iGaming Initiating Coverage 30 November 2017
Two Kings and a Prince Sector iGaming
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 Analysts growth is slowing. Meanwhile, we acknowledge the long-term Lars-Ola Hellstrom opportunities (beyond our estimate horizon) with new markets such as +46 8 402 5277, [email protected] the US and Latin America. 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 Price (SEK) Rating Target FX (EURm) 17e 18e 19e 17e 18e 19e 17e 18e 19e 1m 3m 6m Evolution Gaming 570.0 Buy 800 EUR 2,070 34.2 27.7 23.7 30.6 24.6 20.8 11.5 8.6 7.0 -5 % 18 % 43 % Kambi 85.8 Buy 97 EUR 259 67.2 30.9 27.8 47.4 21.9 19.6 3.9 3.1 2.7 7 % 21 % -4 % NetEnt 60.7 Buy 70 SEK 1,471 25.4 21.5 19.1 22.5 19.0 16.7 8.4 7.2 6.3 -11 % -20 % -16 % Kindred 112.3 Buy 130 GBP 2,578 20.1 17.0 18.6 19.1 15.7 16.6 3.3 2.7 2.4 6 % 32 % 24 % Betsson 59.9 Hold 78 SEK 836 10.5 9.9 10.1 10.5 9.4 9.2 2.0 1.8 1.5 -10 % -19 % -26 % LeoVegas 83.3 Buy 90 EUR 838 37.5 19.3 16.7 33.9 16.7 13.9 3.9 2.5 2.0 3 % 23 % 55 % Mr Green 55.5 Buy 67 SEK 229 18.8 13.1 12.3 15.0 8.8 7.2 1.5 1.1 0.8 -3 % 13 % 41 % Cherry 44.8 Buy 63 SEK 447 45.7 16.0 13.7 20.6 12.2 9.8 2.5 2.1 1.7 -21 % -10 % -24 % Catena Media 87.5 Buy 118 EUR 459 18.2 14.8 13.0 18.1 13.1 11.5 8.3 6.3 5.5 16 % -1 % -13 % Aspire Global 38.4 Buy 41 EUR 180 14.8 14.8 12.4 12.4 11.3 9.1 2.2 1.7 1.4 13 % -1 % nmf * Multiples based on FactSet consensus
Please refer to importantThis disclosuresreport is generated on thefor Viktor last Högberg 5 pages of this document iGaming Initiating Coverage
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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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 Virtual slot machines are the main online casino product and are offered by most as slots, Roulette, Baccarat and operators. There are thousands of slots, one of the largest and most well-known Black Jack 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 Sports betting has been around for centuries and the segment migrated online volatile than casino margins, but early. Bookmakers with a legacy of land-based betting shops and pure online the market is larger 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 Research firm H2 Gambling Capital (H2GC) estimates* that in 2016, the total market was worth EUR 346bn, of market size (revenue from all products** and white and grey markets***) of which ~12% is online 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 Betting Casino Poker Lotteries Other Betting Casino Machines Bingo Lotteries 8.0 EURbn 5.8 EURbn 1.4 EURbn 2.3 EURbn 1.9 EURbn 9.4 EURbn 8.4 EURbn 29.1 EURbn 1.9 EURbn 31.1 EURbn Source: Pareto, H2 Gambling Capital November 2017
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European online penetration of In 2016, Europe accounted for ~28% of the world’s gambling. Around 20% of sports betting and casino is 46% the European gambling was online, representing ~51% of the world’s online and 41% respectively 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.
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 With a European online gambling market of EUR 19.4bn in 2016 representing world´s online gambling 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 Europe online betting CAGR 2016- the next few years. The land-based, offline market is expected to remain the 2021 is expected to be 7.5% and same size while online will take market share. The total European betting online casino 7.8% 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%.
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
In 2018, online betting in Europe is Online penetration has been fast over the past decade, with casino trailing expected to surpass offline betting 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%.
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, Below are the expected growth rates (CAGRs) between 2016 and 2022 for online online betting and casino in betting and online casino, sorted by the highest to lowest online casino CAGR. Europe are expected to continue to What is clear is that the two verticals have some different dynamics. The average grow fast growth rate among the countries in casino is expected to be 7.0%, while betting is expected to grow faster, at an average of 7.5% (note that these figures are not market size weighted). The countries growing the fastest are also among the smallest, such as some Baltic countries. With the recent regulatory updates, the Czech Republic market has seen a number of operators leaving, which could be a reason for the expected negative CAGR in betting.
Some key markets that stand out are the Netherlands, where sports betting is expected to grow by 11%, putting Kindred in pole position in this market. It should be noted that the Netherlands is about to regulate its market, and the proposed tax rate would be among the highest in Europe, at 29% (+ 1.75% licencing fee). Online casino in the Netherlands is expected to grow at a 10% CAGR. In the UK, an important market for virtually all operators, online casino is expected to grow by 9% and sports betting by 8%. Swedish online betting is expected to grow 7% and casino 10%. Italian sports betting is expected to grow 8% and casino 3%.
European CAGRs 2016-2022E – online sports betting vs online casino (sorted by highest to lowest online casino growth rates)
Source: Pareto, H2 Gambling Capital November 2017
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Live casino is expected to take market share from RNG games Splitting the online casino market into live casino and RNG games (Random Number Generated games, such as slots), it is clear that live casino is growing the fastest and it is expected to take market share. In Europe, live casino is expected to grow by a CAGR of 16% through to 2022, with RNG games growing by 4%. In 2016, live casino was 24% of the European market and by 2022 it’s expected to have grown to 38%. Live casino is already huge in Asia and is only expected to grow further, at the expense of RNG games.
Live vs RNG (slots) market share and expected growth CAGRs through to 2022E
Source: Pareto, H2 Gambling Capital November 2017
Live casino vs RNG (slots) GGR (EURm) per market
Source: Pareto, H2 Gambling Capital November 2017
The United States is slowly opening up – a long-term opportunity? At the moment, only Nevada, New Jersey and Delaware accept online gambling, but Pennsylvania recently approved its online gambling bill. Evolution Gaming has undergone the first stage of approval (“transactional waiver”) for a licence in New Jersey (NetEnt already has this transactional waiver) and is currently in the process of evaluating whether to go ahead and build a studio or not in the state. Both New Jersey and Pennsylvania are expected to grow considerably in the coming years, according to H2GC. New Jersey is expected to grow by a 14% CAGR, reaching USD 429m in GGR by 2022, and Pennsylvania is expected to grow by a 40% CAGR, reaching USD 330m in GGR by 2022. The interactive tax rate in New Jersey is 15% of GGR (higher than land based at 8% GGR tax + 1% licensing fee) and operators need land-based operations to hold a licence. The interactive tax rate in Pennsylvania is set at 54% for slot revenue and 16% for table games (including live casino, we assume). A 54% tax rate is unattractively high and will most likely hamper the market size for slot games in Pennsylvania. 16% for table games is on the other hand more attractive and speaks in favour of live casino if it is included in the table games category. There is only limited
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information available on Pennsylvania but it is rumoured that a total of ten operators' licences will be handed out. As New Jersey and Pennsylvania have a combined population of ~17m, i.e. less than the Netherlands, the short-term effects should not be overstated, especially since casino players need to get used to playing online. Over the long term the US market offers an appealing market potential if other US states open up as land-based casino revenue in North America represented about ~50% of total global casino revenue in 2016, according to H2GC.
