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iGaming

Initiating Coverage

30 November 2017

  • Sector
  • iGaming

Two Kings and a Prince

We initiate coverage of Evolution Gaming (Buy, target price SEK 800), NetEnt (Buy, target price SEK 70) and Kambi (Buy, target price SEK 97) as we see various growth opportunities and in most cases margins scaling. Evolution Gaming is the market leader in its niche of live casino and we believe the market has not yet fully realised its longer term growth and margin opportunities. NetEnt is the leader in slots but growth rates are coming down (so have valuations) after some fantastic years and we foresee continued high quality, innovative content from the company. Kambi (sportsbook) has been struggling to scale on its opex but we really believe the trend has turned and that growth and margins will trend upwards from now on.

Evolution Gaming – The King of Live – Buy, target price SEK 800

Over the period 2017-2020E we expect Evolution Gaming to remain the market leader within the European live casino market as it constantly aims to improve its already highly appreciated live casino product to widen the gap with the competition even further and thereby capture a larger share of the growth that is expected to come.

NetEnt – The King of slots – Buy, target price SEK 70

We expect NetEnt to continue to dominate slot games, but with competitors' live casino products taking market share from slots, increased tax pressure and "everyone" already a client, we expect fading revenue growth, although scaling effects on opex will see EBITDA margins trend upwards somewhat. We expect NetEnt to report a sales CAGR for 2017-2020E of 11.5% and an EBIT CAGR of 11.8%, and after the recent share price decline, we still see some upside although we cannot argue for multiples in line with historical valuations as growth is slowing. Meanwhile, we acknowledge the long-term opportunities (beyond our estimate horizon) with new markets such as the US and Latin America.

Analysts

Lars-Ola Hellstrom +46 8 402 5277, [email protected]

Viktor Högberg +46 84 02 52 76, [email protected]

Kambi – The Prince of sports – Buy, target price SEK 97

We see growth picking up again after a disappointing 2017 (hit by contract renegotiations). With this behind the company, we expect a sales CAGR of 14% in 2017-2020E with EBIT margins scaling further, from 7.7% in 2017E to 13.0% in 2020E. Our estimates do not include further signings but we believe Kambi stands a good chance of bringing home new contracts ahead of FIFA 2018 and with regulation in Sweden and the Netherlands coming up. As we do expect further signings we argue that Kambi trading at around a 10% premium to its three-year historical average NTM EBIT multiple is justified, with potential signings possibly bringing down the valuations considerably.

  • M Cap
  • P/E (adj.)
  • EV/EBIT (adj.)
  • EV/Sales
  • Share performance

Company

Evolution Gaming Kambi NetEnt Kindred

  • Price (SEK) Rating
  • Target

800 97 70 130 78 90 67 63 118 41

FX (EURm) 17e 18e 19e

EUR 2,070 34.2 27.7 23.7

17e 18e 19e

30.6 24.6 20.8 47.4 21.9 19.6 22.5 19.0 16.7 19.1 15.7 16.6

  • 17e 18e 19e
  • 1m

-5 % 7 %

3m

18 % 21 %

6m

43 % -4 %
570.0 85.8 60.7 112.3 59.9 83.3 55.5 44.8 87.5 38.4
Buy Buy Buy Buy Hold Buy Buy Buy Buy Buy

  • 11.5 8.6
  • 7.0

2.7 6.3 2.4 1.5 2.0 0.8 1.7 5.5 1.4

  • EUR
  • 259
  • 67.2 30.9 27.8
  • 3.9

8.4 3.3 2.0 3.9 1.5 2.5 8.3 2.2
3.1 7.2 2.7 1.8 2.5 1.1 2.1 6.3 1.7
SEK 1,471 25.4 21.5 19.1 GBP 2,578 20.1 17.0 18.6
-11 % -20 % -16 %
6 % 32 % 24 %
-10 % -19 % -26 %
3 % -3 % -21 % -10 % -24 % 16 % 13 %

