Gtech Spa - Hammer Partners

Gtech Spa
Independent Equity Research
24/3/14
Luigi Padula
Fabrizio Malavolti, CFA
Matteo Radaelli
Sales Contacts:
Antonio Biffi
Pan - European Equity Sales
Gtech Spa
Rating
Target Price EUR
Closing price EUR
Upside
Buy
30
22.05
36%
Market Cap. (mln) EUR
Exp. Dividend Yld
Next Report Date
luigi.padula@hammer-partners.com
fabrizio.malavolti@hammer-partners.com
matteo.radaelli@hammer-partners.com
antonio.biffi@hammer-partners.com
sales@hammer-partners.com
+41 91 92 40160
3836
3.40%
5/5/14
Executive Summary
Bloomberg Ticker GTK IM Equity
Web_Site www.gtech.com
52 Week Low: 17.55
Chg 1W
-1%
Chg 1M
-6%
Chg 3M
3%
52 Week High: 24.13
Chg 6M
0%
Chg YTD
-1%
Chg 1Yr
15%
Gtech is one of the main market leaders within the global gaming industry
and the only one that actually fully integrates its B2C with its B2B
activities as it:
Volume
• provides technology and platform systems;
• manages directly several concessions (lottery, scratch and win, sport
betting, online casinos, VLT, AWP).
The company enjoys very profitable operations which will be improved by
the recent change in the company organization: from last summer, the
formerly known Lottomatica changed its name into Gtech, after having
modified its organizational structure into three geographical divisions
(Italy, Americas and International).
Each area is now responsible for its sales for the entire portfolio of
products and services (lottery, gaming machines, sports betting and
internet).
We are convinced that this new structure can promote the identification
of synergies and efficiencies, both in revenues and costs.
Gtech still collects the bulk of its sales and operating profits from Italy
and the USA. We are aware that the highly competitive and mature
Italian market could constrain growth going forward; at the same time we
think that Gtech is set to strengthen and consolidate its domestic
leadership, by focusing on cost savings while remaining well positioned to
seize higher growth from its international activities.
Investment Case
We initiate our coverage on Gtech with a Buy rating. We think that the
most appropriate way to evaluate the fair value of the company is
through a DCF approach, given that the majority of revenues has a
recurring nature (more than 75% of Service Revenues comes from 10
long terms contracts with an average life of 7 years).
Based on a WACC of 7.3% and terminal growth rate of 1.5% our DCF
model indicates a price objective of Eur 30 per share (pag 7).
At current levels Gtech trades at a discount relative to its main peers on
different metrics (EV/EBITDA, EV/EBIT and PE for 2014E and 2015E). We
think that Gtech instead deserves a premium given its superior business
profile and its sound financials (pag 7).
According to our forecasts the company is able to generate a Levered
Free Cash Flow (LFCF) of Eur 300-400 mn per year on a sustainable basis
which, after dividends, can serve debt reduction and acquisitions. The big
improvement of the Net Financial Position (Net Debt/EBITDA at 2.4x in FY
2013, down from 3.7x in 2010) is fully consistent with our view.
1.20
25
1.00
20
0.80
15
0.60
10
0.40
5
0.20
0
0.00
So urce: Hammer P artners elabo ratio n o n B lo o mberg's Data.
Financials Overview
Profit & Loss EUR
2013 A 2014 E
2015 E
2016 E
Total revenue
Revenue Growth %
3076
-0.4%
3063
4.3%
3194
3.7%
3310
2.3%
EBITDA
EBITDA margin %
1037
33.8%
1090
34.1%
1138
34.4%
1138
33.6%
559
386
572
411
605
444
601
440
Tax rate %
47%
40%
40%
40%
Net income
175
214
234
231
EBIT
Pre-tax profit
Balance Sheet EUR
2013 A 2014 E
2015 E
2016 E
Current assets
1676
1678
1802
1448
Current liabilities
Net working capital
1604
72
1639
87
1671
90
1688
92
Total LT Assets
5448
5386
5229
5567
Capital employed
Net debt (cash)
5520
2507
5425
2530
5361
2460
5327
2853
Group's Net Equity
2604
2692
2795
2889
Enterprise value (EV)
6870
6892
6825
7208
Cash Flow EUR
2013 A 2014 E
2015 E
2016 E
Operating cash flow
696
787
835
837
FFO
846
802
838
839
FCF
469
469
469
469
Dividends
126
130
137
141
Acquisitions
-12
-21
0
0
-329
-456
-375
-875
Capex
Data Per Share EUR 2013 A 2014 E 2015 E 2016 E
N° of sh for fully dil. EPS
174
174
174
174
EPS
1.01
1.23
1.34
1.33
CFPS
4.86
4.61
4.82
4.82
DPS
0.75
0.79
0.81
0.82
BVPS
14.97
15.47
16.07
16.61
Valuation
P/E
P/B
EV/Sales
EV/EBITDA
EV/EBIT
Net debt/Equity %
2013 A 2014 E 2015 E 2016 E
22.5
18.4
16.9
17.1
1.5
1.5
1.4
1.4
2.24
2.16
2.06
2.13
7.8
7.4
7.1
7.4
14.4
14.2
13.3
14.0
96%
94%
88%
99%
So urce: Hammer P artners elabo ratio n o n B lo o mberg's Data.