New Jersey and Pennsylvania – strong growth expected
Source: Pareto, H2 Gambling Capital November 2017
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Regulatory overview In (re)regulated markets, only licensed operators are allowed Regulation is decided at a national Although the majority of the world’s gambling is done offline, this dynamic is level about to change with rising online penetration. And since the business model of most operators is to offer online gambling internationally, most governments have seen tax revenues diminish as international competition has driven revenues online. The largest online products are betting and casino and often state monopolies have exclusive rights to the lottery vertical. At the moment, not all European countries are regulated, complicating the compliance process for operators and suppliers.
Generally the tax rate is based on gross gaming revenue, GGR, which is the The tax rate is often based on gross amount of player bets, minus player wins. Complicating the matter GGR, which is player bets minus further, operators report NGR (net gaming revenue) as their net sales. NGR is wins GGR less bonus costs. The tax rate affects the operators’ cost of sales (CoS) in the P&L. Since suppliers such as Evolution Gaming, NetEnt and Kambi often derive their revenue from a royalty rate on NGR after tax deductions, regulations and subsequent taxation weighs on supplier growth rates. Some countries, such as France, base some of their tax rates on turnover, i.e. betting stakes (not adjusted for wins).
Tax regime must be balanced with regards to channelisation With more countries regulating, As more and more countries regulate gambling, the gambling taxes, or betting betting duty spend will increase duties, paid by gambling companies will rise. When regulating online gambling, the gambling tax rate has to be balanced with regards to channelisation (i.e. gambling done within the regulation regime as a share of the total gambling). Channelisation is inversely correlated with the tax rate. A higher tax rate could result in some operators still operating “illegally”, with margins not impacted by the tax and thus they are able to offer more competitive products than licensed operators. As seen in the chart below, a high tax rate yields low channelisation, with France being an example of a botched regulation from a channelisation perspective. This is further exemplified with the case that a higher betting duty tends to deter operators applying for licences.
Higher tax rate means lower channelisation
Source: Pareto, Copenhagen Economics' study for BOS
Difference between regulated and non-regulated jurisdictions Regulation differs between Regulation differs widely among countries and regions, which is why it is hard to countries, but the common factor say what a regulated market means for operators and suppliers. However, what is that gambling is taxed the regulations have in common is that gambling done within the jurisdiction is taxed. The different kinds of markets can be described as the following: a white market is where the operator is licensed in the same jurisdiction as the player is located. When the operator is licensed but in a different jurisdiction than the
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player it is called a grey market. A dark grey market is where gambling is prohibited but an operator with an international licence can target the market regardless. A black market is where the operator is not licensed and legislation prohibits gambling. Typically in a regulated jurisdiction, only licensed operators are allowed to target the market although some jurisdictions tolerate unlicensed operators targeting customers. In some instances targeting is allowed, even though the governments are mandated to block payments and to ISP block unlicensed operators, such as in Denmark, although not all countries enact the ISP blocking possibilities.
The inherent cross-border dynamics of online gambling make questions The inherent cross-border regarding jurisdiction and laws complicated. On the one hand, countries claim dynamics of online gambling make jurisdiction and want their laws abided with, while on the other hand, members questions regarding jurisdiction of the EEA (European Economic Area) all agree on the free movement of goods and applicable laws complicated and services. Below we have plotted the licences held by the largest Swedish operators and suppliers. Licences from Malta, Gibraltar and Alderney can be seen as being somewhat international. The Maltese licence is especially preferred among operators and this small island country is home to a large number of gambling companies.
Licences and certifications held by Swedish operators and suppliers Operators Suppliers Evolution Yggdrasil Aspire Kindred Betsson Cherry Mr Green LeoVegas Gaming NetEnt Kambi (Cherry) Global Malta Malta Malta Malta Malta Malta Malta Malta Malta Malta International Gibraltar Gibraltar Gibraltar license Alderney Alderney Alderney UK UK UK UK UK UK UK UK UK UK Denmark Denmark Denmark Denmark Denmark Denmark Denmark Italy Italy Italy Italy Italy Italy Spain Spain Spain Spain France Belgium Belgium Belgium Belgium Schleswig- Schleswig- Holstein Holstein Georgia Curacao Lithuania Latvia Latvia National Estonia Estonia Estonia license/ Ireland Ireland Ireland Ireland Certification Romania Romania Romania Sweden (restaurant- casino) New Jersey New Jersey Australia Portugal (through partner) Bulgaria Serbia British British Colombia Colombia Mexico Source: Pareto, company presentations and reports
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European average tax rate By 2020, the tax rate environment As more and more countries regulate, the betting duties paid by gambling will be considerably higher than companies will rise. In recent years, Denmark and the UK have reregulated their today markets. Sweden and the Netherlands await regulation in the next few years, while near-term regulation in Norway and Finland seems unlikely. In the following chart we have plotted a rough timeline showing the market size weighted average tax rate in the 28 EU countries. As can be seen, the market size weighted tax rate is expected to be substantially higher by 2020 at ~19.7%, explained partly by Sweden and the Netherlands regulating. Included in this are some countries such as Austria, which is not regulated but still taxed. We have also included VAT taxes when applicable. The below timeline should be viewed as a rough estimate.
It should be noted that this is the average tax rate over all 28 EU countries, and that these high levels are not yet being seen by the Swedish operators.
Average gambling tax rate in Europe
Source: Pareto, H2 Gambling Capital
Regulatory situation in core markets The Nordic-facing operators’ core markets are of course the Nordics, the UK, the Netherlands and the rest of Europe, but also Australia. The United States and Asia is generally off limits.
Sweden Sweden is set to regulate and first The Swedish gambling market is set to regulate by 2019 and an inquiry into the licences are expected in 2019 with regulation was presented in spring 2017. At the moment, state-owned monopoly a tax rate of 18% Svenska Spel is the sole licence-holder for lotteries, casinos and sports betting, though it is not able to offer online casino games such as slots. ATG (Aktiebolaget Trav & Galopp) is not state-owned, although it is state-controlled since part of the Board (including the Chairman of the Board) has been appointed by the government and holds the current monopoly on horse race betting. Non-profit, public interest organisations (Allmännyttan) have had the exclusive right (together with the state) to arrange lotteries, a dynamic that is set to continue. However, in spite of the historical monopoly, foreign operators have targeted the Swedish market and have a strong foothold. The Swedish gambling authority Lotteriinspektionen estimates that unlicensed operators had a market share of 25% in Q3 2017 (including both online and offline gambling).
The industry has been largely In 2015, an inquiry into how to regulate the market was commissioned by the positive towards the proposed government and the results were presented in March 2017. The inquiry proposed regulation a licensing system with a uniform 18% GGR tax rate, no product or price limitations, and the industry has been largely positive towards the proposals.
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Main findings by the inquiry into the Swedish gambling market Fair tax rate. The proposed tax rate of 18% will most likely be accepted by the industry. The tax base is gross gaming revenue (GGR = gross amount of bets, minus wins; operators report NGR (net gaming revenue) as their net sales; NGR is GGR less bonus costs). Price regulation/licences. No product price limits (i.e. game payout level limit) are proposed, which was in line with industry expectations. Operators and suppliers will need licences, as expected. Product/payment/internet regulation. All gambling products seem to be included, which is imperative for compliance. No ISP blocks but payment method restrictions have been proposed. Timeline. Although intended to be earlier, it seems likely that the first licences will be handed out mid-2019 (with first taxes paid then).