  • Betsson
  • SEK

EUR SEK SEK EUR EUR
836 838 229 447 459 180
10.5 9.9 10.1 37.5 19.3 16.7 18.8 13.1 12.3 45.7 16.0 13.7 18.2 14.8 13.0 14.8 14.8 12.4
10.5 9.4 33.9 16.7 13.9 15.0 8.8 7.2
9.2
LeoVegas Mr Green Cherry Catena Media Aspire Global
23 % 13 %
55 % 41 %
20.6 12.2 9.8 18.1 13.1 11.5 12.4 11.3 9.1
-1 % -1 %
-13 % nmf

* Multiples based on FactSet consensus

Please refer to important disclosures on the last 5 pages of this document

This report is generated for Viktor Högberg

Initiating Coverage

iGaming

Table of contents

Market overview ......................................................................................................... 3 Regulatory overview.................................................................................................. 11 Peer table based on FactSet consensus..................................................................... 20 Evolution Gaming – The King of Live ......................................................................... 21 Company description................................................................................................. 22 Financial estimates .................................................................................................... 35 Valuation ................................................................................................................... 49 NetEnt – The King of Slots ......................................................................................... 53 Company description................................................................................................. 54 Financials ................................................................................................................... 63 Valuation ................................................................................................................... 75 Kambi – The Prince of Sports..................................................................................... 80 Company description................................................................................................. 81 Financial history......................................................................................................... 94 Estimates ................................................................................................................... 97 Valuation .................................................................................................................104

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Initiating Coverage

iGaming

Market overview

In this section we focus on casino and sports betting, the main products offered by the online gambling companies. Other products such as poker usually account for less than 10% of a typical Nordic operator.

Online casino

Online casino entails products such as slots, Roulette, Baccarat and Black Jack

Virtual slot machines are the main online casino product and are offered by most operators. There are thousands of slots, one of the largest and most well-known is Starburst, created by Swedish game developer NetEnt in 2012. Among other products offered are table games such as Roulette, Baccarat and Black Jack. Live casino has emerged as a fast-growing segment in the past couple of years, taking share from slots. Here live dealers in studios make the gambling experience more interactive for the player. The payout ratios (return to player, RTP) per product differ and for slots the payout ratios range from ~92-98% depending on the product. For example, the RTP of Starburst is 96.1% (on an infinite amount of spins).

Sportsbook

Sportsbook margins are more volatile than casino margins, but the market is larger

Sports betting has been around for centuries and the segment migrated online early. Bookmakers with a legacy of land-based betting shops and pure online newcomers alike offer odds to players on a wide range of sports and events 24/7. Since sports betting is based on odds on events that are impossible to predict, the margins are more volatile than in the casino segment (however evening out over time), and the average payout ratios are around 92-93%. Pre-match and live betting have different margins odds and thus margins and the margins also depend on geography and popularity of an event. Sports betting is often regarded as a good customer acquisition tool, used by some operators to channel players to their casino offering. Generally, the customer acquisition costs for sports betting players are lower than for casino players. The sports betting market is larger than the casino segment and in 2016 the European online sports betting market accounted for EUR 8bn while the casino market was EUR 5.8bn.

Global market size is huge, but most gambling is still offline

In 2016, the world gambling market was worth EUR 346bn, of which ~12% is online

Research firm H2 Gambling Capital (H2GC) estimates* that in 2016, the total market size (revenue from all products** and white and grey markets***) of online and offline gambling in the world amounted to EUR ~345bn, of which 12%, or EUR 38n, was online. Below, we focus on the European market, the most relevant geography for the Nordic-facing operators and also because the spread in maturity between Europe and the rest of the world skews the data. Our sub-focus is online betting and casino, excluding lotteries, poker and other gambling products, since online betting and casino make up ~71% of the European online market. All market data estimates are from H2GC.

