GAN Plc – A Player Account Management Software providers for Casinos and Sports Gaming

GAN PLC

GAN is a supplier of internet gambling solutions to the US land-based casino industry. GAN has developed an internet gambling enterprise software system, which it licenses to land-based US casino operators as a turnkey technology solution to launch an online and mobile presence.

 

GAN has developed a Player Account Management (PAM) system where highly sensitive customer and player activity is stored and processed. A PAM, among other things houses all customer data within the state, bears responsibility for identity verification, processing payments, determining that the user is located in a place where gambling is legal, produces regulatory reports and is licensed by each states regulators, provides a dashboard to operators for monitoring purposes and integrates with third party online casino games and sports book, effectively serving as the accounting platform for the casino operator. In a way, the Player Account Management system is to an online casino what the core

processor is to a bank: An operating and accounting system that keeps track of all transactions. In addition to the PAM, GAN also sometimes develops the front-end interface for Online Casino, Sports Betting and Simulated Gaming websites and apps.

Other add-on elements of a platform can include a sportsbook transaction engine, gaming content, payment services, marketing services, trading services and other activities. Outside of the sportsbook, GAN supplies some of these services to some of its customers.

GAN primarily supplies this software in the US where an increasing number of states are legalizing online sports betting due to the Supreme Court of the United States issuing a ruling that struck down the Professional and Amateur Sports Protection Act (PASPA), the 1992 federal law that had prevented states from regulating sports betting. The passage of PASPA in 2018 left it to states to legalize online gambling activity, rather than gambling being regulated federally. After the passage New Jersey quickly legalized online gambling, followed by Pennsylvania, Indiana and Michigan. Other states are expected to follow suite.

GAN received a patent in 2014 for linking a US casino clients’ loyalty account to an online gambling account. The patent covers integration of both social casino gaming and real money gambling with casino loyalty programs and has licensed this patent to FanDuel for a five-year term in return for a Patent license fee.

GAN has several distinct revenue streams:

1. Real Money Gaming Revenue Share (38% of revenues). This consists mainly of revenue share agreements with local casinos for running their online platform. This segment grew 103% YoY.
2. License Revenue (27% of revenues). One-off licensing revenue mostly for licensing to Flutter plc. This licensing revenue derives from GAN plc’s technology and patents integrating loyalty programs with online gambling. Instead of subscribing to the entire GAN platform, these customers just license this specific part. While it is one off revenue , there are large casino groups that could benefit from licensing GAN plc’s technologies and patent.
3. Platform development revenue (8% of revenues). These are one-off software development revenues that GAN receives for developing its online

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Bank of N.T. Butterfield: A great wealth franchise and interest rate derivative

Bank of N.T. Butterfield (NTB)

Overview

N.T. Butterfield (NTB) is a Bermuda-based bank whose shares trade on the New York stock exchange. Bermuda’s corporate taxfree status, together with a conservative culture helps Butterfield generate a superior return on equity with limited risk. That’s right, Butterfield doesn’t pay taxes!

History

After English explorer George Somers crashed into the island in 1609, N.T. Butterfield first opened its doors as a trading firm in 1758 and later received its banking license in 1858. For a long stretch of time, NTB grew in-line with Bermuda’s insurance industry. When in 1956 American International Group, Inc. (AIG) became the first insurer to move its captive unit to Bermuda, an influx of other captive insurers followed in the 1960s and 1970s, and by the 1980s, some of the mutual insurers such as Excel and Ace also came to the island. Now, Bermuda is a global hub for reinsurance. In 2009, NTB required a recapitalization due to investing in CMO, ABS and CRE lending that went bad. Since then, the bank has become extremely conservative in its asset allocation, holding exclusively GSE insured RMBS and treasuries in its securities portfolio.

Business

NTB is a full-service community bank and wealth manager, operating in Bermuda, the Cayman Islands, Guernsey, Switzerland, and the United Kingdom. NTB’s community banking operations provide retail and corporate banking products to individuals, local businesses, captive insurers, reinsurance companies, trust companies, and hedge funds. NTB has seven Bermuda branches and 49 ATMs and a 39% and 35% deposit market share in Bermuda and the Cayman Island.

In Bermuda, the Cayman Islands, Guernsey, and Switzerland, NTB offers wealth management to high-net-worth and ultra-high-net-worth individuals, family offices, and institutional and corporate clients. In practice, the wealth business can be further segmented into trust, private banking and asset management divisions. The trust business has over $92 billion in assets under administration while the custody business has another $29 billion in assets.

