Intralot Integrated Lottery Systems and Services — Focus on business development in FY24

Intralot’s FY23 revenue (before winners’ payout) declined by c 7% y-o-y to c €364m, and gross gaming revenue (GGR; revenue after winners’ payout) increased by c 1% to c €349m. Management’s ongoing focus on controlling costs and a change in business mix towards higher-margin businesses (ie from Licensed Operations (LO) to Technology & Support Services (TSS) and Management Contracts) continued to deliver a better performance at the EBITDA line, which increased by 5% to c €129m. On an underlying basis, revenue increased by 4.3% in the year; the reported decline in revenue included the ending of a Maltese contract from Q322, equivalent to 11% of FY22’s revenue.

Intralot’s reported GGR and EBITDA for FY23 were c 3% below our prior estimates. In absolute terms, the main cause for the underperformance was the decline in revenue from Intralot’s activities in Argentina, which affects both LO and TSS, as a result of the devaluation of the Argentine peso versus the euro. The Argentine peso was devalued in the middle of December 2023 by over 50%, so that by the year end, the stated exchange rate was c ARS894/€ versus c ARS370/€ at the end of Q323 and c ARS190/€ at the end of December 2022. The timing of the devaluation (ie very late in the financial year) meant that management was unable to make any significant corrective action or for it to benefit from the post-devaluation inflation that typically compensates for the devaluation. In absolute terms, Intralot’s FY23 Argentine revenue declined year-on-year by c €25m to c €39m, GGR by c €17m to c €39m and EBITDA by c €8m to €7m. The extent of the currency depreciation is highlighted by the anomaly of implied ‘negative revenue’ for LO in Q423, derived by comparing FY23’s results with the quarterly figures reported through the year. Intralot converts Argentine revenue to euros using period end exchange rates, in accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates, for hyperinflationary economies. On an underlying basis, the picture was much healthier for the year as Intralot’s Argentine operations grew by c 195% y-o-y. The lower revenue from LO was compounded by a higher winners’ payout ratio, 63.1% versus 58.7% in FY22, which only affects Intralot’s Argentine LO revenue.

TSS’s c 4% y-o-y revenue growth to c €263m was boosted by a strong performance in Croatia, which benefited from market growth, contributing to a very strong increase in profitability (see Exhibit 2), as well as a new lottery contract in Taiwan. In March 2024, Intralot announced it had signed a new seven-year contract with options for two extensions of five years each with Magnum Corporation, a leading Malaysia gaming company. Intralot first began working with Magnum Corporation in 2006 and the current contract was due to end in December 2024.

Management Contract (MC) revenue grew strongly, by c 43% y-o-y to €72.4m, mainly due to Intralot’s operations in Turkey. The Turkish sports betting market almost doubled in size during FY23, but reported euro revenues were negatively affected by the ongoing depreciation of the Turkish lira versus the euro: TRY32.65/€ at end FY23 versus TRY19.96/€ at end FY22. As Turkey is also a hyperinflationary economy, Intralot translates its revenue at period-end exchange rates, as it does for Argentina, instead of average rates.

The c 68% y-o-y reduction in LO’s revenue to c €28m was due to the decline in Argentine revenues and the end of a Maltese contract in Q322, which contributed c € 44m revenue in FY22.

The absolute level of FY23’s EBITDA was c 3% below our expectations, due to the foreign exchange issues, but the margin (relative to GGR) of 37.1% was broadly in line with our prior estimate. Intralot’s profitability bore the costs of closing down the contract in Morocco.

Exhibit 2 shows the reported numbers for Intralot’s most important geographies, in descending order of EBITDA contribution in FY23. We shift attention away from revenue to GGR and note that winners’ payout only affects Intralot’s LO revenue. In aggregate, the five countries/regions represented GGR of c €349m (c 80% of group total) and EBITDA of c €129m (c 98% of group total). Their importance to the group has increased versus FY22 when they represented c 73% of GGR and 95% of EBITDA, despite the lower contribution from Argentina.

On an underlying basis, North America’s GGR increased by c 3% y-o-y but euro strength versus the US dollar, notably of c 5% in Q4, restricted FY23’s revenue growth to 0.5%. The differential year-on-year growth rates (H123 c 7%, H223 -5%) reflect the comparatives from the prior year when the industry enjoyed a high number of multi-state large jackpots in H222 and the start of FY23, as well as the changes in exchange rates. Post the period end, Intralot announced a subcontracting agreement with FanDuel, a leading US sports betting provider, recognising the highly competitive nature of the market.

