160M Debt Raise to Fund the Jackpotjoy Earn-Out Pre-Payment Completed. Price ($)

Transcription

1 Price ($) Volume (M) Equity Research December 19, 2016 Research Update THE INTERTAIN GROUP LTD. 160M Debt Raise to Fund the Jackpotjoy Earn-Out Pre-Payment Completed EVENT Intertain announced they have completed a 160M debt raise to fund the Jackpotjoy (JPJ) earnout pre-payment. BOTTOM LINE Positive. 150M of the 160M raised was paid to Gamesys as a pre-payment of the JPJ acquisition. 70M of the 160M is an extension of IT s existing first lien term loan (Libor +6.5%), with the remaining 90M raised as a second lien term loan facility, bearing interest at Libor +9%. In addition, IT continues to focus on listing on the London Stock Exchange and will update investors as soon as possible; discussions are ongoing with the LSE. We are maintaining our BUY recommendation and $28.00 target price. FOCUS POINTS Organic Growth Focus. There are plenty of opportunities for organic growth across brands and geographies leveraged by mobile usage. Mobile Key to Growth. Mobile now is ~45% of total revenues (vs 0% in 2014); and 55% of new customer acquisition. Mobile provides >2.5x the average revenue of a desktop customer. Operating Leverage. More room for margin expansion through marketing optimization between the business segments and integrating the platforms (eg., InterCasino and V&J). Blue-Sky. We believe that a Latin American expansion (organic or acquisition) could take the company past the $500M+ revenue runrate by 2017 or sooner. Valuation. On C2017E, IT is trading at an EV/Sales and EV/EBITDA of 2.0x and 5.1x, vs its comps at 2.8x and 10.4x, respectively. Recommendation: BUY Symbol/Exchange: IT/TSX Sector: Technology - Online Gambling All dollar values in C$ unless otherwise noted. Current price: $9.93 One-year target: $28.00 Dividend / Yield ---/--- Target return: 182% Financial summary Shares O/S (M) Week Range $ $13.43 Market Cap ($M) Avg. Weekly Volume (M) 2.12 Net Cash ($M) (696.7) Fiscal Year End 31-Dec C$M E 2017E 2018E Revenue Revenue (YoY % ) 24.4% 5.7% 10.6% Adj. EBITDA Adj. EBITDA margin 36.3% 38.8% 39.3% 41.5% Adj. EPS (Basic) Adj. EPS (Diluted) Shares O/S (Diluted) EV / Revenue 3.6x 2.9x 2.8x 2.5x EV / Adj. EBITDA 10.0x 7.5x 7.0x 6.0x P/E (adj. EPS) 5.8x 5.0x 4.9x 3.9x Source: Cantor Fitzgerald Canada, Company Documents $15 $10 $5 $0 Dec/15 Feb/16 Apr/16 Jun/16 Aug/16 Oct/16 Company profile: Intertain is an online gaming company that provides entertainment to a global consumer base. Intertain currently offers bingo and casino to its customers using the InterCasino, Costa, Vera&John, Jackpotjoy and other brands Ralph Garcea, MBA, P. Eng. Associate: Gianluca Tucci rgarcea@cantor.com gtucci@cantor.com Sales/Trading Toronto: (416) , (866) See disclosure and a description of our recommendation structure at the end of this report. 1 of 8

