In February, I concluded that the cards were not dealt right for SciPlay (NASDAQ:SCPL). The company has seen a tough time since the spin-off from its former parent company in 2019, which comes a bit of a surprise at first glance given the tailwinds provide by the pandemic. Concerns of quality of the games and the controlled status of the business made me cautious. With the company announcing a bolt-on deal in recent times, it is time to update the thesis here.
SciPlay is a developer and publisher of mobile and web platform games. The company focuses heavily on the freemium model, offering free entertainment games with premium and paid options to progress in the games. Actual games to think of include slots, casino and monopoly-inspired themes, accessed from all major platforms.
The company was spun off from its parent company Scientific Games (SGMS) at $16 per share, as the company was valued at $2.0 billion at those levels at the time, amidst a flattish net debt load. That valuation was applied to a business which generated $418 million in sales in 2018, with three-quarter of revenues generated from mobile games. GAAP operating profits totaled $74 million, with adjusted operating earnings coming in as high as $100 million, working down to a 23-24 times realistic multiple.
The 20% growth looked compelling given the valuation, yet the controlled company (with Scientific still holding the majority of the shares) and royalty arrangements made me cautious. That caution played out as shares fell to $7 ahead of the outbreak of the pandemic and while the Covid-19 period certainly provided a boost to the business, shares only recovered to $15 in the summer of 2020.
Ever since shares have traded in a volatile $12-$22 range, but traded at just $13 early this year, when I last looked at the shares. 2021 has proven to be a year of two tails as the company had a strong first quarter, but second and third quarter sales fell slightly on the back of difficult comparables. The good news actually triggered mother company Scientific Games to make an offer for the 19% of the floating shares, but that deal fell through later in the year.
Through the third quarter, the company was on track to earn about $0.90 per share at an annual rate, with $330 million in net cash working down to just over $2 per share. As the shares traded at $13.50 per share, operating assets traded at $11 and change, resulting in a 12-13 times multiple. That however was amidst negative comparables as the question was how earnings would develop in normal times, with the pandemic clearly on its retreat. This made me very cautious, despite the interest of Scientific Games as well as general M&A in the sector, which in this case would always need the blessing of Scientific Games.
Since voicing these cautious words in February, shares have been trading flat at $13.50 per share a couple of months further in time. The big news came early in March as the company reported its 2021 results and announced a bolt-on M&A move at the same time.
Let’s start with the results as fourth quarter sales of $154 million were up 5% on the year before, with full year sales inching up by similar percentages to $606 million. Adjusted EBITDA for the year was practicality flat at $186 million for the year, inching up sightly in the fourth quarter. GAAP earnings took a beating in connection with the attempt of Scientific Games to acquire the company and a Washington lawsuit. If we adjust for this earnings power comes in around a dollar, slightly higher than my estimates.
Net cash balances rose further to $365 million, equal to more than $2.50 per share already, all of this looks quite good if we compare this to the situation when I last looked at the business in February.
Alongside the release of the annual results, SciPlay announced the purchase of Turkey-based Alictus, a mobile casual game developer in a deal in which it will acquire an 80% stake for a $100 million cash payment. The remaining 20% of the shares will be acquiring the coming years with installments ranging between zero and $200 million, depending on the achievement of certain milestones. The deal is really a bolt on deal, or actually a bit larger given the depressed valuation of SciPlay.
Unfortunately, no financial details on the Alictus purchase have been announced, other than that its games have been downloaded 300 million times to date with 1.8 million daily active users being added. The conference call did shed some light, as the company guided for roughly 10% revenue growth in 2022, with half of the contribution being pegged from Alictus, suggesting a roughly $30 million revenue contribution, which looks quite fair.
With net cash still close to $2 per share after the Alictus deal I am growing a bit more comfortable as the company guides for stabilization, or slight growth this year. With operating assets still trading at $11-$12 per share, while some growth is seen and earnings topping a dollar, the situation looks a bit more compelling in my eyes. On the other hand quality and controlled status concerns remain, making me a bit cautious, yet a small speculative position here seems warranted by now.