*All H2GC data is gross gaming revenue. GGR = player bets minus wins, including bonuses. **All products: betting, casino, gaming machines, bingo/other gaming, lotteries. ***White market: operator licensed in same jurisdiction as player. Grey market: operator licensed but in another jurisdiction than player.

Gambling market breakdown for Europe, 2016

Global gambling market 2016

345 EURbn

Europe

98 EURbn

  • Online
  • Offline

  • 19.4 EURbn
  • 79.8 EURbn

Gaming
Poker

8.0 EURbn 5.8 EURbn 1.4 EURbn 2.3 EURbn 1.9 EURbn

Source: Pareto, H2 Gambling Capital November 2017

Machines

  • Betting
  • Casino
  • Lotteries
  • Other
  • Betting
  • Casino
  • Bingo
  • Lotteries

9.4 EURbn 8.4 EURbn 29.1 EURbn 1.9 EURbn 31.1 EURbn

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In 2016, Europe accounted for ~28% of the world’s gambling. Around 20% of the European gambling was online, representing ~51% of the world’s online

gambling. The global gambling market (online and offline) is predicted by H2GC to grow at a CAGR of 2.5% in 2016-2022 with the European market at a CAGR of 1.5%. With regards to pure volume, land-based gambling still dwarfs online and while the online penetration rate worldwide is a mere 11%, in Europe it is already at ~20%, which can be explained by the high penetration of broadband and the number of computers and handheld devices over the past couple of decades. To be fair, the 20% European online penetration rate is slightly misleading and dragged down by the mainly land-based lottery market. Looking at only sports betting and casino the online penetration rates are already at 46% and 41%, respectively.

European online penetration of sports betting and casino is 46% and 41% respectively

Global market size of offline vs online gambling (LHC) and size of European market (RHC)

Source: Pareto, H2 Gambling Capital November 2017

Europe – the most relevant market

Europe makes up half of the world´s online gambling

With a European online gambling market of EUR 19.4bn in 2016 representing half of the world's online gambling, this is also the focus market for most of the European and Nordic operators. In Europe, regulations are decided on a national basis and all countries treat gambling offline and online differently. Some of the major EU countries such as the UK, France and Italy are regulated, while Sweden and the Netherlands will regulate in the coming years. In 2016, the European online betting market was significantly larger than the casino market.

In Europe, online betting is expected to surpass its offline counterpart in size in the next few years. The land-based, offline market is expected to remain the same size while online will take market share. The total European betting market was worth EUR 17bn in 2016 and online made up 46% of that. Through to 2021, European online betting is expected to grow at a CAGR of 7.5%. The total European casino market was worth EUR 14.2bn in 2016 but, in contrast to sports betting, online casino is not expected to surpass offline until 2022. As with betting, the offline casino market is expected to hardly grow, while the online casino CAGR through to 2022 is expected to be ~7.8%.

Europe online betting CAGR 2016- 2021 is expected to be 7.5% and online casino 7.8%

To put it all into perspective, the European online betting and casino CAGRs between 2003 and 2016 were 18% and 28%, so growth is expected to fade somewhat in the coming years.

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European offline vs online betting (LHC) and the equivalent for casino (RHC)

Source: Pareto, H2 Gambling Capital November 2017

Online penetration has been fast over the past decade, with casino trailing betting. In Europe, 46% of betting is done online with 41% of casino (including poker) online. H2GC estimates the acceleration in penetration rates in sports betting and casino will slow in the coming years, reaching 56% and 50%, respectively, in 2022, implying that in 2018 online betting will surpass offline betting. The overall CAGR 2016-2022 of European land-based offline gambling is projected to be just 1.5%, while the corresponding figure for online is 7.5%.

In 2018, online betting in Europe is expected to surpass offline betting

Between 2003 and 2015 the online penetration rate for betting grew from 9% to 42%. Casino penetration went from 3% to 40%. While more betting than casino is done online, the gap has been roughly the same the last couple of years but is expected to widen slightly ahead.

