Intralot’s Q2 results had some puts and takes but were mostly uneventful and neutral to the thesis.
Q2 prop EBITDA came in a bit light and management similarly lowered 2019 guidance by ~8-10% (implying ~80mm of prop EBITDA at the midpoint). This figure continues to include Inteltek results in continuing operations (flattering results), but also excludes any Ohio terminal sales (expected for Q3). The expected negative variance is mostly driven by higher Illinois start-up costs, non-recurring Morocco guarantee payments related to the old contract (recently settled), and a Netherlands contract delay from Q4 ’19 to Q1 ’20. Most importantly, management reiterated its existing run-rate Intralot Inc. EBITDA guidance of $50mm USD, suggesting that the higher Illinois start-up costs are indeed fully transitory. 2019 results will come in below my prior expectations, although I continue to view this as a transition year.
2020 results will then benefit from the improved Illinois profitability, the Montana sports contract (late 2019 launch), the D.C. sports contract (January 2020 launch), the B.C. lottery contract (January 2020 initial launch, fully live in 2021), Netherlands growth, and announced cost initiatives. I previously didn’t give credit for many of these 2020 tailwinds (due to a lack of disclosure), explaining why my existing 2020 estimates were below management’s prior “run-rate” guidance. When I weigh these new 2019 headwinds against offsetting 2020 tailwinds, I think I effectively get to a similar place on 2020E prop EBITDA. I’m continuing to watch the Bilyoner license renewal and political noise in D.C. for key sources of downside risk. Absent issues there, my view on value coverage is effectively unchanged.
Management reiterated their projected Q4 ’19 parent cash estimate of 75mm (a figure I agree with). This includes the Hellenic Lotteries sale proceeds, completed at a solid 1.4x book value. Management remains open to other non-core asset sales, but reiterated that getting proper value is important. For example, management has frequently stated that its non-core Gamenet stake is undervalued – with shares +55% YTD on strong operating results, the market has validated this view.
Management also renewed and upsized its Intralot Inc. RCF from $20mm to $40mm. This is interesting given that (i) there aren’t many major capital-intensive lottery contracts coming up for RFP in the near-term, (ii) sports betting RFPs are generally less capital intensive, and (iii) the company recently reshuffled its Intralot Inc. Board of Directors. These are signs that something could be happening with Intralot Inc., but we’ll need to wait and see.
So although Intralot reported another sloppy quarter and lowered 2019 guidance, most of the issues are timing related, 2020 should be fine, and the core thesis is still there. Ideally management will provide a bit more detail on the various moving pieces on the Q3 call.