Proposed licensing system, to be enforced by 2019
Svenska Spel Non-profit sector Game type License (exclusive/shared rights) All (exclusive/shared rights) Landbased casinos State gambling X Token gaming machines State gambling X Lottery (inc. Scratch cards) online State gambling/public interests (non-profit) X X Lottery (inc. Scratch cards) landbased State gambling/public interests (non-profit) X X Lottery in the form of additional games Online X Lottery (addt. Games/ to decide interrupted bets) Betting X Bingo landbased Public interests (non-profit) X Bingo online Online X Local pool gambling on horses Public interests (non-profit) X Casino online Online X Computer simulated machines online Online X Sportsbetting online Betting X Sportsbetting landbased Betting X Sportsbetting horses online Betting X Sportsbetting horses landbased Betting X Other betting online Betting X Other betting landbased Betting X Landbased commercial casino games Landbased commercial X Landbased commercial goods gaming machines Landbased commercial X Landbased commercial card tournaments Landbased commercial X Gambling on vessels in international traffic - casino Games on vessels in international traffic X Gambling on vessels in international traffic - VLT:s Games on vessels in international traffic X Source: Pareto, SOU 2017:30
The member companies of the Swedish Trade Association for Online Gambling (BOS) together with the Swedish monopoly companies have a ~90% market share, which means that a reasonable tax rate (i.e. low) would yield ~90% channelisation, in line with the inquiry´s target channelisation level.
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Copenhagen Economics' estimated market shares (stakes) 2016
BOS member companies together with monopoly companies should make up ~90% channelisation
Source: Pareto, Copenhagen Economics' study for BOS
Denmark Denmark was regulated in 2012 The Danish market was regulated on 1 January 2012, and imposes a uniform and imposes a uniform 20% GGR GGR tax rate of 20% for online casino, sports betting and poker. Land-based tax rate casinos and gaming machines are taxed at higher rates. Through ISP blocking, payment blocking (not utilised from what we gather) and prohibiting advertising from unlicensed players, Denmark achieves a high channelisation rate (88% in 2015).
The government still runs Dantoto (horseracing) and Danske Spil (Lotteries and Bingo), which is made up of two companies, Danske Licens Spil A/S and Danske Lotteri Spil A/S. The former openly competes with private companies within sports betting, casino and poker and the latter has the monopoly of lottery products. In 2018 horse racing and Bingo will open up for competition outside of the monopoly. There have been political discussions about privatising Danske Licens Spil. As of May 2017, 27 pure online casino licences and 16 pure sports betting licences had been handed out.
United Kingdom and Ireland
The UK reregulated in 2014, The UK has worked with its regulation over a period of time and in 2007 a new imposing a 15% GGR tax rate on Act was presented and the Gambling Commission was formed. The Gambling all types of games Act 2014 (Licensing and Advertising) was implemented from 1 November 2014. In short, all participants, both operators and game suppliers who want to offer online games to British consumers or market their games in the UK, need a licence. This applies no matter where the game is based. The UK applies a flat tax rate of 15% of GGR for all types of games. Allowed online games encompass sports betting, horse race betting, odds trading, casino games, poker, gaming machines, bingo and various lotteries. Pool games with other countries are allowed if the gambling companies are located in the UK or another EEA
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country. As of 2015 there were 719 outstanding licences for the UK market. Free bets have just begun to be taxed in the UK, which means that bonus rounds are no longer exempt from betting duties.
In Ireland, all gambling products are legal and there is a 1% turnover tax on sports betting. The government holds the lottery monopoly with Irish Lotto.
Italy Italy allows all products and taxes The Italian market has been regulated in steps with betting allowed in 2007 and casino at 20% of GGR and sports casino since 2011. All product verticals are legal but only EU-based operators betting at 2-5% of turnover are eligible for licences. Casino is taxed at 20% of GGR and fixed odds bets are taxed at 2-5% of turnover.
France
In France online casino is The French market, regulated in 2010, is special and regarded by many in the prohibited and sports betting industry as complicated. Online casino, spread betting, betting exchanges and taxes are high virtual games are illegal. Sports betting, horse race betting and poker are allowed. The licences are valid for five years. There are also some restrictions on how to arrange the horse race betting pools. The land-based monopolies are held by Pari Mutuel Urbain (PMU) for horse racing and La Française des Jeux (FDJ) for lottery and fixed odds sports betting, which means that sports betting is not monopoly-only. The French regulation has a number of complicated taxation schemes. For example, sports betting is taxed based on stakes (bet turnover), and not GGR. The turnover tax is set at 8.5% while the payout ratios are capped at 80-85%, implying 15-20% sportsbook margins (for comparison, in normal markets, sportsbook margins are ~6.5-7.0%). The GGR-equivalent tax rate on sports betting is above 50%. Since not all verticals are allowed and the tax rates are high and complicated, some companies have exited the market and France is not targeted by all operators. Of the Swedish operators, most notably Kindred through Unibet.fr is active in the market through a proprietary platform (not Kambi).
The Netherlands The Netherlands is set to regulate The regulatory situation in the Netherlands is about to change but at the at the earliest in 2019 with a moment there is a monopoly situation. There have long been discussions about proposed 29% GGR tax rate regulating the Dutch market and the issue is on the political agenda but has been postponed several times. The proposed tax rate seems to be 29% of GGR and would be imposed at the earliest in 2019, although nothing has been decided yet and some industry players expect it to be delayed, possibly into 2020. The Dutch market is still targeted by foreign operators, but with regards the imminent regulation, many operators have decided to cut down on marketing so as not to jeopardise a future licence.
Germany In Germany only Schleswig- In Germany there is an Interstate Treaty on Gambling which has been found to Holstein allows online gambling be in breach of EU law, partly because of the limit of just 20 sports betting licences. Gambling is further regulated at a regional level but currently only Schleswig-Holstein allows it (casino, sports betting, poker and exchange betting). Under the Interstate Treaty, sports betting is taxed at 5% of turnover. Schleswig-Holstein imposes a 20% GGR tax rate. In addition to this, Germany imposes 19% VAT.
Spain Spain tax online gambling at 25% The Spanish market is regulated and in 2012 foreign operators began to be of GGR awarded licences, although from what we understand the tax rate and regulation have been met with some opposition from the industry over the years. Spain imposes a 25% GGR tax on both sports betting and casino.
30 Nov 2017 Pareto Securities Research 16(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
Belgium Belgium requires foreign operators In Belgium a foreign operator needs to liaise with a local partner that holds a to liaise with a partner that has a land-based licence in order to be able to offer its products, and there is a cap on land-based licence the number of land-based licence holders. Lottery games are held by the state monopoly. In Belgium both sports betting and casino are taxed at 11% of GGR plus an additional 21% VAT.
Norway and Finland
Norway and Finland are not Both the Norwegian and Finnish markets are officially off limits for foreign regulated and are not expected to operators, but are still targeted by unlicensed operators. In Norway state- be in the foreseeable future owned Norsk Rikstoto and Norsk Tipping have monopolies on horse racing, lotteries and sports betting. Restrictions on marketing and payment methods make the Norwegian market somewhat tricky to navigate. In Finland all verticals are held by the monopoly. 1 January 2017 the three monopolies Fintoto (horseracing), Veikkaus (sports betting, lottery and bingo) and RAY (casino and poker) merged under the Veikkaus brand. Despite the monopolistic markets, foreign operators do offer both casino and sports betting in these markets. Betsson brand NordicBet won Norwegian Bookie of the Year at the 2017 eGaming Review Nordic Awards.
Malta With thorough regulations and low betting duties and corporate and income Malta is the base of many taxes Malta has emerged as the global capital of online gambling. The Maltese gambling companies due to the licensing system with four different licences (about to become simpler) enables favourable regulatory situation operators and suppliers alike to target offshore markets utilising EEA rules. Malta imposes a 0.5% tax rate, although it is capped at EUR 466k per year. The Maltese domestic gambling market is of no size and not a core market for operators, albeit operators are located on the island.