Europe – offline vs online gambling (LHC) and online penetration rates per vertical (RHC)

Source: Pareto, H2 Gambling Capital November 2017

Mobile gambling is growing fast

The strong growth in the amount of handheld devices such as cell phones and tablets over the past decade has helped gambling not only go online but also go mobile. This has enabled players to bet on their favourite teams in real time or spin the virtual Roulette wheel, wherever they are. In 2016, only 6% of total European gambling was done on a mobile device. However, looking at the share of European online gambling, mobile held a market share of 33%. Mobile penetration is expected to continue, reaching 13% of the total European market and 50% of the online market in 2022. This corresponds to a CAGR of 16%, highlighting the importance to operators of a strong mobile offering.

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Europe – mobile gambling penetration has been fast

Source: Pareto, H2 Gambling Capital November 2017

Within online, the largest vertical is betting, representing 41% in 2016, followed by casino with 30%, lotteries with 12% and skill-based games, bingo and poker with 17%. This inter-relationship has been the norm since the mid-2000s and among the two biggest verticals the relative size ratios are expected to continue while lotteries are expected to grow and the three other categories will continue to shrink in relative size. The fastest-growing vertical within European online gambling in 2016-2022 is expected to be lotteries, but for most operators the fastest-growing most relevant vertical is casino at a CAGR of 7.8%. Betting is expected to grow at a CAGR of 7.5% with other verticals combined growing at just 2.6%. It should be noted that the lottery vertical is sometimes only offered by state-owned monopolies rather than private companies.

Europe – online gambling split

Source: Pareto, H2 Gambling Capital November 2017

Since the applicable markets for most Nordic-facing operators are online betting and online casino, we have calculated a market size weighted growth rate, based on each vertical's size and expected growth rates. As can be seen in the charts below the growth rates are expected to be still rather high in the coming years although slower than in previous years. It is also worth mentioning that the growth rate spikes in even numbered years are due to sports championships taking place.

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Europe – online betting and casino growth rates (LHC) and addressable market size weighted growth rate (RHC)

Source: Pareto, H2 Gambling Capital November 2017

With a tradition of sports betting that is huge, both offline and online, the UK is by far the largest market in Europe. The same is true within online casino, where the UK is the absolute market size leader. Within betting, other countries with large populations and sports traditions are Germany, France, Spain and Italy, which are all among the largest in Europe. Regarding online casino, virtually the same countries that are large in sports betting are also the largest. To be fair, though, we believe the true market size in some countries is hard to measure, with products being online and sometimes outside of regulations.

Largest European markets – the UK dwarfs them all

Source: Pareto, H2 Gambling Capital November 2017

Splitting up the Nordic countries, Sweden has the largest online market with regards to betting and casino, followed by Denmark, Norway and Finland. Within the Nordics, Denmark is the only regulated country, making the comparison a bit difficult with regards to market data. Sweden is the most relaxed country regarding accepting online gambling and it is also the country next to regulate (expected in 2019). In all four countries state monopolies are active and have rather large market shares, although they do not always offer the same products (in Sweden the monopoly Svenska Spel cannot offer online slots). The Swedish gambling authority Lotteriinspektionen estimates that in Q3 2017 gambling with foreign operators (without licences) accounted for 25% of the total Swedish market (both offline and online, implying an even larger online market share). It should be noted that although these foreign operators lack a Swedish licence, they usually operate through the Maltese licence.