2 DEBT DEAL DONE; FOCUS ON FUNDAMENTALS 150M of the 160M raised was paid to Gamesys as a pre-payment of the JPJ acquisition earn-out. 70M of the 160M is an extension to IT s existing first lien term loan (Libor +6.5%), with the remaining 90M raised as a second lien term loan facility, bearing interest at Libor +9%. In addition, IT continues to focus on listing on the London Stock Exchange (LSE) and will update investors as soon as possible; discussions are ongoing with the LSE. With the earn-out concerns in the rear-view mirror, we can now focus on the fundamentals. Last month, IT reported gaming revenue of ~$113.6M (CFCC: $111.7M; Cons: $112.7M), Adj. EBITDA of $43.8M (CFCC: $36.3M; Cons: $37.2M), and Adj. EPS of $0.49 (CFCC: $0.32; Cons: $0.37). On a constant currency basis, revenue increased 10% y/y and Adj. EBITDA increased 17% y/y. Average active customers per month of 231K, +11% y/y and +0.6% q/q. Exhibit 1. Summary of Estimates Forecasts Q116 Q216 Q316 Q316E Change Q416E Q117E Revenue ($M) % Adj. EBITDA ($M) % Adj. EPS (Basic) % Adj. EPS (FD) % Source: Cantor Fitzgerald Canada, Company Documents HIGHLIGHTS OF THE GAMESYS AGREEMENT INCLUDE: Two-year additional non-compete. Gamesys now has a non-compete clause with Intertain now expiring April 2019 (vs April 2017 previously). This should calm any fears caused by Noel Hayden s resignation from the Board earlier this year and appointment as a Special Advisor. Five-year extension of operating agreement. The operating agreement between Gamesys and Intertain now extends to April This includes an extension of the content licensing agreement to April This should also calm any fears caused by Noel Hayden s resignation from the Board and appointment to Special Advisor. Jackpotjoy earn-out cap of 375M. What was a previous unlimited amount, Intertain and Gamesys have capped the Jackpotjoy earn-out to 375M. This has been financed via a GBP-denominated debt issuance and a 150M prepayment of the earn-out. Dividend Policy. Intertain announced intent to implement a dividend policy once leverage ratios are in-line with industry peers (post debt raise) to that of 50% of adjusted net income. Andrew previously stated at the investor day he wants to return as much value to shareholders as possible, as soon as possible. A dividend policy will be instated when adjusted net leverage is ~2.0x. Ralph Garcea, MBA, P. Eng of 8

3 EARN-OUT SUMMARY: On February 5, 2015, Intertain announced that it was purchasing the Jackpotjoy business from Gamesys for ~ 426M (~C$810M), plus certain cash earn-outs. The Purchase Price was funded through the Initial Purchase Price plus an earn out, which is based on future EBIT performance of the Jackpotjoy Business. For all brands other than the real-money Botemania brands (the "Non- Botemania Brands"), the earn-out (the "Non-Botemania Earn-out") will be based on average EBIT (up to 63.1M) for the first two 12 month periods following closing of the Transaction (April 8, 2015), multiplied by nine, less the Initial Purchase Price, plus 4.5 times the amount of EBIT generated in excess of 63.1 million. There will also be an earn-out related to the Botemania brands, which will be based on the EBIT performance of Botemania during the 12 month periods ending 24 and 36 months after the closing of the Transaction, multiplied by nine. Gamesys will also be entitled to additional earn-out payments of 5.0M each year should the Jackpotjoy Business generate EBIT in excess of 80.0M, 85.0M and 92.5M respectively, for the twelve month periods ending 36, 48 and 60 months after the closing of the Transaction, providing a maximum payment of 15.0M. Our estimate of the total earn-out is as follows: JPJ first 12 mths: JPJ next 12 mths: Average: EBIT 71.1M EBIT 79.1M EBIT 75.1M Earn out: 9 x 63.1M = 568M - 426M = 142M x 12M = 54M JPJ mths 36, 48, 60: Assume full amount = 15M Botemania: 24 and 36 mths EBIT: Earn out: 9 x 2M = 18M Earn out: 9 x 3M = 27M - 18M = 9M Total earn-out = 238M* *(now capped at 375M this wasn t capped initially) Ralph Garcea, MBA, P. Eng of 8

4 No Need to Fret the Rest of the Earn-out. We estimate that IT can easily handle the contingent consideration that is due if the full earn-out is reached. From a balance sheet perspective, current cash and customer deposits are ~$104M and the swap gain is ~$49M. We estimate adj EBITDA for 1H/17 of ~$96M; taking 75% of that yields ~$72M in incremental cash flow. In addition, IT has an undrawn facility of $17.5M. In total therefore, this gives us ~$240M in cash by the end of June In addition, the Company can carve out Vera&John and Mandalay and raise $374M - $467M ( 224M - 280M), if needed. If you look at V&J and Mandalay on a LQA (last qtr annualized) basis, we have: (C$) V&J Mandalay Revenue $98.8M $40.4M EBITDA $35.2M $11.6M Takeout Valuations 2-3x revs $198M-$296M $ 81M-$121M 10-11x EBITDA $352M-$387M $116M-$128M Averages $275M-$342M $ 99M -$125M Total $374M - $467M ( 224M - 280M) Ralph Garcea, MBA, P. Eng of 8

