Cashed up

Sportech (SPO) has contracted to sell its largest business, Global Tote, its Bump 50:50 raffle business and a freehold property in Connecticut (CT) for a combined net ca.£36m. All the transactions are expected to complete in the first half of 2021, leaving SPO with the venues business and a lottery franchise, as well as a £33m pile of cash net of other financial liabilities. The final piece of the jigsaw is its role in the deregulation of sports betting in CT, which is uncertain but could provide significant further upside. SPO is indicating a significant return of surplus cash once it has all been collected.

• FY’20 results: The results were marginally better than our forecasts: £2.6m underlying EBITDA vs. our £1.9m, but, in the context of the group reorganisation, the numbers are academic. Both continuing businesses suffered during the year from COVID-19-related closures – but should bounce back strongly this year.
• Uncertainty: The big unknown is what happens next in gaming regulation in CT. In March, the State announced a proposal to expand sports betting and iGaming with the Mohegan Tribe and the State Lottery, with the possibility of SPO getting sub-licences. We did not expect this, and SPO is seeking “further clarification”.
• Valuation: In its new form, SPO comprises pro-forma net cash of £41.3m, a venues business and a lottery franchise worth a combined ca.£26m, and ca.£8.6m of liabilities – altogether about 31p per share – plus the value of what it stands to gain from the new CT gaming regime, which we estimate at between 13p and 21p.
• Risks: There is a risk that the various disposals fail to complete, although SPO has taken some significant non-returnable deposits. There is also a very clear risk that the outcome of the CT gaming process is below our lower-end expectations. At its worst, the venues business could be harmed, too, by competitive betting options.
• Investment summary: We believe that SPO’s valuation is solidly underpinned by the cash it expects to receive from its various agreed disposals. The lottery business is attractive, and should see a strong recovery this year. The venues business should also bounce back into profitability in its slimmed-down form. The upside is unknowable and depends on what can be negotiated with the State of CT, but it could be substantial.