1
30
Share Price
Gtech Spa
The New Group Structure and the World gaming Market
Gtech is one of the world leading lottery operators and the first Italian player based on global
lottery wagers. The company also provides platforms and technology solutions worldwide in
all segments of the gaming industry (Lotteries, Gaming Machines, Sport Betting, Interactive).
It has a wide international reach with operations in 60 countries, with revenues generated
mostly in Italy and Usa.
Up to January 2013 Lottomatica was organized in four business units (Italian Operations,
Gtech Lottery, Spielo International and Gtech G2); it then renamed itself into Gtech in June
2013 and started to organize its business into three geographical divisions (Italy, Americas
and International).
The new structure assigns a wider and decentralized autonomy to the management of each
geo-division in order to give a more effective response to clients and to better exploit cost
synergies at each stage of the business processes.
Each geo-division is now responsible for the whole offer of products and services (Lotteries,
Gaming Machines, Interactive and Sport Betting) in all its reference markets. According to
management, this reorganization will generate Eur 50 mn in annual cost savings between
2014 and 2015 on a recurring basis, after restructuring costs totaling Eur 35-40 mn of which
Eur 21 mn incurred in 2013.
Gtech a world leader in gaming
industry
The new Geo-Divisions
Structure
Gtech
Americas
Lotteries
International
Italy
Products &
& Services
Services
Products
Interactive &
Gaming
Sports Betting
Machines
So urce: Hammer P artners elabo ratio n o n Co mpany Data.
Gtech, with its geographical units, sells products and services to final consumers (B2C) and to Gtech Business Model
operators, being them private or State entities (B2B). The company collects its revenues by
running lotteries, by selling gaming machines and by managing interactive and sport betting
activities as illustrated in the picture below.
Source: Gtech Presentation ICE
2
Gtech Spa
Products Sales explain for less than 10% of the Group’s Revenues (Eur 279 mn as for Products and Services
A clear competitive advantage
FY2013) while Service Revenues account for the remainder (Eur 2.78 bn as for FY2013).
We believe that Gtech will keep on benefiting from its competitive advantage as it is the only
global player involved in selling products and in providing services in a fully integrated
manner.
We also expect this advantage to become even more effective after a full implementation of
the above mentioned organizational changes.
In addition we think that Gtech new organizational architecture might allow the opportunity The world market: $500 bn in
to better catch the global trends of the industry. According to GBGC1 (Global Betting and 2013
Gaming Consultants), the world gaming market was worth almost Usd 500 bn in 2013 and
has promising prospects going forward. GBGC collects data for more than 250 jurisdictions on
all the gaming categories (Sport Betting, Horse Racing, Casinos, Lotteries and others).
The following data we report from GBGC show that the global market, after the correction
experienced in 2008-2009 (Cagr -1.4%) has completely recovered.
The overall growth from 2008 to 2013 was 3.8% (expected gross gaming yield from Usd 410
bn to Usd 494 bn). We notice that Latam and Asia have collectively delivered the best
performance during the period, offsetting the stagnation in developed areas of Europe and
North America.
While we think it is reasonable to believe that the positive trend in Asia and Latam is
structural (ageing populations, increasing spending power, etc.), we also expect that from
now on global growth may be driven by a recovery of Americas and Europe.
A reas
ROW
Europe
North America
World
2008
145
143
122
410
2009
152
135
117
404
2010
178
130
119
427
2011
198
139
122
459
2012
207
133
128
468
2013 Cagr 2008-2013
221
8.8%
141
-0.3%
132
1.6%
494
3.8%
Global market trends (source
GBGC)
120%
ROW
35%
38%
42%
43%
44%
45%
100%
Europe
35% 29%
33%
30%
30% 27%
28%
29%
27%
28%
30%
80%
North America
30%
29%
28%
27%
27%
27%
60%
28%
30%
30%
35% 100% 33%
World
100% 100% 100% 100% 100%
27%
40%
20%
0%
29%
35%
38%
42%
43%
44%
45%
2008
2009
2010
2011
2012
2013
ROW
Europe
North America
Gtech in most cases generates its revenues through concessions, i.e. after competitive A business based on
tenders aimed at selecting the best operator. A concession can be highly rewarding Concessions
notwithstanding the high regulatory risks and the big upfront investments, and can be
considered a monopoly for a certain period of time.
In this respect we believe this is another key strength in Gtech’s business model. Only the
best and biggest players have the financial capabilities and knowledge to evaluate in advance
the economics of a deal.
Recently the company has indeed displayed a firm capital discipline in different events:
in the Irish lottery tender, where they decided not to bid too aggressively (the lottery
was assigned to Camelot UK);
in the Scratch and Win concession in Greece, where Gtech asked for a put option with
the consortium (Opap 34%, Gtech 33% and the last 33% divided equally between
Scientific Games and Intralot) in case the upfront fee was above Eur 150 mn; since this
was set at Eur 180 mn, Gtech opted out of the consortium;
in Pennsylvania, where, in consideration of the upfront fee required (Usd 100 mn),
Gtech decided not to bid (the concession was initially awarded to Camelot but it was
later cancelled).
