Come September/October, Amaya should be a good buy again. The stock languished after former CEO David Baazov’s failed attempt to take it private, but has recovered since March as Hong Kong investor Hao Tang has stepped in the breach and picked up even more shares than Baazov liquidated at the beginning of the year. Since Hao Tang’s buying spree began in March, Amaya shares have risen. 22%. Baazov sold 19 million shares as his grip on the company basically fell apart and the board basically prevented him from taking the company private. Hao Tang now owns 22.7 million shares, about a 15% stake in the company.
Hao Tang was part of Baazov’s initial efforts to buy out Amaya, and now that that effort has failed, it looks like the Goldenway Group executive may be taking matters into his own hands. There are only three possible reasons for large positions to be accumulated in this way. One is that it’s a long term dividend income play, but Amaya doesn’t pay a dividend so nothing doing there. Two is it’s a long term positioning strategy where an activist buyer believes the company can undergo fundamental change (aided by his influence) and eventually trade in a completely different and higher range at which point he can start scaling out without risking profits. Three is the buyer is looking to take the company private himself.
I tend to believe the second option is more likely than the third. Goldenway trying to take the company private by itself doesn’t seem to be worth the trouble. The Amaya board has proven that it does not want the company to be taken private and that there are consequences for those who try. Unless Goldenway keeps buying more, it doesn’t look likely that it will be able to accomplish what Baazov couldn’t. It is now the second biggest stakeholder behind Caledonia Investments, which holds 28.4 million shares according to Yahoo. Whether Goldenway stops here and is satisfied with its 15% stake or whether it keeps buying and tries to take Amaya private again, either way it’s a good sign for the stock over the next four years…until debt payments become an issue at who knows what rates.
Speaking of rates, a short aside. In an interview with Bloomberg released today, former Federal Reserve Chairman Alan Greenspan sounded the alarm on interest rates, an alarm I’ve been sounding for too long already, I know. Says Greenspan, “When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices.” I admit I sound like a broken record on this, but it will happen, and when it does it won’t be pretty for highly leveraged companies. I continue to believe the bond bubble will pop when price inflation climbs above 5%, and this is almost exactly what Greenspan said today, in so many words. From Bloomberg:
“The real problem is that when the bond-market bubble collapses, long-term interest rates will rise,” Greenspan said. “We are moving into a different phase of the economy — to a stagflation not seen since the 1970s. That is not good for asset prices.”
For now though, Amaya is doing just fine. Its main poker segment is steady at 2.5 million active users and static revenues, but the real growth for Amaya is coming from sportsbook and casino together. Sportsbook and casino revenue last quarter made up 27.4% of the total, up from 20.8% in Q1 of 2016. Revenues from these two segments are up 44% year over year, very impressive. Active users for casino are up an amazing 22x since 2014, and sportsbook users are up 9.3x in the same timeframe.
Also impressive is that administrative expenses are down 8.2% or $11.6 million absolutely, despite revenue growth in casino and sportsbook, which usually costs money. Amaya is getting more efficient and growing at the same time. The only red flag is that financial expenses like interest payments are up 63% year over year, or $15.7 million absolutely, more than the savings in SG&A expenses. Revenue growth outpaced the difference so Amaya can afford the debt at this point no problem, but the question is for how long.
The other red flag is its reliance on European Union markets, which will eventually fall, probably at around the same time that the bond market does. The existence of the EU depends heavily on extremely low – even negative – interest rates to keep the whole crony system alive so EU government can keep borrowing more money for free. The EU comprises 61% of Amaya’s markets. Other European countries 21%, the Americas 13%.
The strategy for Amaya then should be as follows. It has strong backers and good prospects for the next 4 years and its markets are diversifying, if not geographically than at least in type. As long as interest rates remain low it should do well. But, all stocks, even good buys should be avoided until mid to late September, and if you want to be really safe, October. By then we can reassess the money supply situation, which looks to be bottoming out right now. For the next six weeks, stocks will struggle globally and even if they don’t decline too much, they almost definitely won’t trend higher.
After a brief waiting period it should be safe to go long. If stocks do crash heavily this month, Amaya would be a very good buy if it gets hit hard. But if, at any time, price inflation hits 5% annually, all leveraged companies, including Amaya which is near 100% leveraged, should be sold.