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 [email protected] [email protected] [email protected] [email protected] [email protected] +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
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