tyler covered the CA situation, where progress is being blocked by the Pechangas. Lots of color on this topic can be found on the OPR: http://www.onlinepokerreport.com/us/ca/
We believe the company's planned US listing will be a meaningful catalyst--both on its own, but also insofar as it comes with expanded sell-side coverage. They have previously announced an October target for this, but have since communicated they they are ahead of schedule on that target. We should get more news this week with earnings.
It is our understanding that the ongoing insider trading probe is a significant weight on the stock. We view this as a non-issue because: we believe that the main targets of this probe are persons within Manulife Financial and not within Amaya; and--even if persons within Amaya were to be indicted--the impact on the underlying value of the PokerStars business would be minimal. Nevertheless, this is a significant issue weighing on the stock that should clear over time (a process that would likely be accelerated by high-profile sell-side initiations).
A couple other issues worth updating:
Hope that helps. Let me know if your have any more specific questions.
|Subject||Re: Re: Re: update?|
|Entry||05/11/2015 09:47 PM|
1) DFS should launch in August. There are virtually no details available with regards to their plans in this space. DFS is almost exclusively in the US right now, and the market is extremely new. Growth for the market is on the order of 500% YoY. It is currently a duopoly between FanDuel and DraftKings, both which are private and sport rumored valuations in the $1bn range. Amaya explicitly claimed that they were looking to build DFS in house, and the strength of their brand--combined with the (rumored) low cost of customer acquisition--lead this to make sense, but I wouldn't be surprised if they tried to buy one of the two companies. Note that these guys are spending marketing dollars at a very fast clip.
Casino rollout began in Q3 2014, and there should be a meaningful contribution this quarter. Sportsbook's first bets were taken in April, though I expect it will not start contributing to earnings until Q3/Q4.
2) The stock is so underfollowed at this point that it's hard to know what the market is expecting (much less what they will report). Volatility is very high.
3) The company has not broken out its operating metrics in any meaningful way, though they have declared their intent to do so. This is something I will be looking for in this Q's earnings, though I would not be suprised if they take another Q to start doing this. PokerScout and similar sites track cash game traffic, but tournaments are such an important contributor that this is of limited use, and seasonality is another complication.
4) PS claims they will be able to pass on the 15% GGR tax onto consumers, while some of their competitors have guided for a direct hit to earnings. I suspect PS will be able to pass most of the cost on long-term, though costs should spike initially as they increase promotional/marketing spend to win players leaving smaller sites. (Some smaller online gaming sites have margins that would be wiped out by the tax, placing them in a competitively disadvantaged position). I would add that all effects will be muted, as the UK accounts for a high-single digit percentage of Amaya's revenue.
|Subject||Re: Re: Re: Carbone|
|Entry||05/12/2015 01:15 PM|
Do you think he is dishonest? Do you think he cares about the other shareholders? Is he way in over his head and living the good life using shareholder money? Do you think he is secretly pleding or selling or transfering the risk of ownership with respect to his stock? Can you please be more specific?
|Subject||Anyone have a view on RAWA passage?|
|Entry||05/12/2015 02:22 PM|
The one thing that worries me, aside from whatever Carbone is talking about (which I feel he has some obligation to clarify if he is arguing that it is such a big deal that it might result in a distressed debt situation), is RAWA passage. Everyone tells me I shouldn't worry about it, but as long as it exempts lotteries and horse racing, it seems to me just looking at the makeup of the House and Senate that it has a good chance of passing. Congressmen are easy to buy when the issue low profile, at least in my opinion.
|Subject||Re: latest thoughts/updates|
|Entry||07/23/2015 05:37 PM|
I believe the primary reason the stock is down is because they (along with partner GVC) lost out on the bidding war for BWIN.Party. Had they won, they would have bought BWIN's poker assets and had a clear pathway into the U.S. or so the thinking goes. I think it is also becoming increasingly clear that California is not going to pass an on line poker bill this year.
My primary concern with the stock is the DFS product they are supposed to have out by Football season. Assuming the DFS product they come out with is technologically good, there is a debate about whether they can use the PokerStars brand to avoid the enormous customer acquisition costs of the DFS industry. I think right now we are in wait and see mode. If anyone else has thoughts I would appreciate hearing them.
|Subject||Re: Re: latest thoughts/updates|
|Entry||07/23/2015 08:21 PM|
I think tyler is right on the bwin.party deal and California being the main drivers, and I would add Pennsylvania, Portugal, currency, and oil prices to the list. Rumors of an imminent NJ announcement were floating around a couple of weeks ago, but those have subsided. None of these have changed our view.
