Codere - Follow up with management

All,

Please find our updated Codere model here.

We had a long conversation with Codere management yesterday.   Details of some of the adjustments are outlined below, but in summary, although we have reduced the cash outflow for remainder of FY20 and FY21 as the Company continues to conserve cash, there is still limited deleveraging.  We should also acknowledge that the situation is still very fluid, (Italy have shut down for a month, all gambling related operations as from 25th October).   

Despite the lower outflow of cash over FY21, we remain very cautious on the name.  The business, at 90% level of FY19 revenue, does not generate any free cashflow after interest, and with the PIK element on the SSNs leverage will start to creep up.  The Company are working off the basis that at 90% of FY19 revenue, EBITDA could be maintained by better cost management.  As we enter into a 2nd wave of Covid-19 restrictions the 90% of historic revenue target appears ambitious.  

Maintenance CAPEX

One of our main concerns in relation to Codere is the maintenance CAPEX that is required by Codere over the next couple of years prior to the maturity of the outstanding bonds.  We have always maintained that the maintenance CAPEX, for machines only, has consistently been lower than the required amount. The logic of maintaining European machines every 3yrs at €2.5k per machine, and LATAM machines at every 8yrs at c. €20k per Argentine machines (higher import taxes) and €12k per other other countries, results in a annual bill of €80m.   This figure is a theoretical figure and we accept the Company is likely to sweat the machines plus partial refits instead of full replacements via software updates/components, which can bring the bill down towards the €50-60m level.   

The Company guidance for FY20 and FY21 maintenance CAPEX is €40m and we accept in these current times it is unlikely to increase much beyond this, in future years basic machine maintenance CAPEX will have to revert to €50-60m range, pushing the overall maintenance CAPEX bill beyond historic levels of €60m p.a. 

Licenses

Firstly, a large caveat is required given the overall uncertainty surrounding the industry.  Future license expenditures may not replicate the historic norm of an upfront fee, but may move to a continuous license fee/supplementary tax instead.  

In Argentina, there are 8 licenses up for renewal in FY21-FY23 and we had assumed 6 of them were due in FY21 and 2 in FY23.  However, the largest, most expensive license is actually up for renewal in FY22.  This coupled with an expectation that the Italian license that is due in January 2022 will be pushed back by state legislators reduces our license expenditure in FY21.  Therefore, the license expenditure is likely to be €10-15m in FY21, with €20-25m in FY22 for Argentina plus an unknown amount for Italian license, but previously was €25m in FY22.  

Note, the Company acknowledged that the parameters have changed and license renewal process might change to higher continuous tax instead of one-off payments. 

Happy to discuss.

Tomás
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E: tmannion@sarria.co.uk
T: +44 20 3744 7009

M:+44 7786 705 806
www.sarria.co.uk