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The Nordic online gambling market (betting and casino) (LHC) and the total 2016 Nordic split (RHC)

Source: Pareto, H2 Gambling Capital November 2017

Trends and CAGRs

Apart from for Czech Republic, online betting and casino in Europe are expected to continue to grow fast

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  • Boston 7 Stud Poker Table;

    Boston 7 Stud Poker Table;

    Full text of the proposal follows (additions indicated in boldface thus; deletions indicated in brackets [thus]): 13:69E­1.13M Boston 5 stud poker table; boston 7 stud poker table; physical characteristics (a) Boston 5 stud poker and boston 7 stud poker shall be played on a table having positions for six players on one side of the table and a place for the dealer on the opposite side. 1. A true­to­scale rendering and a color photograph of the layout(s) referenced in this section shall be submitted to the Division's principal office located Atlantic City, New Jersey, prior to utilizing the layout design. (b) The layout for a [Boston] boston 5 stud poker table and a boston 7 stud poker table shall contain, at a minimum: 1. The name or trade name of the casino licensee; 2. A separate designated betting area at each betting position for the placement of an ante [wagers] wager; 3. A separate designated area shall be located immediately to the right of each ante betting area for the placement of a first [wagers] wager; 4. A separate designated area shall be located immediately to the right of each first wager betting area for the placement of a second [wagers] wager; 5. A separate designated area shall be located immediately ­ 2 ­ above each ante betting area for the placement of an optional bonus [wagers] wager; and 6. Payout odds for all authorized wagers or [Notice] notice of signage for payout odds for all authorized wagers. (c) If the payout odds for all authorized wagers are not inscribed on the layout pursuant to (b) 6 above, [A] a sign shall be posted at each [Boston] boston 5 stud poker and boston 7 stud poker table that lists the payout odds for all authorized wagers.
  • California Grand Casino Reserves the Right to Change This Rule to Either: the Player/Dealer Wins Ties Or the Player Wins Ties; with Notice to the Division.) 4

    California Grand Casino Reserves the Right to Change This Rule to Either: the Player/Dealer Wins Ties Or the Player Wins Ties; with Notice to the Division.) 4

    • • Caribbean Stud Poker GENERAL DESCRIPTION 1) Caribbean Stud Poker is played with a standard fifty-two (52) card deck. 2) The game is played on a table with up to eight seated-positions. 3) In front ofeach seated-position, there are multiple betting spots. Each betting spot has two positions (ANTE & BET). 4) All players are competing against the player/dealer. 5) The object ofCARIBBEAN STIJD POKER is to make the highest possible poker hand. 6) Hands are ranked according to a standard poker ranking chart. 7) A collection is taken by the house dealer from all players and the player/dealer based on the size ofthe ante according to a posted collection schedule. Antes are limited by the posted limits fo~ table. PLAYOFTHEGAME 1) Players must place an ante prior to receiving their cards. 2) Each player is dealt five cards (one of the player/dealer's five cards is immediately turned face up). 3) Once players have received their cards, players may fold and forfeit their antes (the player is then finished with the hand) or call- by placing a bet in the "bet circle." The bet must be equal to twice the ante. After making their decisions, all players must put their cards face down on the table. 4) Once all players have made their decisions to call or fold, the house dealer will expose the player/dealer's hand. 5) If the player/dealer does not have a qualifying hand: I, Players who called will be paid even money on their antes (regardless of the rank or their hands) and their bets do not receive action.
  • 58 § 639A.1 639A-1

