INTRALOT

All,

Attached is the updated analysis of Intralot - without the Turkish business from September of this year. The impact on this year is minimal (only one quarter), so we have included a simple projection for 2020 on the first page to illustrate how the current business will look on an annualised basis without Turkey. Spoiler: It's NCF negative.

We continue to view both bonds as rich, but have not taken to shorting the 24s as the market appears stubbornly supportive of the company - presumably due to its flattering consolidated financials. If we can gain any intelligence on the progress of talks, will review taking a short position, including any pair trade between now and Friday however - even at these prices. 

Background: Against our and possibly everyone’s expectation SG have partnered with smaller Demioren to present a bid at 0/2% of turnover (vs. 0.5% of Inteltek). We don’t see how SG are planning to generate any money with the bid unless there is further detail of a ramp-up behind it. Clearly Inteltek (Turkcell and Intralot) are protesting, but backtracking now would cause moral hazard to state organisation SporToto, holding the auction. We understand that a final decision may be made on the weekend.

Assuming that the loss of the Inteltek contract fully impacts the entire Turkish business, the loss is a dent in proportionate EBITDA of E10m vs our previous projections. In particular, that was supposed to be achieved by CapEx with less than a 1-year payback period. Given EBITDA-less-CapEx is Intralot’s biggest Achilles heal, this loss shines a bight light on precisely the issue we have been flagging: the business is not producing cash. Competition is globalising and intense and players are undercutting each other with expensive up-front CapEx they struggle to earn back during the term of the first contract (in this case 10 long years). The business is often predicated on the retention of the contract for a second term. But even in a volatile market like Turkey, in pole position, Intralot struggle to defend their investment.

If Intralot lose:

- Intralot would lose an important sales argument: that it can manage contracts. Morocco is coming up in August and that would be the last such contract of significance. 

- The EBITDA impact will be minimal this year as operations may continue through September. The loss of E10m contribution only shows up fully in 2020.

- We don't see the company return to NCF breakeven without a restructuring or otherwise a break-up and sale. The model assumes termination of contract in September 2019. We have not yet assumed costs for closure. 

- Depending on the re-negotiation of the revolving facilities in recent weeks, the company should have ample liquidity to draw from through at least the year and possibly though 2021. However, if those facilities won’t be available, then the company should end 2020 with very low cash and unsustainable leverage in the face of the 21’s maturity. 

If Intralot win: 

- We see the company hover around zero cash production, even before considering that into the process yesterday night Intralot had dropped their proposed commission from 1.2% in the first round to 0.5% and thus already dropping the contract’s profitability from the E10m EBITDA level previously assumed.

- Liquidity will remain a function of any renegotiation of the RCFs.

Wolfgang