The asset management business had $5.6 billion in assets under management as of September as well. This business targets clients, including institutions such as pension funds and captive insurance companies, with investable assets over $10 million, and private clients such as high-net-worth individuals, families, and trusts with investable assets of more than $1 million.

These businesses generate both a stable fee stream as well as a low-cost deposit base that NTB invests in mortgages and low-risk bonds.

Balance Sheet

NTB is extremely asset sensitive, with every -100bp change in interest rates having a -11% impact on net income according to their disclosures. This is because NTB holds about 40% of its assets in agency MBS and Treasuries and another 26% percent in cash and equivalents. The remainder of NTB’s balance sheet consists of loans. This has specific historic reasons: The cash and equivalents are higher than at most banks because Bermuda does not have a central bank or monetary authority. Instead, Butterfield is the lender and liquidity provider of last resort. As such, Butterfield’s liquidity portfolio is much larger …

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Kingstone: A simple New York homeowners insurer

Kingstone Insurance

Kingstone Insurance (KINS) is a multi-line provider of personal and commercial insurance. The company distributes predominately through independent brokers and agencies with a high touch model. The vast majority of premiums underwritten today have been in the state of NY in home property insurance. More recently, the company has begun branching out into neighboring states such as Pennsylvania, Rhode Island and New Jersey.

What is unique about Kingstone is their willingness to operate with smaller rural agencies. While most insurance companies require significant minimum premium volumes for an insurance agent to qualify for commissions, Kingstone’s minimum for agents is 50k. This gives Kingstone a sticky and loyal base of independent insurance agents who originate new business for them year after year.

Kingstone transitioned from a mutual into its current form in 2009 and has since been growing premiums at 25% a year while producing a return on equity of 15-16% in years without hurricanes. When hurricane Sandy hit the New York area in 2012, they experienced mild losses but were still able to maintain a return of equity of 4%.

This streak continued up until the first quarter of 2019, when Kingstone had to restate reserves in its commercial lines business, where it was writing property insurance for small businesses. While commercial lines formed a minor part of their business, Kingstone clearly mispriced the risks here and had to restate its reserves, taking substantial losses. Fortunately, Kingstone has acknowledged its past mistakes, reorganized its claims management department and pulled back on new commercial business. The market however has reacted as if Kingstone’s business model is fundamentally broken. Over the next several quarters Kingstone should show that their core home property insurance business is just as profitable as it used to be and that it can continue its history of profitable growth by growing into adjacent states.

Underwriting

Kingstone has for a long time maintained a mix of roughly 80% personal and 20% commercial policies. As they have experienced reserving issues in the commercial segment, Kingstone will stop growing commercial policies and instead focus on its core homeowner and dwelling coverage business. Approximately half of their policies are written in Long Island / Westchester, with another 43% written in NYC. Long Island / Westchester is a particularly interesting market for Kingstone as major insurers pulled out of the market in the wake of Superstorm Sandy.

Thanks to an Ambest upgrade to A- in 2017, Kingstone is well prepared to continue its growth as this allows Kingstone to access a greater number of insurance agents to sell its home insurance product through (many insurance agents limit their insurance writing with companies that are rated A- or better). Kingstone has been growing premium at 25% per annum for the last several years and is likely to continue to grow premium by at least 20% per annum through a combination of growth in New York and Long Island / Westchester as well as expanding its agent base in upstate New York, Connecticut, …

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Citigroup Capital Securities XIII – a high yield trust preferred from Citi

This is a writeup for Citigroup Capital Securities XIII, or Citi N’s. Citi N’s are trust preferred obligations of Citigroup. Why write up a pref instead of a stock? This one has some interesting special features.

A trust preferred is basically a subordinated debt obligation of the issuer. It ranks above common equity, above preferred shares but below senior in the capital structure. Coupons on subordinated debt are deferrable for up to five years but cumulative, meaning that if Citi cannot pay the coupon on Citi N’s in any given year, this does not constitute an event of default. If Citi does not pay a coupon for five years, this does constitute an event default. As coupons are cumulative any coupons that were skipped at one point have to be repaid later on. Here, I am simply explaining the structure of the security. Citi has never skipped a coupon on Citi N’s and is unlikely to do so in the future.