Gibraltar and to some extent Alderney and Curaçao have similar systems as Malta, yielding a somewhat international licence status although not to the same magnitude. With Brexit ahead, the situation in Gibraltar is a bit unclear, although affected operators do not seem worried.
Baltics The Baltic countries accept online In 2010, Estonia started licensing local operators and servers must be located in gambling although some countries the country. All products are taxed at 5% of GGR. In Lithuania the state has the blacklist unlicensed operators exclusive licence for online lottery games and the gambling authority is allowed to block both payments and sites. Sports betting is taxed at 15% of GGR and casino at 12%. In Latvia there is a uniform online gambling tax rate of 5% of GGR.
United States and Canada
United States and Canada regulate In the United States gambling is regulated at both state and federal levels and at a state level but only a few at the moment only Nevada, New Jersey and to some extent Delaware allow states allow online gambling some gambling products, with more states also allowing Daily Fantasy Sports. Pennsylvania just amended its online gambling bill and will be awarding casino licences. In Nevada the gross win tax rate is 6.75%, in New Jersey 15% and in Pennsylvania the tax rate for slot games 54% and for table games (including live casino we assume) 16% . Some states look as though they will be opening up in the coming years though, with rumours of states such as New York, Michigan and California considering regulating.
As in the US, the regulatory situation in Canada is on a state-by-state basis and foreign unlicensed operators target the market.
30 Nov 2017 Pareto Securities Research 17(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
Australia Australia only allows sports In Australia casino is prohibited and only sports betting is permitted. betting if the operator is licensed Commercial operators need a licence to offer sports betting but unlicensed operators still target the market. The tax regime is complicated with different taxes for different regions and products (horse racing is taxed at around 2-3% of turnover). In-play advertising during sports events was recently prohibited.
South America Mexico is regulated and Kambi has just gone live in the country with a partner, and NetEnt has signed two partners in the country. Colombia formally approved online gambling in October 2016 and operators need a land-based presence to be able to offer sports betting, gaming and poker. Slots are taxed at 12% of GGR. Colombia enforces IP and payment blocks, as far as we understand it. We also gather that the country is considering regulating live casino. Kambi is live in Colombia through Corredor Empresarial. Brazil has not regulated its online gambling yet. In Argentina the smaller provincial lotteries hold the monopoly on gambling as there is no licensing system for offshore operators. In Chile online gambling is not expressly prohibited but licences are only awarded to local players.
Asia Japan does not allow online gambling and is in the process of reviewing land- based casinos, we understand. However, the market is targeted by offshore operators. In general, European operators tend to stay away from the Chinese market.
Addressable market summary Online market Penetration rates (2016) Online split (2016) CAGR 2016-2022 Regulated size, EURm Online* Mobile** Betting Casino Other Betting Casino Australia Yes 2,274 14 % 40 % 61 % 21 % 18 % 5 % 6 % Austria No 279 23 % 35 % 58 % 24 % 18 % 4 % 4 % Belgium Yes 422 27 % 27 % 32 % 26 % 42 % 10 % 7 % Czech Republic Yes 287 18 % 30 % 78 % 13 % 9 % -7 % 7 % Denmark Yes 557 45 % 38 % 35 % 38 % 27 % 6 % 4 % Estonia Yes 32 22 % 24 % 47 % 39 % 14 % 14 % 3 % Finland No 746 37 % 34 % 27 % 19 % 53 % 8 % 7 % France Yes 1,373 14 % 37 % 50 % 18 % 32 % 5 % 12 % Germany Yes 1,830 14 % 37 % 52 % 17 % 31 % 7 % 1 % Hungary Yes 86 15 % 24 % 48 % 12 % 39 % 10 % 4 % Ireland Yes 907 45 % 32 % 30 % 32 % 37 % 5 % 3 % Italy Yes 1,196 6 % 29 % 35 % 45 % 20 % 8 % 3 % Latvia Yes 40 15 % 19 % 50 % 38 % 12 % 13 % 14 % Lithuania Yes 27 19 % 29 % 73 % 18 % 8 % 7 % 17 % Malta Yes 8 9 % 34 % 82 % 14 % 4 % 10 % 5 % Netherlands 2019e 280 11 % 38 % 39 % 25 % 36 % 11 % 10 % Norway No 622 43 % 30 % 38 % 23 % 40 % 9 % 6 % Poland Yes 180 16 % 23 % 46 % 41 % 13 % 8 % 2 % Portugal Yes 152 9 % 35 % 49 % 19 % 32 % 11 % 18 % Romania Yes 77 9 % 20 % 59 % 31 % 10 % 9 % 5 % Slovak Republic Yes 187 30 % 32 % 75 % 19 % 5 % 10 % 6 % Slovenia Yes 78 17 % 24 % 37 % 44 % 18 % 5 % 1 % Spain Yes 686 8 % 33 % 48 % 27 % 25 % 8 % 5 % Sweden 2019e 932 41 % 38 % 55 % 20 % 25 % 7 % 10 % United Kingdom Yes 6,182 38 % 35 % 38 % 42 % 19 % 8 % 9 % US - New Jersey Yes 243 7 % n.a. 15 % 73 % 12 % 2 % 14 % US - Pennsylvania*** Yes 207 7 % n.a. n.a. n.a. n.a. 12 % * Online = Onshore (operator and player in same country) and offshore (foreign operator) gambling ** Mobile, as % of online gambling *** Data for 2018E, H2GC estimates Source: Pareto, H2 Gambling Capital November 2017
30 Nov 2017 Pareto Securities Research 18(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
So what happened when others regulated? Profitability and willingness to adhere to the licensing regime are all dependent on the tax rate. The (re)regulations of Denmark and the UK are often referred to as being successful regarding channelisation. The regulation in France on the other hand failed to gain a high channelisation level (52% in 2015), apparently because of limited products (online casino is prohibited) and high tax rates of above 50%. The UK tax rate was set at 15% and the channelisation was 95% in 2015. Denmark has achieved a channelisation level of 88% with a 20% tax rate. What has become clear is that the tax rate and channelisation level are inversely correlated, with a high tax rate defeating its own purpose.
Regulation implications on the value chain Operators Regulation increases the Compliance costs will rise with an increased focus on anti-money laundering compliance burden for operators (AML), know your customer (KYC), suspicious activity, fraud etc. One of the key reasons for regulating is to ensure player safety and to promote self-helping plans for problem players. At the end of the day, in most jurisdictions it is the operator that pays the taxes to the respective tax authority, but this does not mean that they bear the full tax burden.
Suppliers Game suppliers will have to take Operators pay the game supplier a revenue share of around 8-12% of NGR for on some of the tax burden slots (up to 15% for live casino) while sportsbook suppliers charge 10-20%, hitting the operators’ gross margin by roughly the same amounts. In some jurisdictions suppliers need their own licence while in others not, but the tax burden will be shared with the suppliers. This group of companies’ margins are almost twice as high as those of the operators, with the Swedish suppliers NetEnt and Evolution Gaming having respective EBIT margins of 37% and 30% for 2016.
Affiliate companies will also have Since the affiliate channel is such a large customer acquisition tool for operators to take on some of the tax burden (in some markets up to 40% of traffic comes from affiliates) the relationship – the reliance on affiliates could go between operators and affiliates is important. The two main revenue models down in a regulated environment for affiliates are revenue share and upfront payments, with the former being more cash efficient for operators, while potentially hitting margins long term (some revenue shares are 25-50% of the NGR). Affiliate companies will also have to take on some of the tax burden – the reliance on affiliates could go down in a regulated environment.