We have commented on Turkey’s strong revenue growth in the year above, but draw attention to the lower EBITDA margin in H223 as the company invested in gaining new customers.

Intralot’s activities reported good underlying revenue growth, with Australia up by 5% and New Zealand by 13%, but local currency weakness versus the euro from Q223 onwards dampened reported year-on-year growth rates.

Intralot saw a strong improvement in free cash flow generation (before interest payments and after the principal payments of leases) on an absolute basis, growing by 18% y-o-y from c €62m in FY22 to c €73m in FY23, relative to GGR, which increased by c 1%. The drivers of the improved free cash flow generation were the higher profitability and lower working capital investment, which were partially offset by a modest increase in capital investment (from €26.6m to €29.7m). The lower working capital investment appears to be mainly due to the phasing of payments and receipts.

The company raised equity (net proceeds of c €130m) in November 2023 and redeemed the senior notes that were due in FY24 at a net cash cost of c €142m. Therefore, by the end of the year, its gross cash position had improved to c €112m (FY22 c €102m) as had gross debt excluding leases to c €429m (FY22 c €577m). This took the net debt position to c €317m (FY22: c €474m) before leases. In addition, the company has relatively minor lease liabilities of c €16m, giving a total net debt to EBITDA of 2.6x, a significant improvement from 4.0x at the end of FY22 and the peak of 9.8x at the end of FY20.

In December 2023 Intralot announced a binding agreement for a syndicated bond loan of up to €100m with a consortium of five Greek banks, whereby two of them will act as lead arrangers under the main condition of a successful issuance of a five-year retail bond of at least €130m to be listed on the Athens Stock Exchange. The public bond offer was completed in February 2024 with an interest rate of 6% and the syndicated bond loan was completed at the end of March 2024. The proceeds will fully repay (€130m in March 2024 and €100m in April 2024) the September 2024 5.25% debt maturities that were outstanding at the end of FY23.

In addition to these debt movements, in March 2024 the US subsidiary announced that its credit agreement has been extended by a year so that the maturity date is towards the end of July 2026.

We have made no changes to our underlying growth estimates for FY24 and FY25, but have updated for the changed FY23 base as well as for movements in foreign exchange rates versus the euro. Our estimates for GGR and EBITDA for FY24 and FY25 are reduced by c 3%, but estimates for PBT increased to reflect a more favourable net interest charge.

Rolling forward our DCF for FY23’s results and the changes to our estimates means our DCF-based valuation is relatively unchanged at €1.60 per share (€1.62 previously). The underlying assumptions for the DCF valuation remain as highlighted in our initiation note. The report also shows the potential further upside to the share price if the company wins new contracts. The sensitivity of our ‘base’ DCF valuation to changes in the WACC and terminal growth are shown below:

Intralot’s prospective EV/EBITDA multiples for FY24 and FY25 of 7.4x and 6.8x are in line with the average multiples for its gaming technology peers. However, there is a wide range of multiples for the companies, which all enjoy attractive EBITDA margins. Adjusting for the more extreme valuations, the median multiples for its peers are lower at 5.7x and 5.1x for the same years.

In the charts below, we show Intralot’s historical high, average (figures quoted on the charts) and low EV/GGR and EV/EBITDA multiples, along with its prospective multiples for FY24 and FY25. In each chart we also show how the EBITDA margin has progressed.

In the first chart EV/GGR only goes back to FY16 as the company did not disclose winners’ payout before that. We estimate that Intralot’s EBITDA margin will increase towards 40% in FY24 and FY25 versus its historical margins, which were as low as c 23% in FY19 and FY20. Therefore, we would argue the company now deserves higher prospective EV/GGR and EV/EBITDA multiples given the change in business mix towards more profitable and predictable revenue streams, that is, away from more variable LO to more TSS and MC revenues and higher cash conversion.

Fuller disclosure means we can look at Intralot’s EV/EBITDA multiple over a much longer term. The prospective multiples for FY24 and FY25 of 7.4x and 6.8x are at justifiable premium to the historical average since FY07 of 5.1x, excluding FY20 when the valuation was heavily skewed by the outbreak of COVID-19. While we mostly ignore reported revenue for Intralot as it is gross of winners’ payout, our forecast EBITDA margin on revenue, not GGR, for FY24 of c 39% is significantly higher than the low- to mid-teens margins reported since FY08. Free cash generation relative to GGR is higher, which is supportive of a higher valuation than historically.