I'm actually pleased that they didn't win the bwin bid--there are a lot of issues there, and I'll be surprised if the 888 integration goes smoothly.
I will also be surprised if they have a DFS product out before football season. They backed away from that target in recent comments, and checks indicate they are still in the exploratory phase. I'm okay with that for two reasons: keeping up with DK&FD ad spend would be very costly; and DK's aggressive moves are tempting a regulatory crackdown.
|Subject||Re: Re: Re: latest thoughts/updates|
|Entry||07/24/2015 10:00 AM|
Avahaz and Blaueskobalt, thanks for the comments.
Avahaz, reasons I care about DFS:
1) roll out of a crappy product would suggest management incompetence and send the stock lower;
2) heavy ad spend would also send the stock lower in my opinion, however
3) if a heavy ad spend isn't required to compete with Fan Duel and DK (ie. the PokerStars brand is sufficient), I believe this becomes a big (and potentially huge) revenue / earnings driver, and if (and this is a really big if) they are able to broaden the platform to tap into gambling on E-sports this revenue stream will in my opinion become greatly sought after. You correctly point out that poker is a declining industry. E-sports isn't and a company that can make a significant amount of money on it will be extremely valuable.
|Subject||Re: Re: Re: Re: Re: latest thoughts/updates|
|Entry||07/24/2015 12:36 PM|
Avahaz, a large guidance miss would be really bad. It is pretty much at the top of the problem list for most growth stocks. I don't think a big 2015 guidance miss will be ignored because DFS is on its way and didn't mean to imply otherwise. But the question I tried to answer was why the stock has fallen from recent highs. I think I gave the correct answer. I also wrote about DFS. I made a mistake saying it was my primary concern. I should have just said I think it could be a game changer if, and it is a big if, the company can create a competitive product that relies on the PS brand instead of a huge ad spend. What do you think a DFS business that can compete with DK&FD without having to spend a lot of ad dollars would be valued at?
|Entry||07/29/2015 07:18 PM|
Any thoughts on q2 pre-announce? Company reaffirmed full year guidance.
|Subject||Re: q2 pre-announce|
|Entry||07/30/2015 09:24 PM|
The results were exactly in line with our expectations. Going in,we were a bit concerned that the market did not fully appreciate the seasonality of the business, but the reaction suggests that there was no surprise (or that the price action over the past several weeks had de-risked that).
The debt paydown & refi makes sense.
Of the past week's news, I am most excited about the decision to make Full Tilt into a recreational players' haven. There had been rumors of this circulating, and I'm glad to see it.
|Subject||Re: Re: Re: Re: Re: Re: Re: latest thoughts/updates|
|Entry||08/11/2015 02:04 AM|
Avahaz, for whatever its worth, I am no longer very excited about Amaya's entry into DFS. The reason is the huge guaranteed price pools DK/FD have been offering/promoting. Assuming for the moment that there was cross sell (I acknowledge you disagree with this statement), if the incumbents are going to operate the actual games at a loss, I don't see how they can compete in any material way.
|Subject||Re: Amaya Acquires Victiv Daily Fantasy Sports Site; Will Launch Under New "Starsdraft" Brand|
|Entry||08/13/2015 11:37 AM|
I went to the site. Love, love, love the ringing endorsements from the half a dozen guys on twitter with their literally hundreds of followers.
In all seriousness, they paid nothing for this, and aren't going to spend much on this, and from what little I have heard about it it is a technically competent operation and at the very least an option should DK/FD ever try to run their businesses profitably by reducing ad spend and especially over sized guaranteed prize pools. The best thing I can say for it now is that it helps management's credibility (another instance of management meeting guidelines, not putting out a crappy product and committing to not pissing away gobs of shareholder money).
Your thoughts on everything else?
|Subject||Re: 2015 fcf|
|Entry||08/25/2015 08:28 PM|
$420mn FCF was based upon management's EBITDA guidance of $600-640mn, which was based upon a 9% contribution of casino to revenues.
Cash taxes and CapEx are very low (and somewhat offset by a contribution from working capital), such that the conversion from EBITDA to unlevered FCF is greater than 95%. Thus, the only delta is cash interest of ~$200mn--though that has shrunk as the company divested noncore businesses to pay down their highest coupon debt.