5 TECHNICALLY SPEAKING IT has completed its downside measured move post head-and-shoulders break, and is now testing its critical $10 resistance. If breached, next resistance lies at ~$10.60 (its 200-day moving average). Exhibit 2. IT Technical Chart Source: Cantor Fitzgerald Canada, StockCharts.com RECOMMENDATION AND VALUATION We are maintaining our BUY recommendation and a DCF-based oneyear price target of $28.00 per share. Intertain currently trades at a C2017 EV/Sales of 2.0x, EV/EBITDA of 5.1x and a P/E of 4.9x vs its Global Gaming comparables at an average of 2.8x, 10.4x, and 17.5x respectively. Ralph Garcea, MBA, P. Eng of 8

6 Exhibit 3. Global Gaming Comparables Price Rating Target Mkt Cap LTM Rev EV/Sales EV/EBITDA P/E Ticker (Local) (Local) (US$) (US$) Amaya Inc. AYA-CA $ BUY $ ,072 1, Intertain Group Ltd. IT-CA $ 9.93 BUY $ Pollard Banknote Limited PBL-CA $ 8.15 BUY $ NYX Gaming Group Limited NYX-CA $ 1.19 BUY $ NM NM NM 10.4 Innova Gaming Group Inc IGG-CA $ 1.57 BUY $ Tangelo Games Corp. GEL-CA $ 0.05 SPEC BUY $ NM NM NM Sector Averages: Great Canadian Gaming Corporation GC-CA , Global Daily Fantasy Sports, Inc. DFS-CA Gaming Nation, Inc. FAN-CA DEQ Systems Corp. DEQ-CA Poydras Gaming Finance Corp PYD-CA Fantasy Aces Daily Fantasy Sports Corp FAS-CA Contagious Gaming Inc. CNS-CA Jackpot Digital Inc JP-CA Scientific Games Corporation Class A SGMS ,327 2, NM NM NM Everi Holdings, Inc. EVRI NM NM NM Paddy Power Betfair plc PPB-GB ,960 1, Playtech plc PTEC-GB , William Hill PLC WMH-GB ,186 2, International Game Technology PLC IGT ,209 5, NM NM NM Unibet Group PLC UNIB-SE , GVC Holdings PLC GVC-GB , NetEnt AB Class B NET.B-SE , Ladbrokes Coral Group Plc LAD-GB ,837 1, Betsson AB Class B BETS.B-SE , Rank Group Plc RNK-GB , Evolution Gaming Group AB EVO-SE Holdings Plc 888-GB Kambi Group plc Class B KAMBI-SE LeoVegas AB LEO-SE NM NM 19.4 NM NM 29.4 Cherry AB Class B CHER.B-SE NM NM 11.3 NM NM 21.0 Sportech PLC SPO-GB Stride Gaming PLC STR-GB NM Red Plc TTR-GB Mr Green & Co. AB MRG-SE Aristocrat Leisure Limited ALL-AU ,010 1, Tatts Group Limited TTS-AU ,736 2, Tabcorp Holdings Limited TAH-AU ,858 1, Ainsworth Game Technology Limited AGI-AU AVERAGES: Source: Cantor Fitzgerald Canada, FactSet Ralph Garcea, MBA, P. Eng of 8