Players Although we do not know the strategies for tax cost absorption by the respective operators we assume some operators will try to push part of the tax burden onto the players, while some operators will try to avoid this.
Regulated share of revenue During the next 2-3 years the Most of the operators are already paying betting duties as they operate and are regulated revenue of operators licensed in regulated markets. To name a few operators' regulated share of will rise dramatically revenues as per Q3 2017, Kindred was at 41%, Betsson 25% and LeoVegas 25%. With Sweden and the Netherlands regulating, we expect these figures to be considerably higher in a couple of years.
30 Nov 2017 Pareto Securities Research 19(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
Peer table based on FactSet consensus
Peer group comparison
MCAP EV EV/Sales P/E EV/EBIT Sales EBIT EBIT margin Company name Country Platform (EURm) (EURm) 17e 18e 19e 17e 18e 19e 17e 18e 19e CAGR 2016-2019E 17e Nordic operators Betsson AB Sweden Operator 836 979 2.0 1.8 1.5 10.5 9.9 10.1 10.5 9.4 9.2 11 % 0 % 19 % Kindred Group Plc Malta Operator 2,578 2,698 3.3 2.7 2.4 20.1 17.0 18.6 19.1 15.7 16.6 21 % 11 % 17 % LeoVegas AB Sweden Operator 838 784 3.9 2.5 2.0 37.5 19.3 16.7 33.9 16.7 13.9 43 % 53 % 11 % Cherry AB Sweden Operator 447 621 2.5 2.1 1.7 45.7 16.0 13.7 20.6 12.2 9.8 40 % 67 % 12 % Mr Green & Co. AB Sweden Operator 229 170 1.5 1.1 0.8 18.8 13.1 12.3 15.0 8.8 7.2 20 % 115 % 10 % Average 2.7 2.0 1.7 26.5 15.1 14.3 19.8 12.6 11.3 27 % 49 % 14 %
International 888 Holdings Plc Gibraltar Operator 1,040 904 2.0 1.7 1.6 19.0 17.1 15.6 14.6 12.3 10.7 5 % 10 % 14 % GVC Holdings Plc Isle Of Man Operator 3,094 3,063 3.2 3.1 2.8 16.3 14.8 13.5 13.7 12.3 10.7 9 % 18 % 24 % The Intertain Group Ltd. Canada Operator 187 1,049 1.7 1.4 1.0 8.8 7.5 6.6 4.8 4.0 3.1 10 % 33 % 35 % Ladbrokes Coral Group Plc United Kingdom Operator 2,849 4,078 1.5 1.4 1.3 11.5 8.7 8.1 11.3 8.8 8.1 21 % 42 % 13 % Paddy Power Betfair Plc Ireland Operator 8,163 8,011 4.1 3.6 3.2 22.2 19.4 17.8 18.2 15.4 13.2 9 % 14 % 22 % Rank Group Plc United Kingdom Operator 1,045 1,064 1.4 1.2 1.1 15.5 15.3 14.4 11.7 11.4 10.5 4 % 1 % 12 % Stride Gaming Plc Jersey Operator 202 162 2.0 1.7 1.5 9.7 12.0 9.9 9.1 10.0 7.7 33 % 25 % 22 % Tabcorp Holdings Ltd. Australia Operator 2,604 3,442 2.5 2.3 2.2 22.7 25.5 20.7 17.4 16.5 14.6 4 % 4 % 14 % William Hill Plc United Kingdom Operator 2,766 3,331 1.8 1.6 1.5 12.5 11.6 11.3 11.2 10.2 9.8 5 % 3 % 16 % The Stars Group, Inc. Canada Operator 2,770 6,243 4.1 3.5 2.9 9.8 9.2 8.6 8.6 7.3 6.3 7 % 25 % 47 % bet-at-home.com AG Germany Operator 716 623 4.8 4.3 3.9 21.5 18.4 16.4 17.5 14.6 13.0 9 % 13 % 27 % Jackpotjoy plc United Kingdom Operator 710 1,048 3.2 2.8 2.4 8.9 7.5 6.8 16.7 12.1 10.3 10 % 21 % 19 % Average 2.4 2.2 1.9 14.8 14.1 12.7 12.1 10.8 9.5 11 % 18 % 22 %
Game suppliers/platform Aspire Global plc Malta Supplier 180 180 2.2 1.7 1.4 14.8 14.8 12.4 12.4 11.3 9.1 19 % 14 % 18 % Kambi Group Plc Malta Supplier 259 235 3.9 3.1 2.7 67.2 30.9 27.8 47.4 21.9 19.6 16 % 10 % 8 % NetEnt AB Sweden Supplier 1,471 1,451 8.4 7.2 6.3 25.4 21.5 19.1 22.5 19.0 16.7 14 % 15 % 37 % Evolution Gaming Sweden Supplier 2,070 2,060 11.5 8.6 7.0 34.2 27.7 23.7 30.6 24.6 20.8 37 % 42 % 37 % Gaming Innovation Group Norway Supplier 431 470 4.1 2.6 1.9 nmf 12.4 8.6 149 11.9 7.4 60 % 140 % 3 % Scientific Games Corp. United States Supplier 3,909 10,560 4.1 3.9 3.6 n.a. n.a. 64.3 29.2 23.9 20.5 5 % 65 % 14 % Playtech Plc Isle Of Man Supplier 2,970 3,267 3.2 2.8 2.4 12.4 11.2 10.2 9.7 8.4 6.9 14 % 15 % 33 % International Game TechnologyUnited Plc States Supplier 4,713 10,742 2.7 2.7 2.6 21.9 19.5 17.8 n.a. 19.7 17.4 -1 % 4 % -1 % INTRALOT SA Greece Supplier 169 740 0.5 0.5 0.5 n.a. n.a. n.a. 8.7 8.4 7.5 2 % nmf 6 % XLMedia Plc Jersey Affiliate 451 407 3.6 3.2 2.7 17.2 15.5 14.1 12.1 11.3 9.9 14 % 12 % 30 % Catena Media plc Malta Affiliate 459 541 8.3 6.3 5.5 18.2 14.8 13.0 18.1 13.1 11.5 38 % 35 % 46 % Average 5.0 4.1 3.5 28.1 19.2 22.1 36.4 16.2 13.8 20 % 38 % 21 % Source: FactSet
30 Nov 2017 Pareto Securities Research 20(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
Evolution Gaming – The King of Live
We initiate coverage of Evolution Gaming with a Buy recommendation and target price of 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 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.
We expect Evolution Gaming to report a revenue CAGR of 23.3% and EBIT CAGR of 25% over the period 2017-2020E, supported by around a 16% CAGR for the European live casino market according to H2GC and geographical expansion. The expected market growth for live casino is supported by its relative attractiveness as its share of total casino will soar at the expense of RNG games.
In contrast to FactSet consensus we expect EBIT margins to remain high and increase slightly as we expect commission-based revenue growth to scale on costs and a major North American expansion, while possibly margin dilutive, is not likely to have a material impact before the end of the forecast period.
Trading at a 2018E EV/EBIT and PEG of 0.82x and 22.1x we find Evolution Gaming attractively priced given its strong position and expected growth. Our target price of SEK 800 represents 25x EV/EBIT 2019E, which is slightly below the historical average NTM EV/EBIT, and a 2018E PEG of 1.15x, both of which are supported by a DCF value of SEK 788 per share.
