The move by Intertain Group (TSX:IT) management to place all options to unlock shareholder value on the table, combined with Amaya CEO David Baazov’s recent actions to bid to take that company private, are strong signals that the public markets are under-valuing Canadian online gaming names, says Mackie Research Capital analyst Nikhil Thadani.
This morning, Intertain responded to claims made on December 17 by hedge fund manager Ben Axler of Spruce Point Capital Management who 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”.
Intertain Group arranged a committee that consisted of law firms Voorheis & Co. LLP and Stockwoods LLP, and accounting firm Deloitte LLP to conduct what the company described a “thorough” review. Intertain said the findings supported the strength of its underlying business.
“Contrary to the claims of the short seller, each of the Jackpotjoy, Vera&John and Mandalay businesses performed well during 2015 and continue to meet, or exceed, management’s expectations,” said Intertain spokesman Jacques Cornet. “This is consistent with Intertain’s Jan. 11, 2016, news release announcing increased total revenue, adjusted net income and adjusted net income per share guidance for 2015. Intertain’s only business unit that has been underperforming is InterCasino, which is no longer a significant component of Intertain’s consolidated results.
Importantly, the Jackpotjoy brands, which represent Intertain’s most significant acquisition to date, continue to perform, on a consolidated basis, in line with the expectations of Intertain’s management at the time the acquisition was negotiated and completed. As set forth in Intertain’s Dec. 22, 2015, news release, the principal criticisms levelled by the short seller regarding the Jackpotjoy brands, including in regard to their EBIT (earnings before interest and taxes) margins and their market-leading position in the United Kingdom on-line bingo-led market, were false and misleading.”
Thadani says there are no shortcuts on the long road to recovery for Intertain, but thinks there could be catalysts.
“We believe the most important take-away is that there is no change to IT’s financials, while more details regarding short seller report rebuttal would always be welcome,” says Thadani. “IT’s next move could be to unlock value in stock. We speculate some potential avenues could include spinning out assets, selling a stake in the business, listing on a different exchange or perhaps some sort of restructuring of earn-outs. Management has indicated all options are on the table.”
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 244 per cent at the time of publication.