ESO PL_Estoril Sol SGPS SA

Holding company focused on gaming activities at casinos in Portugal;

- its subsidiaries own concessions of Casino Lisboa, Casino do Estoril and Póvoa de Varzim;

- since July 2016 it holds near 50% of a company dedicated to online gaming (govt has issued a total of three online casino licenses thanks to a 2015 Portugal’s legislation);

- majority controlled by Finasol Sgps Sa, whose major shareholder (and the current chairman) is Stanley Ho Hung Sun, as per Wiki “(...) nicknamed "The King of Gambling", reflecting the government-granted monopoly he held on the Macau gambling industry for 40 years (...)”.

In Portugal, the gambling activity in land based casinos is developed by four business groups that exploit, under a public concession, the eleven casinos existing in the national territory.

- ESO operates three of the four biggest casinos and account on average 63-65% of the gross game revenues (296 mln.€ in 2016);

- end date of the concession is 2020 for Lisbon and Estoril Casinos, 2023 for Póvoa Casino and 2019 for Casino Online (renewal for periods of three years)

Sales, growth and margins for the 3 land based casinos:

- Lisboa (1st in Portugal): 81 mln.€ sales, 22 ebitda (+2% sales growth, avg. 26-27% ebitda margins);

- Estoril (2nd in Portugal): 59 mln.€ sales, 6.5 ebitda (-4% sales growth, avg. 11-13% ebitda margins);

- Póvoa (4td in Portugal): 44 mln.€ sales, 4 ebitda (-4% sales growth, avg. 15-19% ebitda margins);

- FY16 sales @ 189 mln.€, 2nd year of sales growth (+4%, after +8% in FY2015), 20 mln.€ more than the minimum touched in FY14 (168 mln.€) but -27% from the high (FY08 @ 258 mln.€);

- FY16 Ebitda @ 30 mln.€; Ebitda margin in line with what seen after FY08 (16-17%, 18-19% before);

- FY16 Capex @ 5 mln.€, 2-3% of sales, the low end of the range of the last 6 years (2-7%);

- Free cash flow has never been negative in the last 6 years and averaged 30 mln.€ in the last 2 years;

- Net debt has gone from a high of 209 mln.€ in 2006, to 90 mln.€ end of 2013 to 17 mln.€ today.

Taxes: after a 52% in 2015, effective tax rate hover around 50% for the sector, 51% in 2016 thanks to lower taxation for online gaming revenues (15% to 30% depending on the volume of the revenues achieved);

- interesting: in 2013 the operating companies from the Group Estoril-Sol have filed lawsuits against the State in which they seek to be restored from an excessive taxation that were based on the assumptions that gaming revenue would have been constantly growing throughout the concession period.

Why I was interested:

- I was looking for European stocks (banks apart) that were still in negative territory after this eight years rally (ESO has had an yearly cagr of -6% from end of March 2009 to end of May 2017, European stocks near 13%) with improving fundamentals: ESO actually was showing more than 40% fcfy with a Piotroski score of 9, but (see below) ...

… now projections. What we’ll get at the end of 2020 (expiry dates of most of the concessions):

- if we could take it private, assuming annual average sales of 190 mln.€ and 3 years of 30 mln.€ fcf, we’ll end up with an enterprise value around 70-80 mln.€ … but today (end of May 2017) enterprise value is, well, exactly there: 71 mln.€! So, no margins of safety despite the fact that there are some chances that governmental concessions will be renewed.