7 Consolidation in the Global Gaming Sector The introduction of the UK Point of Consumption Tax, as well as certain EU VAT taxes, and the move to online and mobile gaming, has forced the industry to consolidate. Recent transactions in the sector are listed below. We note that Caesars (CZR-US, Not Rated) has confirmed the sale of its social and mobile games business, including Playtika, to a Chinese consortium that includes Jack Ma s private equity firm, for cash consideration of $4.4B. Caesar Interactive s online casino business had ~$800M in revs (for an EV/Sales of ~5x). In Europe, NYX Gaming recently acquired OpenBet and European private equity shop CVC Capital Partners is paying 1B (US$1.1B) for Italian gambling and payments services operator Sisal Group SpA from funds advised by Apax Partners, Permira and Clessidra. For CVC, this follows CVC's agreement last month to purchase a majority stake in German sports betting operator Tipico Group in a deal that valued the company at 1.4B, according to media reports. CVC has previously invested in Britain s Sky Bet and William Hill (which both invested in NYX Gaming as part of the OpenBet transaction). Exhibit 4. Recent M&A Transactions Transaction EV/Sales EV/EBITDA Announced Closed Acquirer Target Value (US$) Aug 26/15 Feb 2/16 Paddy Power Betfair $8, Jul 16/14 Apr 7/15 GTECH IGT $6, Aug 1/14 Nov 21/14 Scientific Games Bally Technologies $5, Jun 12/14 Aug 1/14 Amaya Rational/Pokerstars $4, Jun 22/15 Pending Ladbrokes Plc Gala Coral $3, Sep 4/15 Feb 1/16 GVC/Cerberus bwin.party $1, Jan 31/13 Oct 18/13 Scientific Games WMS Industries $1, May 16/12 Nov 20/12 Boyd Gaming Peninsula Gaming $1, Jul 16/13 Nov 25/13 Bally Technologies SHFL entertainment $1, Jul 7/14 Oct 21/14 Aristocrat Leisure Video Gaming Technologies (VGT) $1, Jul 29/10 Mar 31/11 PartyGaming bwin.party $1, Sep 8/14 Dec 19/14 Global Cash Access Multimedia Games Holding $ Feb 5/15 Apr 8/15 Intertain Group Gamesys (Jackpotjoy) $ Oct 1/12 Mar 19/13 GVC/William Hill Sportingbet Plc $ Jan 12/12 Jan 20/12 IGT Double Down $ Apr 4/16 May 20/16 NYX Gaming OpenBet $ Mar 30/15 May 29/15 Apollo Global Management Amaya's Cadillac Jack $ Feb 7/14 Mar 4/14 Betsson Class One Holding $ Sep 25/12 Nov 5/12 Amaya Cadillac Jack $ May 26/11 Aug 31/11 Sportingbet Plc Centrebet International $ Apr 9/15 Jul 31/15 NYX Gaming Chartwell/CryptoLogics $ Oct 9/14 Dec 23/14 Intertain Group Dumarca/Vera&John $ Apr 18/12 Jun 20/12 Betsson Nordic Gaming Group $ Jun 4/14 Jul 14/14 Intertain Group Mandalay Media $ Jun 5/14 Jul 3/14 Bally Technologies Dragonplay $ Aug 7/15 Sep 16/15 Unibet igame $ May 13/11 Jun 15/11 Betsson Safepay Malta $ Jun 29/15 Jul 23/15 Betsson Europe-Bet.com $ Oct 21/13 Feb 11/14 Goldstar (Intertain) Wagerlogic (InterCasino assets) $ Feb 19/13 Feb 19/13 Betsson Scandinavian Slots from Cherry AB $ Jan 24/13 Mar 1/13 Ladbrokes Plc Global Betting Exchange (Betdaq) $ Jul 31/15 Jul 31/15 Stride Gaming InfiApps $ Oct 1/12 Nov 1/12 Amaya Ongame Network from bwin.party $ Jun 12/13 Feb 14/14 Amaya Diamond Game Enterprises $ Dec 15/11 Aug 1/12 Amaya CryptoLogic $ May 12/11 Jul 14/11 Amaya Chartwell Technology $ Average Source: Cantor Fitzgerald Canada, FactSet, Bloomberg Ralph Garcea, MBA, P. Eng of 8