Given the dollar's performance over the past year versus their customers' currencies, the USD numbers no longer hold. Management has adjusted their guidance accordingly and made efforts to be transparent on their FX assumptions. At current exchange rates, I have them coming very close to that USD420mn FCF number in 2016, which is actually much better on a CAD-denominated stock, given what the USD-CAD rate has done.
My 2016 estimate includes 17% of revenue coming from non-poker verticals. For context, they were run-rating at 12% of revenue coming from casino in Q2, up from 6% in Q1. This was with a very limited roll-out, no sportbook, and no marketing. For additional context, remember that the online casino market is 2x the online poker market, and online sportsbook is 2x the online casino market, so this represents a low, single-digit market share, with abundant room to continue growing organically.
Putting a bow around it, the shares are yielding a double-digit % on 2016 FCF with double-digit topline growth and a strong, network-driven moat. Regulatory filings indicate that several prominent names have been adding recently, as have we.
|Subject||Thoughts post q call?|
|Entry||11/16/2015 07:13 PM|
Following up on hkup881's questions, any updated thoughts on:
1. Quarter-over-quarter trends in core/segregated markets?
2. Fundamental reasons for big revision 2 months after issuing guidance with Euro FX rates reasonably constant?
|Subject||Re: Thoughts post q call?|
|Entry||11/18/2015 10:46 AM|
We have cash EPS of just under C$2.00 in 2016, taking into account the new information. This aligns well with the 2013 (pre-acquisition) Rational Group numbers, adjusted for currency and for 17% casino revenues.
At 10x 2016 cash EPS, we think this continues to look cheap, given that: 1) the core business is high-quality and remains intact, and 2) the casino rollout strategy is working well.
However, we are less bullish overall because--where we thought we saw a cheap price on a quality business with quality management--that third leg has proven untrue.
Up until the most recent quarter, management was adamant that there is substantial elasticity in customer playing habits with respect to FX movements. Q1 and Q2 data supported this, but Q3 data did not. We view management's failure to understand and/or communicate this issue as a major problem (and the biggest driver of the guidance revision). It also eliminated the "pass" that they had been given on a couple other issues (e.g., debt hedging, overpromising on DFS).
Regarding your point on segregated market trends, we do watch this carefully, but we don't see anything too worrying there. Notably, France accounts for 1/3 of this, and pokerstars.fr traffic took a big hit in Q3 due to the introduction of a poker/bingo hybrid on Winamax that was very well received (doubled traffic). This shift in French market share should revert over time--either naturally or by the introduction of a similar game on pokerstars.fr. Additionally, our expectations for segregated markets on a like-for-like basis are more muted versus the core poker business globally (slight decline versus slight growth).
|Subject||Re: Re: was short, covered recently but still some downside|
|Entry||01/15/2016 12:14 PM|
re: debt hedges. I believe they hedged some of their debt into a fixed euro:usd rate of about 1.10, which makes sense this the majority of their revs are euro based
|Subject||Re: Re: was short, covered recently but still some downside|
|Entry||01/15/2016 01:29 PM|
I agree with some of what you said and disagree with others. Dont have a ton of time now but will post quick thoughts
- debt being denominated in USD is unfortunate for them and wasnt a foreseeable headwing but I wasnt criticing your original post, just commenting on where they stand now
|Subject||Online gaming 101|
|Entry||01/18/2016 07:03 AM|
Reading this discussion it occured to me that you are ingoring what is at the core of the online gaming business. If you speak to any senior online gaming executive about what this business is about they will explain that the key is minimizing customer acquistion costs and maximising ARPU. This is a not about 'grinders' or building long term customer raltionships. Online gaming is a burn and churn business. This is why cross sell is so important. Casino generates by far the highest ARPU. Therefore acquiring a casino customer has the highest CAC. If you ask google to rank online gaming search terms by CPC, the casino related terms always cost a multiple of the other verticals. The holy grail in online gaming is figuring out how to acquire players into cheaper verticals and cross sell casino to them. This is how you earn high margins.
Amaya is in a unique position because it so happens to be that poker players are by far the cheapest to acquire. This is in part due to what was discussed below (declining industry) and to a larger extend because poker player yields are the lowest compared to other verticals. I therefore disagree with the suppositions below that Amaya's casino business will not grow as large as peers. They have a huge oppportunity and their position is the envy of every competitor (just ask around - I have). In fact, their Q3 run rate casino revenue of c.US$150m is already among the largest in the industry and has been achieved with a minimal/lacking offering. Party was mentioned below, they are on record stating that 77% of their casino revenue is generated from poker cross sell.