1
http://www.gbgc.com
3
Gtech Spa
Italy
Italy is the most important market for Gtech: its domestic operations represent the majority Italy, a mature but profitable
of revenues (56.7%) and EBITDA (70%). In Italy Gtech runs two concessions out of three: market
the Lotto (which will expire in 2016) and the instant lottery Scratch & Win “Gratta e Vinci” (to
be auctioned again in 2019). In Italy the company also ranks as the 2nd operator in sports
betting (in terms of wagers) and as the 1st in gaming machines (AWPs and VLTs).
The Italian market has reached a maturity stage, where operators must compete with
product innovation and by expanding and strengthening the channel mix to retain their
market shares. This is what Gtech is actually doing with its web initiatives (e.g. the Lotto
online) along with the forthcoming introduction of applications for mobile devices, tablet and
smartphones, and through other initiatives in order to consolidate the relationship with the
distribution network.
We think that through these initiatives and with a stringent cost control the company will be
able to maintain its position as market leader. Currently the domestic EBITDA margin is a
healthy 40% which could only be barely eroded by the competitive dynamics. We believe that
Gtech will be able to keep on generating stable cash flows from its domestic operations to
meet all its obligations and partly fund its international growth.
Americas
For 2013 Americas accounted for 33% of revenues and 25% of EBITDA. This market has USA, more PMAs to come
been recently characterized by the privatization of the State lotteries: since 2011 four public
tenders have been put in place for the selection of private managers (Illinois, Indiana,
Pennsylvania and New Jersey). Gtech has won three of them, two through a consortium
(Northstar Lottery Group in Illinois and Northstar New Jersey Lottery Group, LLC) and one
directly as Gtech (Indiana). In Pennsylvania the winner was Camelot, the UK lottery operator,
but the privatization was eventually cancelled.
Gtech has a clear competitive advantage in the bidding process, thanks to its strong presence
in the United States: out of 44 States where lotteries are allowed, Gtech has Facility
Management contracts with 26. Furthermore, Gtech processes more than 70% of the wagers.
Gtech’s uniquely vertically integrated business model and the strong relationship with State
Lotteries operators are a clear advantage. In the chart below (included in the company’s
Illinois tender material) it is clearly shown how Northstar consortium aggregates companies
that were already supplying the lottery with products and services (the consortium is
composed by Gtech, SGI, Energy BBDO).
4
Gtech Spa
Furthermore Camelot, apparently the only other bidder in past concessions, is a client of
Gtech for technology. In fact, in December 2012 Gtech was awarded a 4 years extension until
2023 for technologies, services and new games products for the UK National Lottery by
Camelot.
Assumptions
To support our investment thesis we list below some favorable business trends that might
positively impact the company and support our buy stance:
1) A general trend of new privatizations of State lotteries around the world and especially in
the USA where Gtech - as already shown- has a strong presence. Furthermore, the Italian
market represents the best case for the industry and Gtech can leverage on its expertise;
2) Gtech expansion in South America;
3) Gtech expansion in Asia ex-Japan.
Growth outside Italy
We shaped our Sales and Operating Profit expectations accordingly.
In absolute terms the Italian operations are set to continue to deliver superior margins (they Italy will keep to generate cash
are consensually considered the “cash cow” of the group) but we expect revenues
contribution from the international activities to rise at a faster pace.
We therefore expect Gtech to hold a much more balanced portfolio of operations going International expansion will
forward, less dependent on the Italian “cash-cow” and more skewed towards international help profitability
“new-stars”.
We expect that the international activities will contribute more in terms of profitability and
may offset the likely decline/stagnation of domestic EBITDA.
The tables below summarize the assumptions implied in our financial model:
Sales CAGR
italy
Americas & ROW
Total
2013-2016E
1.19%
6.17%
3.41%
2016E-2022E
0.46%
1.01%
0.72%
2012E-2022E
0.19%
2.96%
1.40%
Our scenario for Sales & EBITDA
EBITDA margins
45%
40%
35%
30%
25%
So urce: Hammer P artners elabo ratio n o n Co mpany Data.
20%
EBITDA CAGR
Italy
Americas & ROW
Total
2013-2016E
-0.26%
10.39%
3.17%
2016E-2022E
0.03%
2.48%
0.97%
2012E-2022E
-0.25%
5.20%
1.57%
15%
10%
5%
0%
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
So urce: Hammer P artners elabo ratio n o n Co mpany Data.
