Intertain Group (TSX:IT) will recover from the short seller attack that sent its stock reeling, says Mackie Research Capital analyst Nikhil Thadani.
On December 17, hedge fund manager Ben Axler of Spruce Point Capital Management wrote an article in Seeking Alpha that claimed Intertain Group had 45 to 70 per cent downside. Axler called Intertain “…another questionable, highly levered Canadian roll-up focused on online gaming, but fraught with numerous accounting, financial disclosure, and management/governance issues” and claimed the company had “questionable” connections to stock promoters. Axler also said that the company’s use of three auditors was “a red flag”.
In the wake of the article, shares of Intertain fell $2.44 to $9.86 on December 17 and another $1.88 to $7.98 the following day. The company issued a press release on Friday that called the report “misleading and self-serving” and today another saying it had initiated a review led by non-management directors and independent advisers who would evaluate the information. The company said its initial take was that there were “numerous factual inaccuracies and mischaracterizations of data”.
“I have the utmost confidence in the process the board has undertaken,” said CEO John Kennedy FitzGerald. “Management will not let the recently published report distract us from operating our business and letting the results speak for themselves.”
“I continue to work closely alongside our management team to assist the company to expand the business globally and enhance shareholder value,” added Noel Hayden, executive chairman of Gamesys Group. “As a director and significant shareholder of Intertain, I remain excited about the growth prospects for the business.”
Thadani thinks the short-sellers may have already come and gone from Intertain, and says investors should take advantage of what he sees as a company with compelling value.
“We expect IT stock to recover footing after damage already done by short report preying on investors’ fears,” said the analyst. “Following today’s IT initial response to last week’s short seller report, which sent the stock reeling down over 30% in two days, the stock could conceivably have begun to traverse the road to recovery as cooler heads prevail. However, the damage is likely already done. We suspect short sellers could have profited handsomely in the millions of dollars. Short interest spiked to an all-time record of ~4.8 mln shares on Dec 15th, covering shorts entered prior to the report’s publication was seemingly a very profitable trade at the expense of selling shareholders. We point out that the short seller’s Twitter feed has gone silent following initial inflammatory statements post their report, suggesting their goal could be fulfilled, although we would not be surprised to see more attacks continue on that forum.
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 207 per cent at the time of publication.