Key figures
Source: Pareto, company data
Key risks Risks to our investment case include lower-than-expected growth for the live casino segment; competitors catching up with Evolution Gaming, causing its market share to fall; higher price pressure and higher costs than those captured in our estimates; and possible mix effects. It should be noted that Evolution Gaming is a quiet, “secret” company that only provides a few KPIs in addition to its quarterly financial statements, making the estimate risk higher.
30 Nov 2017 Pareto Securities Research 21(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
Company description Short company history Founded in 2006, Evolution Evolution Gaming was founded in 2006 by Jens von Bahr, Fredrik Österberg and Gaming is the leading live casino Richard Hadida, and is currently the leading live casino provider in the European provider in the European iGaming iGaming market with some 100+ B2B customers, including several well-known market, with an estimated market tier 1 operators, giving it an estimated market share of ~55% in 2017. Live share of ~55% in 2017 casino, which is interactive casino table games with real dealers streamed over the internet, has been one of the fastest-growing segments within the European online casino vertical over the past decade and Evolution Gaming has been the dominant player, followed by its main competitor Playtech.
In contrast to most competitors, Evolution Gaming focuses solely on live casino and B2B operations by providing online gambling operators and land-based casinos with software and hardware solutions to enable live casino games to be streamed over the internet in HD quality and played on all platforms (desktop, mobile, tablet and TV). Evolution Gaming is highly rated among its customers and it has been awarded the EGR B2B Live Casino Award eight out of eight times since the award was first handed out in 2010.
The company is an early mover in Before Evolution Gaming started up in 2006 live casino had become popular in the European live casino market Asia but it hadn´t gained much ground in Europe as no provider was offering the product and it also hadn´t been feasible for a long time as live casino in HD required an increased bandwidth. Since its start, Evolution Gaming has been an early mover in the European live casino market, usually being the first live casino provider to establish it in newly regulated markets, introducing new games as well as adapting its game products to most platforms and introducing technical solutions (Dual Play) to enable land-based casinos to get online. Evolution Gaming has been growing fast, at a CAGR of 58% since 2008, reaching EUR 115m in revenue in 2016 with an EBITDA margin of 38.6%. Evolution Gaming was floated on Stockholm Nasdaq First North on 20 March 2015 and moved to the Stockholm Nasdaq main list on 7 June 2017.
Over the next few pages we describe Evolution Gaming's organisational set-up and operations, financial goals, business model, business strategy, product offering and some of its customers.
Organisational set-up and operations Present in 11 countries At present, Evolution Gaming has a physical presence in 11 countries with Riga, Latvia and Luqa, Malta the main hubs as this is where its two main production studios are based, operating 24/7 all year round.
Studios The Riga studio can host ~250 live The Riga studio was where it actually all started in 2006 and the studio has been casino tables expanded several times as demand for live casino tables has been very strong; the studio was last expanded in 2015. Due to strong demand Evolution decided to acquire the 10,800 sqm Riga premises in 2015, which today is estimated by Pareto to be able to host ~250 live casino tables, mostly with English-speaking dealers.
The Malta studio is home to The Malta studio was built in 2013-14 and went live in Q1 2014, and it is home Evolution's international dealer to Evolution’s international dealer teams, providing native-speaking dealer live teams casino tables for operators and their end customers. Evolution Gaming targets a third large production studio in Tbilisi, Georgia being operational by Q2 2018, and this studio is expected to support growth over the next 2-3 years. The operational activities, including software development, video streaming, staffing as well as the end customers are monitored and controlled in real time 24/7 all year round from the primary “Mission Control Room” (MCR) in Latvia and secondary MCR in Malta, which are also both used to steer the operations
30 Nov 2017 Pareto Securities Research 22(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
for the studios based in Spain, Italy, Belgium and Romania. The Riga MCR is the central hub while the Malta MCR is part of the company’s continuity planning. The MCRs ensure the scalability of Evolution’s business, as all the studios can be monitored from one place.
Evolution Gaming organisational set-up
Source: Company data
Four satellite studios In addition to two, soon to be three, large production studios Evolution has four satellite studios in operation in Belgium, Romania, Italy and Spain with a fifth being built in Vancouver, Canada to go live by the end of 2017. In some regulated markets, including Belgium, Romania, Italy, Spain and Canada, a physical presence is required for Evolution to be able to offer its live products to operators.
These studios are rather small and as Evolution Gaming has been the first to gain a licence and set up live casino operations, it holds No. 1 positions in all these markets and has close to a 100% market share in the Belgian market.
Most of these satellite studios are based inside real land-based casinos where Evolution has been able to build its own live casino environment, e.g. at Casino de Spa in Belgium (2015), Casino Campione in Italy (2012), Grand Casino Murcia in Spain (2013) and Grand Casino Bucharest (2016). In some cases, Evolution has built an on-premises studio for its customers, placed in the same casino as its own studios in Spain and Romania, while the dedicated studio for Napoleon Games was built inside its office building in Aalst, Belgium (2016).
British Columbia Lottery Corporation chose Evolution Gaming as the first live casino provider to bring its live casino products to the regulated market within the British Columbia Canadian market, giving it a head start if other provinces are to follow. The 16,000 sq ft Vancouver studio will be based inside of British Columbia Lottery Corporation's facilities with the intention to support additional Canadian lottery corporations.
Also provides land-based casino Evolution Gaming also provides land-based casino operators with the opportunity operators with the opportunity to to get online through its Dual Play solution where the company set up and ran the get online with its Dual Play production of the offered live casino products on a real land-based casino table. solution Dragonara Casino in Malta was the first customer to go online with Evolution's Dual Play product in 2015 and others have followed in 2016-17.
30 Nov 2017 Pareto Securities Research 23(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
Personnel ~3,800 employees with 2,740 full As of Q3 2017 Evolution Gaming had some ~3,800 employees (compared with time, of which ~80% work in Riga the 3,500 mentioned in the chart above, which is the figure communicated as of year-end 2016), of which 2,740 were regarded as full-time employees (FTE). About ~80% of all FTEs work in Riga as this is where the largest live casino production studio is situated. In 2016, 86% of all FTEs worked within operations, mostly as live casino dealers or support staff, 11% worked within tech and product development, 1% within sales and 2% within administration. Evolution Gaming's headquarters are in Stockholm, Sweden and it has two tech offices – one in Amsterdam, the Netherlands and one in Tallinn, Estonia.
All dealers have to pass a training To become a dealer on Evolution Gaming's live casino tables all dealers need to period to ensure a top-quality pass a training period in order that a top-quality product is assured. Evolution product Academy, located in both Latvia and Malta, is responsible for the recruitment, and initial and ongoing training of all gaming personnel – from dealers to card shufflers – as well as customer service personnel. The Academy is set up just like a real live casino studio which provides camera training that is as realistic as possible. Normally it takes about 100 hours of training before a dealer is ready for live operations and Evolution has high standards on how staff should interact with end customers, in line with providing a premium product. For a majority of dealers it is an extra job while studying at university, which is why the labour turnover within the operations is rather high, making a well- organised HR function a critical part of the daily operations. The dealer is paid an hourly rate but is also being evaluated on different KPIs, e.g. speed of dealing the cards is one of the components for variable remuneration.