Italy
Total
EBITDA evolution
Revenues evolution
4,000
Americas & ROW
1,400
3,500
1,200
3,000
1,000
2,500
800
2,000
1,500
600
1,000
400
500
200
-
-
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
italy
Americas & ROW
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Italy
Americas & ROW
Valuation
We initiate our coverage on Gtech with a Buy rating. We think that the most appropriated
way to evaluate the fair value of the company is through a DCF approach, as the majority of
revenues has a recurring nature (more than 75% of the Service Revenues comes from 10
long term contracts with an average life of 7 years). Our WACC is calculated as follow:
5
Gtech Spa
Cost of debt
Our Wacc
Cost of equity
x Pre-Tax Cost ST Debt
x Pre-Tax Cost LT Debt
+ ST Debt
+ LT Debt
Total Debt
ST Debt to Total Debt
Pre-Tax Cost of ST Debt x ST Debt to Total Debt
LT Debt to Total Debt
Pre-Tax Cost of LT Debt x LT Debt to Total Debt
x Total Pre-Tax Cost of Debt
Effective Tax Rate
(1 - Effective Tax Rate)
Cost Of Debt
2.00%
5.50%
x Country Premium
Beta
+ Equity Risk Premium
Risk Free Rate
Cost of Equity
190
2,821
3,011
10.71%
0.6426
6.88%
3.400%
10.28%
6.30%
0.13%
93.70%
COST OF PREF EQUITY
5.15%
5.28%
37.45%
Preferred Dividend
-
62.55%
Preferred Equity
-
Cost of Preferred Equity
3.30%
Capital Structure
Weights
-
WxC
56.0%
-
Mkt Cap
3,836
Pref Equity
LT debt
ST debt
2,821
190
5.76%
0.00%
total debt
3,011
2.8%
44.0%
1.45%
6,847
100.0%
WACC
41.2%
7.21%
Mkt Cap
Pref Equity
LT debt
ST debt
3%
41%
56%
0%
Our DCF model TP: Eur 30
GTECH SPA
DCF/EVA valuation
EUR
Years
EBIT
Taxes
EBIT after tax
Minority Interests
D&A
Total Capex
(164)
(179)
(177)
(179)
(173)
(164)
(177)
(191)
(214)
(241)
408
426
424
426
418
417
437
458
492
531
69
72
71
71
69
63
65
72
78
83
518
533
537
519
503
533
524
519
500
478
(456)
(375)
(875)
(354)
(344)
(933)
(367)
(363)
(361)
(361)
(14.7)
(3.2)
(2.1)
(0.9)
0.3
(0.2)
(0.6)
(1.1)
(1.6)
(2.1)
FCFF
386
508
13
519
509
(47)
528
542
552
564
Discount Factor
NPV
0.93
360
0.87
442
0.81
10
0.76
393
0.71
359
0.66
(31)
0.61
324
0.57
311
0.53
295
0.50
281
g
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
WACC
5.7%
8,792
9,366
10,062
10,922
12,015
13,447
15,407
6.2%
8,031
8,493
9,043
9,710
10,535
11,582
12,954
6.7%
7,388
7,764
8,207
8,734
9,373
10,164
11,168
7.2%
6,837
7,148
7,509
7,735
8,439
9,051
9,810
7.7%
6,360
6,620
6,918
7,264
7,465
8,156
8,743
8.2%
5,944
6,163
6,412
6,698
6,815
7,420
7,885
8.7%
5,578
5,764
5,974
6,213
6,265
6,806
7,180
Change in working capital
WACC
Terminal Growth rate
PV of forecast FCF
Terminal Value
Implied EV
Net Debt FY1
Equity Value
No. Of Shares
Target Price
Last price
upside/downside
6
2014 E
2015 E
2016 E
2017 E
2018 E
2019 E
2020 E
2021 E
2022 E
2023 E
572
605
601
605
592
581
614
649
706
772
7.21%
1.50%
2,744
4,991
7,735
-2,507
5,228
174
30
22
36%
Gtech Spa
Years
EBIT after tax-minorities
Capital Invested
ROIC
WACC
EVA spread
2014 E
339
5,520
6.1%
7.2%
-1.1%
2015 E
354
5,473
6.5%
7.2%
-0.7%
2016 E
353
5,319
6.6%
7.2%
-0.6%
2017 E
355
5,659
6.3%
7.2%
-0.9%
2018 E
349
5,495
6.4%
7.2%
-0.9%
2019 E
354
5,336
6.6%
7.2%
-0.6%
2020 E
371
5,737
6.5%
7.2%
-0.7%
2021 E
386
5,580
6.9%
7.2%
-0.3%
2022 E
414
5,424
7.6%
7.2%
0.4%
2023 E
448
5,286
8.5%
7.2%
1.3%
(59)
(41)
(31)
(53)
(47)
(31)
(42)
(16)
22
(55)
(35)
(25)
(40)
(33)
(20)
(26)
(9)
12
67
17,829
8,918
EVA
Terminal EVA
PV
PV of EVA
+ Capital Invested
+ PV of Chg Capital in Yr 10
= Firm Value
-
8,684
5,520
6,469
7,735
Peers comparison (current price)
Company Name
GTECH SPA
LADBROKES PLC
SCIENTIFIC GAMES CORP-A
INTRALOT S.A.-INTEGRATED LOT
INTL GAME TECHNOLOGY
TATTS GROUP LTD
BALLY TECHNOLOGIES INC
OPAP SA
Average
MKT Cap
EV
3,836 6,759
1,427 1,815
1,355 2,715
469
936
3,856 5,250
3,703 4,969
2,720 3,261
3,678 3,562
3,199 3,411
Source: Hammer Partners elaboration on Bloomberg's Data.