Pokerstars' previous owners maximised what there was to to take out of the poker business, but they also recognized that it had reached its peak and had already introduced some casino games to the full tilt brand before selling to Baazov. It is exactly the right strategy to now fully monitize the company's low CAC by cross-selling high ARPU casino and sports products. That a couple hunder poker 'pros' are pissed about this a totally irrelevant. Revenue will grow, but earnings will grow much faster thanks to this margin opportunity.
One last point. I have also met Baazov a couple of times and can't say i was particularly impressed by his online gaming acumen...he is a dealmaker. That said, he has begun to surround himself with some high quality people, not the least of which is the company's COO, Rafi Askenazi, who is one of the most respected executives in the online gaming industry. This bodes well for Amaya's prospects.
The biggest problem/highest risk in this name is the large debt pile. This is what is causing urgency for execution. Delivering on this kind of business plan takes time, but Amaya is in a rush to pay down debt. This has led Baazov to give guidance based on an execution timeline that left no room for error. That was a rookie mistake which has led to the stock price collapse. The business will get there, but it may take more time and shareholders will need to be patient.
|Subject||Re: Re: Re: was short, covered recently but still some downside|
|Entry||01/18/2016 09:08 AM|
sorry I just wanted to correct the below. I was in a hurry and took the numbers from the wrong line in my model. The point remains the same.
"- Financial adjustements. I wasnt counting changes in equity investments, just the rest which makes no sense. they will have 78mm in professional fees this year. for the first 3 qs in 2015 that number was 32.4mm 28.3mm and 39.5mm. It grew in Q3 when there was no M&A! They are also trending for 19mm stock comp, together you get about 98mm of real costs that show no signs of abating."
Numbers should be 15.2mm, 19.4.. and 24.2mm which has me targeting 78.4mm for the year hence my 98mm number for costs that should be included in ebitda
|Subject||Re: Re: Today's news|
|Entry||03/24/2016 09:15 AM|
Because it kills the deal. The stock is back to trading where it was before his unfunded takeover proposal. Now how is he ever going to raise the 3.6 billion of equity he would need to get a deal done.
|Subject||good short again|
|Entry||08/18/2016 10:48 AM|
Quarter came in ok, btu same old adjustments and trickery to make results seem better than they are. Here im talking about the standard bs adjustments that get amaya reported ebitda up to 130mm when im getting 108mm real ebitda. difference is stock comp and professional fees which are always present.
Other operational change to one time boost results was a rakeback (price) increase on March 28th for many games. Management claims it worked out to a company wide 4% increase, but I have my doubts as it seems much larger than that to me. Without being an insider and having the breakdown of the volume of different stakes and games its impossible to say.
The guidance is fairly weak with poker revs down about 8% in july and august not looking better. Management again blames currency but with the usd/euro flat yoy I dont really see how that is hurting them any more. And this decline is after a 4% price increase so actual volumes are down further.
Overall, using Q3 guidance and the normal step up into Q4 im seeing real ebitda of 398.4mm for the year. Casino growth has slowed/topped out, and poker is declining. Next year we may see total revenues drop.
Total debt stands at roughly 2900mm including the 400 payout to rational group coming up in feb. thats over 7x current year ebitda and ebitda will drop next year if revs decline (operating leverage that worked on way up will bite on way down).
Overall I can argue for a target price of $4. Id pay 9x (decent fcf profile but declineing top line) 2017 ebitda of 380mm - ending debt of 2.7 billion. 195mm shares outstanding. All the value is in the debt which should be good.
Buyout: With the Baazov case looming and the process 6 months old, not sure anyone is stepping up now. Plus its already 7x leverage, no room on that front
Legalization in the US: This is more relevant with some rumblings out of california. But cali has tried and failed for so long its hard to give this much weight
|Subject||Re: good short again|
|Entry||08/18/2016 10:57 AM|
Let me also add New Jersey hasn't been that strong with them losing share to other players. Also, let's not forget they are getting targeted by Russia, etc.... the whole "grey" market arb is starting to look more like a thing of the past.
|Subject||WMH / AYA|
|Entry||10/10/2016 08:21 AM|
Any updated view on valuation in light of the strategic review and potential WMH MOE?