Intertain IT CN
September 08, 2015 - 3:31pm EST by
2015 2016
Price: 11.66 EPS 1.50 1.69
Shares Out. (in M): 77 P/E 7.9x 7.1x
Market Cap (in $M): 900 P/FCF 12% 14%
Net Debt (in $M): 630 EBIT -41 22
TEV ($): 1,530 TEV/EBIT NA 69x

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Intertain is the largest online bingo company in the world with leading market share in the UK, Spain, and Sweden. IT CN listed as a SPAC on the TSX in February 2014 and embarked on a number of acquisitions to consolidate the global bingo market. The Company is run by John Kennedy Fitzgerald (son of JFK and brother of Caroline) and management owns $20 million+ of stock and is highly aligned to build shareholder value.




While the bingo business is not as sexy as other gaming verticals, there is ample public data from public competitors 888, Bwin.Party, the Rank group, Gala Coral, and Stride Gaming demonstrating that bingo is a real business that generates significant FCF. H2 Gambling, the leading consultant in the sector, estimates the market is ~2 billion and growing at a 6%.  Rank and Coral's online gaming business are growing in the upper teens, while Bwin.Party and 888 are growing low single digits. Intertain's portfolio of assets fall in the middle and are growing organically at ~10%+.




Overall, the business model is highly attractive with double digit organic growth, ~35% EBITDA margins, 5% tax rate given Gibralter domicile, less than C$10 million of G&A, and no capex. The Company discloses sales by customer acquisition cohort for Jackpot Joy which is helpful in understanding the stickiness of players. Scale is highly important as larger sites can offer larger payout and liquidity, creating a virtuous circle and  attracting more players.




With the platform in place, management is currently evaluating a number of newly regulated markets including Mexico, Norway, Poland, and Portugal which will provide. I do not believe the current valuation reflects upside from any additional geographies.




At 8x P/E, Intertain trades a massive discount to gaming peers. Applying a peer multiple of 15x to their run-rate EPS of $1.69 implies over 100% upside. Assuming EPS grows 10% in 2016, implies $1.85 of EPS in 2016 worth C$28 at 15x.  Even at 10x P/E there is ~50% upside from current levels.




Peers include Amaya, 888,Betfair,Bwin,Paddy Power, Betsson, Unibet, Wiliam Hill, and to a lesser extent Playtech.


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


I believe the stock will re-rate as management continues to execute and hits the guidance of $1.40 - $1.60 of EPS. Guidance  implies $0.85 of EPS in the 2H or $1.69 run-rate given a full quarter of Jackpot Joy acquisition. Q3 will be the first full quarter with Jackpot Joy, the first full quarter with Spanish side games, the first full quarter with a strengthened GBP, and the first full quarter with PF share count of 77 million shares.




Management reaffirmed guidance on August 12th and again on September 1st (de-risking Q3, and basically Q4 given no seasonality) and noted that numbers are likely too low given significant move in the GBP relative to the CAD. Management gives you assumed Fx rate in guidance and rates will add ~7% tailwind based on spot prices




The stock sold off hard on a management compensation plan that would pay management 2% of EV for any additional deals they do. After defending the proposal, Intertain listened to shareholders and voluntarily removed this part of the plan. They held a detailed call to discuss the change and noted very strong July performance. Given that the plan has been ammended, I do not understand why the stock has not bounced back and think it will over time.





Management believes the stock is a double from here and the board recently authorized a 5% buyback.


There is speculation that bingo assets could be divested after GVC merger and IT CN is the logical buyer.

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