8 DISCLAIMERS AND DISCLOSURE Disclaimers The opinions, estimates and projections contained in this report are those of Cantor Fitzgerald Canada Corporation ( CFCC ) as of the date hereof and are subject to change without notice. CFCC makes every effort to ensure that the contents have been compiled or derived from sources believed to be reliable and that contain information and opinions that are accurate and complete; however, CFCC makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions which may be contained herein and accepts no liability whatsoever for any loss arising from any use of or reliance on this report or its contents. Information may be available to CFCC that is not herein. This report is provided, for informational purposes only, to institutional investor clients of CFCC, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. This report is issued and approved for distribution in Canada, CFCC, a member of the Investment Industry Regulatory Organization of Canada ("IIROC"), the Toronto Stock Exchange and the CIPF. This report has not been reviewed or approved by Cantor Fitzgerald & Co. (CF & Co.), a member of FINRA. This report is intended for distribution in the United States only to Major Institutional Investors (as such term is defined in SEC 15a-6 and Section 15 of the Securities Exchange Act of 1934, as amended) and is not intended for the use of any person or entity that is not a major institutional investor. Major Institutional Investors receiving this report should effect transactions in securities discussed in the report through CF & Co. Non US Broker Dealer 15a-6 disclosure: This report is being distributed by (CF Canada/CF Europe/CF Hong Kong) in the United States and is intended for distribution in the United States solely to major U.S. institutional investors (as such term is defined in Rule15a-6 of the U.S. Securities Exchange Act of 1934 and applicable interpretations relating thereto) and is not intended for the use of any person or entity that is not a major institutional investor. This material is intended solely for institutional investors and investors who Cantor reasonably believes are institutional investors. It is prohibited for distribution to non-institutional clients including retail clients, private clients and individual investors. Major Institutional Investors receiving this report should effect transactions in securities discussed in this report through Cantor Fitzgerald & Co. This report has been prepared in whole or in part by research analysts employed by non-us affiliates of Cantor Fitzgerald & Co that are not registered as broker-dealers in the United States. These non-us research analysts are not registered as associated persons of Cantor Fitzgerald & Co. and are not licensed or qualified as research analysts with FINRA or any other US regulatory authority and, accordingly, may not be subject (among other things) to FINRA s restrictions regarding communications by a research analyst with a subject company, public appearances by research analysts, and trading securities held by a research analyst account. Potential conflicts of interest The author of this report is compensated based in part on the overall revenues of CFCC, a portion of which are generated by investment banking activities. CFCC may have had, or seek to have, an investment banking relationship with companies mentioned in this report. CFCC and/or its officers, directors and employees may from time to time acquire, hold or sell securities mentioned herein as principal or agent. Although CFCC makes every effort possible to avoid conflicts of interest, readers should assume that a conflict might exist, and therefore not rely solely on this report when evaluating whether or not to buy or sell the securities of subject companies. Disclosures as of December 19, 2016 CFCC has not provided investment banking services or received investment banking related compensation from The Intertain Group Ltd. within the past 12 months. The analyst responsible for this research report does not have, either directly or indirectly, a long or short position in the shares or options of The Intertain Group Ltd.. The analyst responsible for this report has visited the material operations of The Intertain Group Ltd. in Toronto, Ontario and London, UK. No payment or reimbursement was received for the related travel costs. Analyst certification The research analyst whose name appears on this report hereby certifies that the opinions and recommendations expressed herein accurately reflect his personal views about the securities, issuers or industries discussed herein. Definitions of recommendations BUY: The stock is attractively priced relative to the company s fundamentals and we expect it to appreciate significantly from the current price over the next 6 to 12 months. BUY (Speculative): The stock is attractively priced relative to the company s fundamentals, however investment in the security carries a higher degree of risk. HOLD: The stock is fairly valued, lacks a near term catalyst, or its execution risk is such that we expect it to trade within a narrow range of the current price in the next 6 to 12 months. The longer term fundamental value of the company may be materially higher, but certain milestones/catalysts have yet to be fully realized. SELL: The stock is overpriced relative to the company s fundamentals, and we expect it to decline from the current price over the next 6 to 12 months. TENDER: We believe the offer price by the acquirer is fair and thus recommend investors tender their shares to the offer. UNDER REVIEW: We are temporarily placing our recommendation under review until further information is disclosed. Member-Canadian Investor Protection Fund. Customers' accounts are protected by the Canadian Investor Protection Fund within specified limits. A brochure describing the nature and limits of coverage is available upon request Ralph Garcea, MBA, P.Eng. (416) of 8