In 2010 he starts working at Carthersio in Lugano, managing the Philos Flexible Fund.
What is a mistake?
According to the layman definition it is anything that sets us apart from our objective. If our objective is to make money then losing money is a mistake.
As achieving objectives is dependent on chance or contingency, a process is necessary to realize goals and objectives. Therefore, a mistake in conclusion is any action which is not coherent with our process.
According to "The Checklist Manifesto," The New York Times Best Seller, by Atul Gawande, the following questions should be asked:
Do I have a solid bid?
Do I have a strong discount to sum of the parts?
Do I have a franchise at a fair price?
Is it a franchise or a business? If it is a business, is the investment desired? How is the market structure, regulation, long-term perspective, and resilience of the business?
How is management? ROE of the past few years is one of the most important aspects of evaluation.
Valuation is last and one of the most essential steps. Everything is ranked on basis of how good the business is and what the valuation is. Valuation facilitates a person in sizing the investment position and also helps determine whether a stock should be sold or purchased.
Today’s stock: Sai
Snai is an online gaming and betting service which is now expanding its business to include gaming machines.
The company’s business had been very flat over the years due to mismanagement. The CEO of Snai was the CEO of Snai Servizi and therefore, 51% of the business was controlled by Snai Servizi. Every time someone bought a ticket from Snai, the commission was pocketed by Snai Servizi. Resultantly, Snai ended up with a lot of debt which posed high economic risk. Moreover, the interest of the management was not parallel to that of the stakeholders.
Investindustrial, run by a successful Italian company, together with Palladio established a company called Global Games which bought Snai from Snai Servizi. Snai also merged with Cogetech, which was a business similar to Snai. Global Games now owns 50%, Cogetech owners own 26%, and Snai floats 24% of the company in the market. Snai has been buying licenses for Video lottery machines to further develop its business. With the current management being very capable, there are no conflict of interest between them and the stakeholders. The market structure seems strong in the long-run and the company has high resilience because gambling is not a onetime trend.
Decomposition of Snai’s EBITDA, it is evident that 23% of their EBITDA is from slot machines. The earnings are realized through the contract between the company and the place where the company is installed. Video Lottery makes up for 26% of EBITDA and Sport betting makes up for 37%.
Despite the fact that there is a lot of regulation, there still is a lot of illegal betting and the Government is not too strict in preventing this. They would rather people gamble legally then try to force more regulation, which will prevent people from going to illegal gambling parlors.
Video lottery and slot machines are both regulated, but it is harder to keep a check on video lottery machines as in slot machines a person can only put in one coin at a time, but Video Lottery a lot of money can be put at once; so VLTs earn much more per machine.
Valuation of Snai is difficult because the company recently came into existence. To get to a run rate EBITDA of 168.8 million Euros, the EBITDA of 2010 of all the business segments of the company were added. The conservative estimate of earnings of VLT Snai by Lottomatica, the maker of the machines, and VLT of Cogetech were added to the basic EBITDA of 141.8 million. Then, the various costs which summed up to 70 million were subtracted from the total amount.
The following calculations were conducted using 5x EBITDA multiple to realize that the current price of 2.5 implies an upside of 47%:
· Ebitda = 168.8
· Gross Target EV = 168.8*5=844
· Net Target EV = 844 + 120 (San Siro) = 964
· Target market cap = 964 – 383 = 581
· Target Price = 581 / 157.41 (Fully diluted) = 3.69
The only risk the company faces is internet betting, as there are many internet market makers. However, internet connection in Italy is slower than other places, additionally people in Italy gamble as a hobby in the afternoon as people go to bar, have a drink/smoke and bet on games and play machines, so the risk is not a large threat for Snai.