    58 § 639A.1 639A-1

    Ch. 639a CARIBBEAN STUD POKER 58 § 639a.1 CHAPTER 639a. CARIBBEAN STUD POKER Sec. 639a.1. Definitions. 639a.2. Caribbean Stud Poker table physical characteristics. 639a.3. Cards; number of decks. 639a.4. Opening of the table for gaming. 639a.5. Shuffle and cut of the cards. 639a.6. Caribbean Stud Poker rankings. 639a.7. Wagers. 639a.8. Procedure for dealing the cards from a manual dealing shoe. 639a.9. Procedures for dealing the cards from the hand. 639a.10. Procedures for dealing the cards from an automated dealing shoe. 639a.11. Procedure for completion of each round of play. 639a.12. Payout odds; rate of progression. 639a.13. Irregularities. Authority The provisions of this Chapter 639a issued under 4 Pa.C.S. § 13A02(1)—(4), unless otherwise noted. Source The provisions of this Chapter 639a adopted July 6, 2012, effective July 7, 2012, 42 Pa.B. 4320, unless otherwise noted. § 639a.1. Definitions. The following words and terms, when used in this chapter, have the following meanings, unless the context clearly indicates otherwise: Bet Wager—An additional wager that a player shall make if the player opts to remain in competition against the dealer after the player reviews his hand. Envy Bonus—An additional fixed sum payout made to a player who placed a Progressive Payout Wager when another player at the Caribbean Stud Poker table is the holder of an Envy Bonus Qualifying Hand. Envy Bonus Qualifying Hand—A player’s five-card Poker hand with a rank of a straight flush or better as defined in § 639a.6(b) (relating to Caribbean Stud Poker rankings).
  • Optimizing Returns in the Gaming Industry for Players and Operators of Video Poker Machines

    Optimizing Returns in the Gaming Industry for Players and Operators of Video Poker Machines

    Swinburne Research Bank http://researchbank.swinburne.edu.au Barnett, T., & Clarke, S. R. (2004). Optimizing returns in the gaming industry for players and operators of video poker machines. Originally published in Proceedings of the 2004 ACM SIGCHI International Conference on Advances in Computer Entertainment Technology (ACE 04), Singapore, 03–05 June 2004 (pp. 212–216). New York: ACM. Available from: http://doi.acm.org/10.1145/1067343.1067369 Copyright © ACM, 2004. The definitive version was published in Proceedings of ACE, (2004). This is the author’s version of the work, posted here with the permission of the publisher for your personal use. No further distribution is permitted. You may also be able to access the published version from your library. The definitive version is available at http://dl.acm.org/. Swinburne University of Technology | CRICOS Provider 00111D | swinburne.edu.au Optimizing Returns in the Gaming Industry for Players and Operators of Video Poker Machines∗ Tristan Barnett and Stephen R. Clarke Swinburne University PO Box 218, Hawthorn Victoria 3122, Australia [email protected] [email protected] ABSTRACT player. On the other hand, it could be argued the enter- Video Poker in Australia is on the verge of extinction. These tainment value of Video Poker machines is greater. They machines are being replaced in casinos as it is claimed they require some thought process from the player in deciding generate less money than the traditional slot machines. A which cards to hold on any hand. Optimal strategy de- brief outline of Video Poker is given and a method of calcu- pends on the various payouts, and while all the necessary lating the optimal strategies for any Video Poker machine information is available, the calculations are extremely diffi- is developed.
  • Caribbean Stud Poker Rules to Be Able to Play a Good Game, Naturally the Rules Must Be Learned

    Caribbean Stud Poker Rules to Be Able to Play a Good Game, Naturally the Rules Must Be Learned

    Caribbean Stud Poker Rules To be able to play a good game, naturally the rules must be learned. You can of course get the hang of it by simply playing trial and error, but that can cost you quite a profound sum of money in the end. So, let's be safe and understand what we're getting involved in and what the consequences can possibly be. Caribbean Stud Poker is a table game that many think of as a combination between poker and slot machines. The table is similar to that used to play blackjack and features a 5-card poker game comparable to Draw Poker, but no draw. If you are familiar with poker, you'll be able to see the differences, but the game will not be much easier to understand or play. It still has its own set of rules. The Caribbean Stud Poker rules are very simple and there really isn't any way to make mistakes as not much is left for you to decide on. The goal of the game is to get a better hand than the dealer, who must at least have an ace and a king in his hand. This rule alone makes Caribbean Stud Poker one of the most difficult games to win at, because the chances are so low. How to Begin: Like with all casino games, you start by exchanging your cash for chips. The amount depends on the kind of bettor you are and whether you make high or low bets. Depending on the sum you're exchanging, the dealer will automatically break down the chips to allow you to make bets that relate to your bankroll.