Licences Some jurisdictions require In addition to its operator clients needing licences in regulated markets, some suppliers to have licences or jurisdictions also require suppliers to have licences or certifications. Evolution certifications Gaming can operate under a Malta Gaming Authority (MGA) B2B licence in many European markets but in some jurisdictions it needs to hold a local B2B licence or certificate to be able to offer its services to operators active in the country. Evolution Gaming holds the following licences/certificates: a Class 4 Licence for B2B operations from the Malta Gaming Authority, a Category 2 Certificate from Alderney Gambling Control Commission, a Remote Operating Licence and a Remote Gambling Software Licence issued by the UK Gambling Commission as well as being certified in Belgium, Denmark, Italy, Romania and Spain, and it has also undergone the first stage for approval (“transactional waiver”) for a licence in New Jersey. In addition, Evolution Gaming has been approved for Class B Gaming Services by the Gaming Policy and Enforcement Branch of British Columbia in 2017. The licensors perform regular reviews to ensure that Evolution complies with their licensing requirements.
Financial goals – medium-term and long-term objectives Revenue growth: To growth faster than the total European live casino market.
Profitability: Sustain EBITDA margins of at least 35%.
Dividend policy: To distribute a minimum of 50% of net profit over time.
We expect the profitability goal to Over the past few years Evolution Gaming has fulfilled all of its main financial be raised goals as it has continued to take market share, with above 35% EBITDA margins since 2014 (38.6% in 2016) and distributing more than 50% of the 2015 and 2016 years' net profit. We believe it is fair to assume that Evolution Gaming will consider revising its profitability goal upwards as the EBITDA margin is currently at 47.7% as of Q3 2017.
30 Nov 2017 Pareto Securities Research 24(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
Business model Evolution Gaming works purely Evolution Gaming works purely within the B2B space, providing live casino within B2B, providing live casino products to online casinos, sports betting operators and land-based casinos. products to online casinos, sports The products portfolio encompasses HD-streamed live casino games such as betting operators and land-based Roulette and Black Jack as well as technical solutions to enable a high-quality casinos live casino product for the operators to promote on all their platforms, allowing for branding as well as cross-selling opportunities. The most basic B2B customer agreements normally include generic live casino tables while more complex agreements can include dedicated tables and environments, VIP services, native-speaking dealers and other customisations to produce a live casino experience that is as unique as possible for the end user.
Three revenue streams Evolution Gaming has three revenue streams, which are applicable depending on the chosen services: commission on generated gross gaming revenue (GGR), set-up fees and monthly dedicated table fees. Set-up fees and fees for dedicated tables are fixed but dependent on the scope of the added services; the former is paid when a new dedicated table is being set up while the latter is a monthly fee charged to the operator to cover extra costs for the dedicated environment. The charged commission is based on an operator's percentage royalty rate times its generated GGR. The operator royalty rate is dependent on a numbers of factors such as size of the operator, number of live casino tables at Evolution's studios, etc.
We estimate that commission is the largest share of revenue, representing ~66% in 2017E, while we estimate dedicated table fees and set-up fees at ~24% and ~10%, respectively. Most of Evolution Gaming’s costs relate to personnel within the operations as well as tech and product development and costs for the production studios, including premises, bandwidth and other consumables. The cost for adding an additional customer is usually relatively low if existing studios are used although it can be more expensive if the customer wants something more unique.
Business strategy – 'widen the gap' Aims to strengthen position in Evolution Gaming constantly aims to strengthen its leading position in the European live casino market and European live casino market and long term in markets outside of Europe. As the long term outside of Europe live casino product continues to increase its share of other online casino games and operators are increasingly keen to invest in the product as it represents a larger share of their total revenue, Evolution Gaming has identified a clear strategy of how to 'widen the gap' to its competitors, thereby capturing a larger share of the market growth.
30 Nov 2017 Pareto Securities Research 25(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
Evolution Gaming – business strategy 'widen the gap'
Source: Company data
1) Product development: At the start in 2006, the three classic core casino games of Roulette, Black Jack and Baccarat were offered on a desktop solution. Evolution has continuously developed these games by introducing game derivatives, e.g. Immersive Roulette, which has been appreciated by the operators and end customers. In addition, it has five new core games and derivatives of these have been introduced, which has most likely increased Evolution's share of the customer wallet. Evolution has made its products available for all platforms (desktop, mobile, tablets, TV), where especially the mobile channel has been an important growth driver in recent years. In 2017, Evolution Gaming introduced a live Lucky Wheel product (Dream Catcher), partly targeting new types of players to live casino.
2) Operational excellence: Live casino is a rather complex product and Evolution Gaming has a sophisticated platform that simultaneously handles software, hardware, video, employees and user data as well as providing scalability as the company can expand with new studios without having to replicate the software locally.
3) Product offering and exclusivity: Evolution aims to provide a live casino product that offers high value for the operators, e.g. unique products that are highly appreciated by the end consumer. Partly related to point one, product development is one way to achieving this pull effect, e.g. Dream Catcher, which has exceeded expectations, is a unique product that is only provided by Evolution. Also other games such as Caribbean Stud Poker and Ultimate Texas Hold'em can only be found at Evolution. Other exclusive features may include unique VIP and dedicated environments as well as different technical features.
4) Entering into all regulated markets: Evolution aims to be the first live casino provider in newly regulated markets as early establishment enables operators to promote its live product to new users reachable after an regulation. Evolution may also provide country-specific games, e.g. native- speaking dealers. Evolution Gaming has successfully entered countries such
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as Italy (2011), Denmark (2012), Spain (2013), Belgium (2015) and Romania (2016).
5) Natural transition: The land-based casinos still represent the majority of total global casino revenue but growth has been low or negative for land- based operators over the past few years, which is why these operators are increasingly seeking ways to leverage their strong brands and increase their VIP customer base by migrating online. Evolution Gaming with its Dual Play solution aims to be the natural partner for these operators over time.
6) Most strategic vertical: Evolution will always strive to optimise its operators' live casino offering with the intention to maximise the end customers' lifetime values for the operators, which over time yields exceptional growth for the operators by using Evolution Gaming.
Product offering Product innovation a key pillar of As mentioned above, product innovation is one of the key pillars in Evolution the business strategy Gaming's business strategy and in our view it seems as though the company has been agile and innovative in providing operators with the best possible live casino products. We categorise all of Evolution's products as per the following bullet points and over the next few pages describe them briefly.
Core live casino games and related game derivatives. Generic, dedicated and VIP live casino environments. Platforms and technical features.
Core games and game derivatives At the start in 2006 and through to 2012 when Casino Hold’em was introduced Evolution only provided the three classic casino games of Roulette, Black Jack and Baccarat, and one game derivative, Auto Roulette, which was launched in 2009. As Evolution has stepped up its product development activity, which is focused on bringing new games to the live casino scene, it now offers eight popular core games, six card games, Roulette and a Lucky Wheel product developed by Evolution, named Dream Catcher and introduced in 2017.
All core games apart from Black Jack are fully scalable live casino games, i.e. they allow for thousands of concurrent players while Black Jack tables are less scalable as there are only seven seats at a table. The three other core games of Live Three Card Poker, Live Caribbean Stud Poker and Live Ultimate Texas Hold'em were launched in 2014, 2015 and 2016, respectively. Live Three Card Poker was introduced at the ICE trade show in 2014 after Evolution signed a licensing deal with SHFL Entertainment for a number of games. Live Caribbean Stud Poker was launched exclusively for Evolution's customers after an agreement with Games Marketing signed in 2015. Live Ultimate Texas Hold'em is also an exclusive product for Evolution Gaming’s customers following a licensing deal with Scientific Games, which provides operators with a game to convert poker players to casino players. We believe Evolution will continue to introduce new core games, especially as it will expand its geographical footprint and its games mix is quite different.