Peers comparison (@ DCF TP)
Company Name
GTECH SPA
LADBROKES PLC
SCIENTIFIC GAMES CORP-A
INTRALOT S.A.-INTEGRATED LOT
INTL GAME TECHNOLOGY
TATTS GROUP LTD
BALLY TECHNOLOGIES INC
OPAP SA
Average
MKT Cap
EV
5,228 8,151
1427
1815
1355
2715
469
936
3856
5250
3703
4969
2720
3261
3678
3562
3,199 3,411
Source: Hammer Partners elaboration on Bloomberg's Data.
EV/Sales
EV/EBITDA
EV/EBIT
P/E
Sales FY1 Sales FY2 Ebitda FY1 Ebitda FY2 Ebit FY1 Ebit FY2 EPS FY1 EPS FY2
2014 E
2015 E
2014 E
2015 E 2014 E 2015 E 2014 E 2015 E
2.1
2.0
6.2
5.9
11.8
11.1
17.9
16.4
1.7
1.6
8.9
8.1
12.4
11.3
13.3
11.7
2.6
1.7
6.8
4.2
30.7
15.5
nm
32.4
0.7
0.7
4.8
4.7
9.8
9.3
32.8
28.1
2.3
2.3
6.5
6.3
9.7
9.3
12.4
11.2
1.7
1.6
9.3
9.0
11.1
10.7
15.6
14.7
2.8
2.6
8.5
7.9
11.8
10.8
17.0
15.2
1.0
0.8
14.6
12.4
17.9
16.7
23.6
23.9
1.9
14%
1.7
22%
8.2
-24%
7.3
-19%
14.4
-18%
11.8
-6%
18.9
-6%
19.2
-15%
EV/Sales
EV/EBITDA
EV/EBIT
P/E
Sales FY1 Sales FY2 Ebitda FY1 Ebitda FY2 Ebit FY1 Ebit FY2 EPS FY1 EPS FY2
2013 E
2014 E
2013 E
2014 E 2013 E 2014 E 2013 E 2014 E
2.7
2.6
7.9
7.5
14.6
14.3
29.8
24.4
1.7
1.6
8.9
8.1
12.4
11.3
13.3
11.7
2.6
1.7
6.8
4.2
30.7
15.5
nm
32.4
0.7
0.7
4.8
4.7
9.8
9.3
32.8
28.1
2.3
2.3
6.5
6.3
9.7
9.3
12.4
11.2
1.7
1.6
9.3
9.0
11.1
10.7
15.6
14.7
2.8
2.6
8.5
7.9
11.8
10.8
17.0
15.2
1.0
0.8
14.6
12.4
17.9
16.7
23.6
23.9
2.0
34%
1.7
55%
8.2
-4%
7.7
-3%
12.1
20%
11.1
29%
17.0
76%
19.5
25%
Recent Developments
During 2013 financial results reporting, the company announced that they will exercise the call on
the 12.5% stake held by Unicredit in Lotterie Nazionali Srl (the owner of the Italian Scratch and Win
concession) for a total consideration of Eur 72 mn plus Eur 20 mn in accrued dividends. The stake
held by Gtech in Lotterie Nazionali Srl will increase from 51.5% to 64%. Lotterie Nazionali sales
were Eur 377 mn in 2013.
The Scratch and Win
In March 2014 the Greek game operator Opap chose Gtech as its provider for interactive online
betting. The company has managed to win the concession after a tender involving five international
names. Opap, through its partnership with Gtech, aims at expanding its offer and services in the
world of online gaming and targets to enter the online betting market before the World Cup starts
in June 2014.
The cooperation of Gtech and Opap will be initially focused on online sports betting. This is another
strong achievement by Gtech as Opap is among the top 10 lottery operators worldwide with total
sales worth USD 5.6 bn.
OPAP
7
Gtech Spa
Key Risks:
1) We acknowledge that Gtech will face challenging cash flow requirements in 2016:
- the Lotto concession in Italy will expire and it is assumed that Gtech will bid again (we include
Eur 500 mn of extraordinary capex for this in our model);
- Eur 750 mn of senior unsecured bond comes due;
- Eur 750 mn of perpetual hybrid is callable.
Refinancing risks
With cash on hands of Eur 419 mn as reported in 2013 and cash from operations of over Eur 800
mm per year according to our estimates, we believe that the company will maintain full access to
the capital markets to finance its activities. We make the same assumptions for 2019, another
pivotal year for Gtech since the Scratch and Win concession will expire and the company will have
to commit further resources in order to take part in the tender process.
Furthermore, in consideration of the easing in the credit market conditions and of the improved
situation of peripheral credit markets, we highlight that the overall cost of funding should keep on
improving and therefore the company might decide to opportunistically tap the market before the
natural expiry of the outstanding bonds.
2) Gtech is exposed to regulatory risks. We know that the Monti's government, for instance,
raised the tax on VLT. As of today there are no news regarding possible changes in tax rates but
this is always a possibility.
