Strong third quarter from Intertain Group could trigger short-squeeze, says Mackie

Mackie Research Capital analyst Nikhil Thadani says if Intertain Group (Intertain Group Stock Quote, Chart, News: TSX:IT) delivers strong third quarter results tomorrow it could trigger a short-squeeze, sending shares rapidly north.

Thadani notes that shorting Canadian M&A growth stocks appears to be a profitable tactic right now, and that short interest in Intertain Group is at an all-time high, with more than $3.9-million shares short as of October 15. He thinks this is motivated by sentiment rather than fundamentals, and notes that the company is trading at a discount to its peers.

“(Intertain Group’s ) valuation remains disconnected from business,” says Thadani. “IT trades at ~9x 2016 EV/EBITDA and ~9x P/E (including Gamesys earnout). Peers trade at an average ~14x 2016 EV/EBITDA and ~20x P/E. Market volatility combined with investor concerns around management incentive plan and communication has pushed IT stock down ~30% since the beginning of August. While we are cognizant of investor concerns, IT’s EV (including Gamesys earnout) has declined by ~25x the value of the management incentive in question. In early September, IT’s Board indicated it was engaging in discussions with shareholders and existing third party compensation consultant, GGA, with some expected progress towards a new MIP in ~one quarter. An update, which is well received by investors could reverse IT’s stock price trajectory.”

Thadani expects Intertain will post EBITDA of approximately $31-million on revenue of about $96-million in the third quarter, a little below the street consensus of $36-million in EBITDA on a topline of $101-million.

In a research update to clients today, Thadani maintained his “Buy” rating and one-year target price of $27.00 on Intertain Group, implying a return of 116% at the time of publication.

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