Citi N’s pay a coupon of Libor + 637, which means the current coupon is 9.1205%. It is a $25 face security currently trading at 27.70, so the current yield is about 8.2%. 8.2% is a very high yield for a high quality credit like Citigroup. For comparison, JP Morgan and Bank of America Preferred Shares currently yield 5.6%, Morgan Stanley Preferreds yield 5.7% and Goldman Sachs Preferreds yield 5.8%. Trust Preferreds are higher in the capital structure than preferred shares, yet Citi N’s have a significantly higher current yield.

Citi N’s have a final maturity of 2040, but are immediately callable today. If Citigroup decided to call Citi N’s tomorrow, they would fall from 27.70 to something closer to par + accrued, so around 25.50. Citi could call Citi N’s tomorrow and issue new preferred shares with a coupon around 5.6%-5.7%. Why has this not happened yet?

To understand this we have to go back to the financial crisis. On January 15^th 2009 Citigroup entered into a loss-sharing arrangement with Treasury, the Federal Deposit Insurance Corporation (the “FDIC”) and the Board of Governors of the Federal Reserve System related to a pool of $301 billion of assets. Citigroup issued to Treasury $4.034 billion of its perpetual preferred stock as consideration for the loss-sharing protection provided by Treasury and $3.025 billion of its perpetual preferred stock to the FDIC as consideration for the loss-sharing protection provided by the FDIC. Treasury’s and the FDIC’s perpetual preferred stock was exchanged for capital securities issued by Citigroup Capital XXXIII on July 30, 2009. On December 23, 2009, as part of an agreement to end the loss-sharing protection, Treasury cancelled $1.8 billion of the $4.034 billion Capital XXXIII Capital Securities it held, and the FDIC agreed to transfer an additional $800 million of its remaining Capital XXXIII Capital Securities to Treasury upon the maturity of Citigroup debt issued under the FDIC’s Temporary Liquidity Guarantee Program. On September 29, 2010, Citigroup modified Citigroup Capital Trust XXXIII by redeeming $2.234 billion of those securities …

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National Cinemedia (NCMI)

Would very much appreciate everyone’s thoughts / comments / feedback / criticism. If there’s interest, I might follow-up with a full writeup.

Notes

• NCMI has the #1 market share for on-screen advertising (about 50%)
• The industry is an oligopoly with NCMI and Screenvision having about 85% market share
• Basically NCMI owns the right to run a 30-minute pre-movie show in its founding members US theaters, which includes advertising. This right is backed by long-term exhibitor agreements with the founding members which, to the best of my understanding cannot be revoked
• Let me repeat, 90% of the opportunity around NCMI revolves around their ability to monetize the 30-minutes BEFORE the movie trailers start
• Founding members (and co-owners of NCMI) are AMC, Cinemark, Regal
• NCMI derives revenue principally from selling advertising during these 30 minutes
• NCMI has produced stable OIBDA margins since its IPO as well as relatively stable revenues
• NCMI, Inc., the publicly listed entity owns a 49.5% stake in NCMI, LLC. The rest of LLC is owned by the founding members
• AMC, the largest owner of NCMI, LLC is being required to divest the majority of its equity interests after an anti-competitive DOJ ruling (this was a condition for its takeover of Cinemark)
• AMC has until June 2019 to dispose of 9.5% of its stake (to reduce its stake below 5%)
• At the same time, 2017 had a relatively mediocre movie slate and attendance was down. Somehow this led to the stock falling from $16 to $5
• At its current price of $5.24 NCMI trades at a 13% dividend yield
• The company pays out almost the entirety of its free cash flow via dividend to shareholders and founding members
• 2018, so far, has been a better year in terms of theater attendance led by Black Panther
• Optimism and pessimism about the slate come and go, offset by probably 6 to 12 months
• MoviePass could help increase theater attendance as well

Further Comments

• I find this situation highly interesting and am looking for reasons why this traded at a 5-6% dividend yield forever and now should trade at 13% yield. Note I am using dividend yield as a simplified proxy for FCF, which is somewhere in the range of $120MM-$150MM per annum (to LLC, not Inc, so cut this in half)

Risks

• Further decline in theater attendance
• Weakening in pricing power if the US moves due to impact of reserved seating/online ticketing. Advertisers may be worried that nobody will watch the pre-shows (which start 30 minutes before the advertised movie start time) if this happens
• AMC somehow finds a way to wiggle out of its contract with NCMI as once it only owns <5% of NCMI, LLC interests are less aligned
• The threat of cinemas losing their exclusive right to screen movies a couple of months before DVD/other releases

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