Regulatory risks
On this regard we note that in 2013 Gtech has been able to soften the impact of the greater
taxation by increasing its operating profits generated by other divisions (eg Sport Betting and
Interactive)
3) The gaming industry is going to consolidate and Gtech, as a well-capitalized market leader may
decide to play an important role in the process.
Acquisition risks
In this respect we believe that the company will stick to its credit rating (Baa3 / Stable Outlook by
Moody's) even though we recognize that it has some room to afford small-sized debt-financed
acquisitions (like the one announced on February 18 of Probability Plc, the leading provider of
mobile entertainment gaming paid with cash for about Eur 21 ml).
ENTERPRISE VALUE
Market Capitalization
Market Capitalization (DCF tp)
Cash & Equivalents
Preferred Equity
Minority Interest
Total Debt
Enterprise Value
Enterprise Value (DCF tp)
2009 A
2366
2366
474
0
59
2896
4848
4848
2010 A
1566
1566
159
0
444
3135
4986
4986
2011 A
1999
1999
207
0
422
2948
5162
5162
2012 A
2966
2966
465
0
374
3013
5886
5886
2013 A
3836
5228
419
0
404
2939
6759
8151
2014 E
3836
5228
398
0
404
2939
6780
8172
2015 E
3836
5228
465
0
404
2939
6713
8105
2016 E
3836
5228
82
0
404
2939
7096
8488
@ Current market price
EV/Sales (x)
EV/EBITDA (x)
EV/EBIT (x)
2.2
6.2
13.2
2.2
6.1
12.9
1.7
5.3
9.6
1.9
5.7
10.1
2.2
6.5
12.1
2.1
6.2
11.8
2.0
5.9
11.1
2.1
6.2
11.8
@ DCF target price
EV/Sales (x)
EV/EBITDA (x)
EV/EBIT (x)
2.2
6.2
13.2
2.2
6.1
12.9
1.7
5.3
9.6
1.9
5.7
10.1
2.7
7.9
14.6
2.6
7.5
14.3
2.4
7.1
13.4
2.5
7.5
14.1
NET INCOME
Shares outstanding
EPS
BVPS
Price
P/E
P/B
DPS
Dvd Yld
68
169
0.40
11.25
14.03
34.7
1.2
0.74
5.3%
0
169
0.00
13.97
9.28
3183.1
0.7
0.00
0.0%
173
172
1.01
15.16
11.61
11.5
0.8
0.71
6.1%
233
172
1.35
15.32
17.20
12.7
1.1
0.73
4.2%
175
173.96
1.01
14.97
22.05
21.9
1.5
0.75
3.4%
214
174
1.23
15.47
22.05
17.9
1.4
0.79
3.6%
234
174
1.34
16.07
22.05
16.4
1.4
0.81
2.1%
231
174
1.33
16.61
22.05
16.6
1.3
0.82
3.7%
8
Gtech Spa
Levered Free Cash Flow
Operating CF
CAPEX
Maintenance Capex
Maintenance Capex %
Free Cash Flow
Interest Paid
Dividends Minorities
Levered Free Cash Flow
Net Debt
Cash Dividends
Shares outstanding
DPS
Dividend Rate (as % of LFCF)
PROFIT & LOSS
Revenue
2009 A
2010 A
2011 A
#RIF!
#RIF!
850
-423
-1211
-343
2012 A
814
-256
#RIF!
5
-44
#RIF!
#RIF!
-185
-46
#RIF!
506
-161
-62
283
557
-179
-75
303
2013 A
696
-297
-169
57%
527
-137
-64
326
2014 E
787
-456
-281
62%
506
-161
-69
276
2015 E
835
-375
-233
62%
603
-161
-72
369
2016 E
837
-875
-263
30%
575
-161
-71
342
2423
101
169
0.74
#RIF!
2975
125
169
0.00
#RIF!
