Intralot - Status Quo

All,

Please find our unchanged analysis here.

Clearly, our 24s have been on fire (please send champagne and congratulations to: info@Sarria.co.uk). But just how good are the news and is it worth buying/holding/selling at 87?

On track to NCF break even:

- The restructuring was not undertaken with the primary goal of deleveraging, but with the aim of moving the 21s structurally sr. on the one hand and retaining Kokkalis’ control on the other.

- Therefore Intralot remains leveraged to its eyeballs. At the moment, FY21 cashflows promise to stack up as follows (yes trend is positive, but Q4 tends to hold more costs):

Inc:

80 EBITDA

(6) CapEx

(15) Interest (PIK)

60 NCF

ROW:

16 EBITDA (proportionate from fully consolidated, excl. US)

11 EBITDA (proportionate from Argentina and Turkey)

27 EBITDA (proportionate)

(39) CapEx

(19) Interest (Cash)

(31) NCF

Group:

39 Dividend from Inc. - 65.7% owned

(8) 20% tax?

0 Group NCF

CapEx:

- Intralot has gone through a year of low CapEx, mostly because it did not have a major contract expiry.

- Malta re-tender, however, is due early next month (October 8th) for another long-term license to operate the lottery. This is one of the two largest contracts the company still as outside the US and it will require CapEx - possibly more than €30m. Note also that due to the nature of these contracts this represents incremental CapEx over 2021.

- Contracts in Oz are also coming up for renewal.

Sub-scale:

- In the business plan that underpinned the restructuring (little of it remains), Management forecast a reduction of net Greek central costs from €38m in 2020 to €34m this year and largely stable costs from there. These costs include central IT and R&D costs that are not capitalised (see large minimum CapEx expense).

- Intralot is a distant third next to IGT and SG and reducing these cost blocks risks falling too far behind.

- The company’s only way forward, therefore, is to sell more. Intralot does occupy an interesting niche - it offers a one-stop-shop for smaller countries and administrations, which are looking for a single partner to offer lottery, gaming and betting (instead of dealing with different specialists for everything). So the company has all to play for, but it has to play quickly, or a loss of Malta (auction results set for November) could very much spell require Kokkalis to make adjustments (and the 24s to trade back down again).

The Gaming market:

- It’s hot. A further sell-down of the US business may be an option.

- However, even a full sale of the US business is unlikely to pay down the 24s entirely, nor is that an attractive option for Kokkalis. He needs time to grow sales more than a short term debt reduction.

Investment Considerations:

- For the moment we are owning the 24s, which have gone from a recovery calculation to a 10% yield this week. But given Malta is just around the corner and that a loss of that contract would merit a return to recovery calculations, we may want to take some risk off.

Wolfgang

E: wfelix@sarria.co.uk

T: +44 203 744 7003

www.sarria.co.uk