June 15, 2020 - 11:57am EST by
2020 2021
Price: 14.98 EPS nm NM
Shares Out. (in M): 94 P/E nm NM
Market Cap (in $M): 1,416 P/FCF nm 3.5x
Net Debt (in $M): 8,461 EBIT 120 584
TEV (in $M): 9,874 TEV/EBIT 82x 17x

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Scientific Games Corp.

Company Description


Scientific Games Corp (“SGMS”) is a leading developer of technology-based products and services and associated content for the worldwide gaming, lottery, social and digital gaming industries. Portfolio of revenue-generating activities primarily includes 1) supplying gaming machines and game content, casino management systems and table game products and services to licensed gaming entities; 2) providing instant and draw-based lottery products, lottery systems and lottery content and services to lottery operators; 3) providing social casino game solutions to retail consumers and regulated gaming entities through SciPlay Corp (“SCPL”); and 4) providing a comprehensive suite of digital real money gaming and sports wagering solutions, distribution platforms, content, products and services.


Capital Structure & Relevant Financial Metrics




Recent History & Business Trends

●   SGMS is a rollup of 5 publicly traded companies since 2013

●   SGMS operates under 4 segments.  Each segment exhibits a different growth profile and customer base

●   Gaming segment (50% of Revenue and 56% of EBITDA) primarily serves the land based casino industry worldwide.  Its growth is dependent mostly on capital expenditures of existing casino’s and growth of new casinos.  This segment exhibits growth rates that are fairly consistent with US GDP growth.  While there are many competitors, the industry has high EBITDA margins (approximately 50%) and FCF margins (approximately 37-40%)

-    Within this industry, market share is driven by installed base and the success of the games produced.  A good game is hard to predict

-    There are still growth opportunities in this segment; In the first quarter, SGMS sold 525 historical racing machines (for horse racing) their first entry into this market

●   Lottery Business (27% of Revenue and 28% of EBITDA) is essentially an oligopoly.  With SGMS having a dominant position in instant tickets.  This business is very defensive, with long contracts and a high recurring revenue stream. 

-    Lottery business has bounced right back after a tough first quarter due to covid

●   SciPlay (14% of Revenue and 10% of EBITDA) is a leading developer and publisher of digital games on mobile and web platforms.  This company is a growth company (10% topline last few years) and is leveraged to the proliferation of gaming, particularly mobile gaming which has been growing at a 20% rate the last few years.

-    In May 2019, SGMS, sold a 18% stake in Sciplay to investors through an Initial Public Offering at $16 a share.

●   Digital - (8.5% of Revenue and 5.5% of EBITDA).  This is SGMS high growth platform that is leveraged to the proliferation of sports gaming and iGaming in the United States.

-    provides highly customizable software design, development, licensing, maintenance and support services from a comprehensive suite of technology solutions. Interactive casino solutions allows interactive casino operators to utilize its distribution platform, including full gaming process support services, and brand and player management services, iLottery and Real Money Gaming services through its remote gaming servers.

-    Sports betting services enable our customers to operate sports books, including betting markets across both fixed-odds and pari-mutuel betting styles, a distribution platform, full gaming process support services, and brand and player management. 


Investment Thesis

●   SGMS is a rollup of gaming technology and equipment companies that is trading at a large discount to its underlying value

-    Equity stake in SCPL, which is free and clear of debt, is worth more than the Market Equity Value of SGMS

-    Investors today are receiving a “free option” on the high growth Digital business

●   Digital Business, is conservatively worth $20 a share and a monetization opportunity will most likely be considered soon

-    Company indicated that they would be interested in realizing value of this business in a similar way that they did with SCPL

-    Proceeds of any offering would probably be used to pay down debt

●   Digital business is growing rapidly, and is leveraged to sports gambling growth in the US

-    Recently won a contract with Fanduel for the sports betting platform and could potentially win some of Fanduel’s iGaming business

-    Currently is the backbone for a large share of the NJ iGaming business and has singed large casino customers like Ceasars online

-    Since SGMS owns the entire gaming stack (betting engine, player management services, and the actual games) they can offer a complete suite of products to operators.

-    SGMS can help operators differentiate their casino’s by offering some games exclusively for limited time periods

●   Large debt overhang has inhibited investors, but debt should be paid down rapidly over the next few years

-    In 2021, SGMS is expected to generate over $400 million in FCF

-    Lottery business is a stable, high cash flow business, with low capital intensity, which brings stable support to a highly leveraged business

-    SCPL is also undervalued, but the company would consider selling some stock in the mid 20’s and use proceeds to pay down debt

●   Company has used the Covid crisis to reevaluate its operating and capital costs, while some of the cost reduction is temporary, the company is confident that much of it will lead to future savings and accelerated cash flow production

-    Cut $50 million of operating expenses

-    Lowered Capital expenditures by $100 million




●   Most of the comps in Gaming Segment & Lottery Segment currently trade at 7x 2019 numbers

-    Historically, SGMS has traded at 8x forward EBITDA and the Comps at 8.25x forward EBITDA

-    Most analysts are assuming that SGMS will be able to achieve at least 90% of 2019 EBITDA in 2021

●   7x 2019 EBITDA and 8x 2021 EBITDA give a range of value for the Gaming & Lottery Business (inclusive of all corporate expenses) $8-$8.3 billion

●   SGMS stake in SCPL is currently valued at $1.387 Billion

●   The Digital Business is growing quickly and is similar (but better) than GAN.  GAN a recent IPO, is trading at 10x 2021 revenues and 33x 2021 EBITDA

-    Assuming that SGMS digital business is worth 5x LTM Revenues and 20x EBITDA which are more typical software valuations, the digital business would be worth $1.8-$2.2 billion

●   Total Enterprise Value of $11.2 -11.9 Billion, which would value the equity between $2.725-3.425 billion or $29-$36 a share


Why Does This Opportunity Exist?

●   High Leverage causes many investors to shy away from the stock

-    Company has a strong liquidity position – after drawing down their revolver in April, they have over $800 million in available cash

-    Banks have relaxed covenants for a year do to the Covid concerns

-    Company has a $340 million debt maturity in 2021 which can easily be managed with cash on hand and no maturities until 2025

●   Digital business, which deserves a much higher multiple is a “hidden gem” and its value is masked by the relatively small contribution of Revenues & EBITDA

●   Covid has caused all Casino Operators to cut back on Capex in 2020, which temporarily hurts SGMS. 





I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


  Operator “wins” in the digital business

  Announcement of strategic considerations of the Digital segment


  Continued monetization of SCPL

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