2741
0
172
0.71
43%
2548
122
172
0.73
42%
2507
126
174
0.75
40%
2530
130
174
0.79
50%
2460
137
174
0.81
38%
2853
141
174
0.82
42%
2009 A
2,177
2010 A
2,314
2011 A
2,974
2012 A
3,076
2013 A
3,063
2014 E
3,194
2015 E
3,310
2016 E
3,387
Sales growth
5.7%
6.3%
28.5%
3.4%
-0.4%
4.3%
3.7%
2.3%
Service revenue
Product sales
2,015
161
2,145
169
2,780
194
2,822
253
2,784
279
2,932
262
3,051
260
3,111
276
EBITDA
784
812
970
4%
36.0%
4%
35.1%
19%
32.6%
6.3%
33.5%
0.5%
33.8%
331
86
367
364
62
386
429
2
540
436
13
583
478
0
559
572
605
601
16.8%
16.7%
18.1%
19.0%
18.3%
17.9%
18.3%
17.8%
152
11
16
188
76
172
59
41
114
68
168
11
-6
366
160
155
2.6
1.2
424
158.8
163
8
2.3
386
180.8
161
0
0
411
164
161
0
0
444
179
161
0
0
440
177
Tax rate
40%
60%
44%
37%
47%
40%
40%
40%
Income Before XO Items
Extraordinary Loss Net of Tax
Minority Interests
NET INCOME
Dividends Paid
112
0
44
68
101
45
0
45
0
125
206
0
33
173
0
265
0
32
233
122
205
30
175
126
247
32
214
130
265
31
234
137
263
32
231
141
43%
42%
40%
50%
38%
42%
(33)
(124)
173
111
50
84
96
90
2009 A
469
5
792
134
70
1,469
2010 A
152
7
712
165
74
1,110
2011 A
191
16
670
146
106
1,129
2012 A
456
9
810
164
201
1,640
2013 A
419
12
904
146
194
1,676
LT Investments & LT Receivables
Net Fixed Assets
Other Long-Term Assets
Total Long-Term Assets
0
863
3866
4,729
0
979
4847
5,826
0
1080
4799
5,878
0
1031
4595
5,626
Total Assets
6,199
6,936
7,007
Accounts Payable
Short-Term Borrowings
Other Short-Term Liabilities
Total Current Liabilities
906
132
293
1,331
979
195
280
1,454
821
292
381
1,494
Long-Term Borrowings
Other Long-Term Liabilities
Total Long-Term Liabilities
2764
206
2,971
2939
184
3,123
Total Liabilities
Total Liabilities & Equity
4,302
6,199
Working capital
Capital employed
Financed by:
Net Debt
Group's Net Equity
Shareholders Funds
Minority Interest
Capital employed
EBITDA growth
EBITDA margin
Depreciation & Amortization
Other
EBIT
EBIT margin %
Interest Expense
Net Non-Operating Losses (Gains)
Foreign Exchange Losses (Gains)
Pretax Income
Income Tax Expense
Dividend Rate (as % of LFCF)
RETA INED EA RNINGS
BALANCE SHEET
Cash & Near Cash Items
Short-Term Investments
Accounts & Notes Receivable
Inventories
Other Current Assets
Total Current Assets
9
1,032
1,037
1,090
5.2%
34.1%
518
1,138
4.3%
34.4%
533
1,138
0.1%
33.6%
537
2014 E
2015 E
2016 E
398
11
465
14
82
4
987
141
141
1,678
1,023
146
155
1,802
1,046
149
167
1,448
1
976
4471
5,448
0
955
4,431
5,386
0
927
4,302
5,229
0
995
4,573
5,567
7,265
7,124
7,064
7,031
7,015
1002
191
386
1,579
979
237
389
1,604
1,040
237
1,078
237
1,103
237
361
355
348
1,639
1,671
1,688
2656
248
2,904
2821
224
3,045
2702
215
2,917
2,702
2,702
2,702
32
-137
-264
2,733
2,565
2,438
4,577
6,936
4,398
7,007
4,625
7,267
4,521
7,124
4,372
7,064
4,236
7,031
4,126
7,015
195
4,868
102
5,482
172
5,513
214
5,686
72
5,520
87
5,425
90
5,361
92
5,327
2423
1897
1,838
59
4,868
2975
2359
1,914
444
5,482
2741
2609
2,187
422
5,513
2548
2642
2,268
374
5,688
2507
2604
2,200
404
5,520
2530
2692
2288
404
5,425
2460
2795
2392
404
5,361
2853
2889
2485
404
5,327
Gtech Spa
CASH FLOW
Net income
Dividends Minorities
Depreciation & Amortisation
Other non cash
FFO
Change in working capital
Cash From Operations
Total Capex
Disposal of Fixed Assets
Financial Investments net
Other Investing Activities
Cash From Investing Activities
Dividends Paid
Increase in Capital Stocks
Decrease in Capital Stocks
Decrease in Long-term Borrowings
Increase in Long-Term Borrowings
Change in Short-Term Borrowings
Other Financing Activities
Cash from Financing Activities
Net Changes in Cash
NET DEBT
2009 A
68
44
331
193
636
85
721
(269)
0
-3
-145
(417)
-101
350
0
-663
750
-53
-296
(13)
291
2010 A
0.49
46
364
259
669
93
763
(260)
0
-10
-960
(1,231)
-125
388
0
-1246
1409
-21
-490
(85)
(553)
2011 A
173
62
429
2012 A
233
75
436
2013 A
175
64
478
2014 E
214
69
518
2015 E
234
72
533
2016 E
231
71
537
256
112
129
920
-70
850
(317)
0
-5
-16
(338)
0
8
-27
-219
0
6
-45
(277)
856
-42
814
(222)
0
-8
-21
(251)
-122
0
-43
-320
502
-15
-370
(369)
846
-158
696
(329)
802
(15)
787
(456)
838
(3)
835
(375)
839
(2)
837
(875)
-12
(342)
(126)
-21
(477)
(130)
0
0
(375)
(137)
0
0
(875)
(141)
0
-188
(314)
-201
(332)
-253
(391)
-214
(355)
234
193
41
(22)
69
(393)
2,423
2,975
2,741
2,548
2,507
2,530
2,460
2,853
CREDIT FIGURES
Sales
EBITDA
EBIT
Depreciation & amortisation
Interest
Funds from operations
Retained cash flow
Free cash flow
Net debt (cash)
Total Debt
Shareholder's equity
