Stocks in the gambling industry have been under pressure; however, the declining valuations are creating some compelling buying opportunities. One such growth opportunity – Intertain Group Ltd. – is discussed below.
Toronto-based Intertain is an online gambling holding company with a focus on expanding its portfolio through acquisitions and organic growth. The company offers online bingo and casino games to customers in Europe, and its key markets include Britain, the Nordic region and Spain. In terms of its customers, bingo players – the majority of whom are female – are considered loyal customers offering the company high retention rates.
The investment thesis can be summed up with the following three key drivers:
1) Industry leader and consolidator. Intertain is one of the top 10 online gambling operators in the world. The company has a history of successfully identifying and acquiring companies. Importantly, the company's growth is far from over, as management sees opportunities to increase its penetration in its current markets and to expand into new regions. Furthermore, in December, 2014, Britain introduced a point-of-consumption gambling tax, which may put pressure on smaller operators and foster greater merger and acquisition activity.
2) Growth. Management is forecasting revenue growth of between 20 per cent and 30 per cent, with 2016 top-line guidance of between $460-million and $500-million, up from $384-million in revenue reported last year. The Street is forecasting revenue to reach $536-million in 2017. Management is predicting adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) will climb to between $175-million and $190-million in 2016, up approximately 25 per cent to 36 per cent from $139-million reported in 2015. Looking out to 2017, the consensus EBITDA estimate is $207-million.
Finally, earnings per share (EPS) is forecast by management to increase to between $1.87 and $2.13, up from EPS of $1.72 reported in 2015. The consensus EPS forecast is $2.42 in 2017. Management's guidance may prove, once again, to be conservative. Last year, the company's financial results exceeded management's targets.
3) Near-term potential catalyst. Management has indicated that it has received several expressions of interest in acquiring all or part of the company's operations, and has a special committee of three directors considering all options that would unlock shareholder value. As John Fitzgerald, the CEO, indicated on last month's fourth-quarter conference call, "[T]hings can't remain status quo. There is tremendous value in our business and we will look at all opportunities to enhance the value to shareholders."
Returning capital to shareholders
The company is focused on growth, and as a result, Intertain does not pay its shareholders a dividend.
Management has been active with its share buyback program. Since the program was instituted in the third quarter, until the end of 2015, the company acquired nearly 2.5 million shares at a weighted average cost of $12.31.
With the declining share price, the stock has experienced multiple compression. According to Bloomberg, the stock now trades at an enterprise value-to-EBITDA multiple of under six times the 2017 consensus estimate – a compelling valuation given the company's anticipated growth.
This small-cap growth stock, with a market capitalization of approximately $750-million, is well covered by the Street.
According to Bloomberg, there are eight buy recommendations and no hold or sell recommendations, with the average one-year price target among these analysts at $24.31, implying the share price will more than double in value. Target prices range from a low of $21 to a high of $28.
There is limited trading history on Intertain, as the company was just listed on the Toronto Stock Exchange in 2014. The stock has been in a downtrend since mid-2015, declining from nearly $20 in June, 2015, to below $8 in February, 2016. Year-to-date, the stock has rallied about 7 per cent. A break above the $12 level would suggest that an uptrend is now in place.
There is upside resistance around $12, which is near the stock's 200-day moving average. After that, there is resistance around $14.50 to $15.
There is downside support around $10, which is close to the stock's 50-day moving average. Failing that, there is strong support around $8.
The bottom line
Regardless of whether the company is acquired or partly sold, it is delivering solid growth and has opportunities to sustain its positive earnings momentum. In addition, the stock is trading at an attractive valuation. The pullback in the stock price represents a buying opportunity for investors.
I strongly encourage readers to consult a financial adviser, and to do their own proper due diligence before taking any investment action.
The author does not personally own shares in the security mentioned in this story.