2009 A
2,177
784
367
331
152
636
510
351
2,423
2,896
1,897
2010 A
2,314
812
386
364
172
669
568
378
2,975
3,135
2,359
2011 A
2,974
970
540
429
168
920
795
532
2,741
2,948
2,609
2012 A
3,076
1,032
583
436
155
856
856
469
2,548
3,013
2,642
2013 A
3,063
1,037
559
478
163
846
724
233
2,507
2,939
2,604
2014 E
3,194
1,090
572
518
161
802
676
322
2,530
2,939
2,692
2015 E
3,310
1,138
605
533
161
838
708
332
2,460
2,939
2,795
2016 E
3,387
1,138
601
537
161
839
702
321
2,853
2,939
2,889
ADJUSTED FIGURES
Rents as % sales
Rents
Unfunded pension plan
EBITDA
EBIT
Depreciation
Interests
Funds from operations
Retained cash flow
Free cash flow
Net debt (cash)
Total debt
2009 A
0.5%
10
8
794
373
338
155
642
517
358
2,510
2,984
2010 A
0.4%
10
8
822
393
371
175
676
575
384
3,063
3,222
2011 A
0.3%
10
8
980
546
435
171
927
802
539
2,829
3,036
2012 A
0.3%
10
7
1,042
590
443
159
862
862
476
2,635
3,100
2013 A
1.5%
45
7
1,082
589
508
178
876
754
263
2,874
3,305
2014 E
0.6%
19
7
1,109
585
531
168
814
688
212
2,687
3,096
2015 E
0.6%
19
7
1,157
618
546
168
851
721
335
2,623
3,101
2016 E
0.6%
20
7
1,159
615
551
168
853
715
(165)
3,023
3,108
CREDIT RATIO adjusted
EBITDA maring (%)
EBIT Margin (%)
EBITDA interest coverage (x)
Pre-tax Interest Coverage (x)
EBITDA less Capex Interest Coverage (x)
FFO Interest Coverage (x)
Tot debt/EBITDA (x)
Net debt/EBITDA (x)
Funds from operations/Net debt (%)
Free operating cash flow/Net debt (%)
Net debt/Operating Cash Flow (x)
Retained cash flow/Net debt (%)
Net debt/Capitalization (%)
FFO/Tot debt %
Total debt/Capitalization (%)
10
2009 A
36.5
17.1
5.1
2.4
3.4
5.1
3.8
3.2
25.6
14.2
3.5
20.6
57.0
21.5
61.1
2010 A
35.5
17.0
4.7
2.2
3.2
4.9
3.9
3.7
22.1
12.5
4.0
18.8
56.5
21.0
57.7
2011 A
33.0
18.4
5.7
3.2
3.9
6.4
3.1
2.9
32.8
19.1
3.3
28.3
52.0
30.5
53.8
2012 A
33.9
19.2
6.6
3.7
5.17
6.4
3.0
2.5
32.7
18.1
3.2
32.7
49.9
27.8
54.0
2013 A
35.3
19.2
6.1
3.3
4.2
5.9
3.1
2.7
30.5
9.2
4.0
26.2
52.5
26.5
55.9
2014 E
34.7
18.3
6.6
3.5
4.6
5.9
2.8
2.4
30
8
3
26
50
26
53
2015 E
34.9
18.7
6.9
3.7
4.7
6.1
2.7
2.3
32
13
3
27
48
27
53
2016 E
34.2
18.2
6.9
3.7
4.7
6.1
2.7
2.6
28
(5.5)
3.6
24
51
27
52
Gtech Spa
DISCLAIMER
This report has been prepared by Hammer Partners S.A.
This report is for distribution only under such circumstances as may be permitted by applicable law. Nothing in this report constitutes a
representation that any investment strategy or recommendation contained herein is suitable or appropriate to a recipient's individual circumstances
or otherwise constitutes a personal recommendation. It is published solely for information purposes, it does not constitute an advertisement and is
not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments in any jurisdiction. No representation or
warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, except
with respect information concerning Hammer Partners S.A., nor is intended to be a complete statement or summary of the securities, markets or
developments referred to in the report. Hammer Partners does not undertake that investors will obtain profits, nor will it share with investors any
investment profits nor accept any liability for any investment losses. Investments involve risks and investors should exercise prudence in making their
investment decisions. The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Any opinions expressed
in this report are subject to change without notice. Research will initiate, update and cease coverage solely at the discretion of Hammer Partners S.A.
The analysis contained herein is based on several assumptions and different assumptions could result in materially different results. Hammer
Partners is under no obligation to update the information contained herein. Analyst compensation is not based on investment banking revenues.
Any prices stated in this report are for information purposes only and do not represent valuations for individual securities or other instruments.
There is no representation that any transaction can or could have been effected at those prices and any prices do not reflect Hammer Partners
theoretical model-based valuations.
This report is for distribution to institutional investors only
Hammer Partners specifically prohibits the redistribution of this material in whole or part without the written permission of Hammer Partners.
Hammer Partners accepts no liability whatsoever for the actions of third parties. Copyright Hammer Partners S.A. 2009.
11