30 Nov 2017 Pareto Securities Research 27(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
Evolution Gaming – core games portfolio
Source: Company data
In Europe, Roulette is the major casino game followed by Black Jack and Baccarat, but in the US Black Jack is the number one casino game followed by Poker and Roulette. In Asia, where Playtech is the largest live casino provider, the dice game Sic Bo is one of the big games in addition to Baccarat and Mahjong.
In addition to introducing new core games Evolution has introduced a total of 27 game derivatives that are all related to the core games (see list below). These derivatives provide the operator with tools to deepen the engagement with the end consumer by allowing for increased customisation and cross- selling opportunities as well as it being able to offer higher game scalability due to the introduction of side bets, bet behind functions (allows a waiting Black Jack player to play on the cards of a seated player) and speed versions of the core games. Immersive Roulette has become especially popular among players and operators and the game was named EGR's game of the year in 2014.
Evolution Gaming – roll-out of core games and game derivatives
Source: Company data
In 2014, Evolution introduced the important side bet and bet behind derivatives for Black Jack, which enables some multiplayer scalability even for this game. It appears that the bet behind function has gained in popularity since it was introduced. Naturally, most game derivatives have been released for the three large core games, with Roulette topping the list with ten derivatives. Some of the game derivatives seen below are due to the licence agreements signed with Games Marketing, etc.
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Evolution Gaming – core games and their derivatives
Live Roulette Live Blackjack Live Baccarat Live Three Card Poker Live Caribbean Stud Poker Immersive Blackjack Party Multi camera live Baccarat Pair plus bonus bet 5+1 bonus bet Immersive Lite Bet behind Live Baccarat Squeeze Six card bonus bet Progressive Jackpot European Roulette Perfect pairs and 21+3 side Live Baccarat control squeeze Speed Roulette Pre decision Live speed Baccarat Live Casino Hold`em French Roulette Choice of Roads Jumbo Jackpot side bet Native speaking Roulette Pairs side bets Live double ball Roulette Further optional side bets Live Ultimate Texas Hold'em Dual play Roulette Trible bonus bet Mini Live Roulette Slingshot auto Roulette Dreamcatcher Favorite bets Source: Company data
Generic, dedicated and VIP live casino environments Evolution Gaming offers generic live casino tables for all core games and their derivatives. Generic as well as dedicated live casino tables are live streamed in HD and are easy to play. The player can interact with the dealer through a live chat, watch real-time game stats and play several games simultaneously. Generic tables are unbranded tables open to the whole operator network and their end customers. New customers are likely to start with generic tables, especially if they are a smaller operator new to the live casino segment. We believe Evolution Gaming provides 50-60 generic tables, of which ~55-60% are Black Jack tables, 25-30% Roulette tables with other games like Baccarat, etc, accounting for 10-20% of the generic tables. All generic live casino games can be played on desktop, mobile and tablets and in some cases even TV, as in the case of Immersive Roulette.
Generic Roulette and Black Jack tables
Source: Leovegas.com, generic live casino tables powered by Evolution Gaming
To be able to allow operators to address VIP customers and high rollers Evolution also offers generic VIP environments for Roulette and Black Jack. These tables have a more exclusive setting and allow for bet limits that attract VIP/high-roller customers. Generic VIP Roulette is available in European, French and Slingshot variants with betting limits set to appeal to high rollers. Black Jack is given in five versions: Silver VIP, VIP, Fortune VIP, Platinum VIP and Diamond VIP. Diamond VIP live Black Jack tables are usually operated by the best dealers and the bet sizes are set from a minimum of EUR 1,000 to a maximum of EUR 5,000 (configurable by each licensee in line with their jurisdiction rules) to attract VIP and high-roller customers. As a comparison, bet sizes for a generic low-stake Black Jack table can be set as low as EUR 1-25.
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VIP live casino tables – VIP Roulette and Diamond VIP Black Jack, i.e. more exclusive settings
Source: Company data
In addition to generic tables, Evolution Gaming offers operators the opportunity to invest in branded/dedicated live casino environments that are exclusive for the operator's customers and operated by Evolution. These environments can be customised completely in line with the operator's requirements, e.g. in terms of graphics, brand attributes and language. The pictures below show two dedicated tables at LeoVegas's dedicated/branded live casino environment in Riga, where LeoVegas's colours, logo and brand name are clearly being exposed to the end customers. In addition, a dedicated environment gives the operator better opportunities to run live promotions, which can be a good channel to attract more players, increase player times and retention rates, as well as provide cross-selling opportunities.
Dedicated tables – LeoVegas-branded Roulette and Black Jack tables
Source:Leovegas.com, branded tables for LeoVegas and powered by Evolution Gaming
As market growth for the live casino segment has been very strong over the past year, a well-invested and customised live casino product has become a strategically important tool for operators that aims to achieve brand differentiation and strengthen the relationship with the operator's players. Even smaller operators who have historically used generic, shared tables have increasingly begun to invest in dedicated environments. As there are some extra costs associated with setting up and operating dedicated live casino tables, Evolution charges a set-up fee as well as monthly dedicated table fees, which are both priced at cost plus. The fee varies greatly from customer to customer, depending on factors such as type of game, number of tables, languages, operating hours, etc.
Platforms and technical features Most of the live casino games offered by Evolution Gaming can be played across the different platforms of desktop, mobile and tablets, and Roulette is even offered for TV. Evolution released its first mobile product in 2012 and tablets
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followed in 2013. The mobile solution supports both iOS and Android and the live casino games are built in HTML5 to enable smooth integration with the operator’s mobile websites as well as apps. Today, a good mobile solution is a must have as operators' revenue is increasingly being generated through the mobile channel. A strong mobile product offers players 24/7 availability as well as reducing seasonal effects for the operators. Operators such as LeoVegas and Kindred derive ~70% of their revenue from the mobile channel while other operators that are geared to markets with lower bandwidth/lower smartphone penetration have a lower percentage of their revenue from mobile. Evolution Gaming's early presence within mobile has most likely been an important growth factor for it over the past few years as it now derives ~50% of its revenue from the mobile channel.
Mobile share of group revenue
Source: Company data
In 2015, Evolution Gaming introduced its Dual Play Roulette product, which enables land-based casinos to provide an online product that is streamed in real time at a real live casino table. Dual Play allows online players and offline players that are present at the casino to participate in the same game. Evolution operates Dual Play Roulette at Dragonara Casino in Malta and at The Ritz Club Casino and The Hippodrome Casino in London, the Grand Casino Bucharest and Genting Casino in Birmingham. Dual Play from Dragonara Casino is also offered as a generic product to the operator network.
Dual Play and multi-play functions
Source: Company data
The highly scalable technical multi-game play feature was introduced in 2014 for desktop, allowing players to play up to four live casino games simultaneously. Another technical feature is “Direct Game Launch”, which likely increases conversion rates for operators as players can act on impulse and instantly launch and join live casino games via direct links that the operators can place anywhere on their websites, on other web pages, or as links in emails or texts.
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Customers Customers include a number of tier Evolution Gaming’s customers encompass a number of tier 1 online gambling 1 online gambling operators, operators as well as emerging online operators, platform providers, state emerging online operators, monopolies and land-based casinos. As Evolution purely works within B2B it has platform providers, state relatively few customers and the company claims it had some 100+ customers monopolies and land-based as of year-end 2016, which we believe could be 120+ at present. Evolution casinos Gaming's customer contract is usually signed for a 1-3 year period with a termination notice period of 6-9 months. Contracts are usually tiered, with 3-5 levels, which regulates the effective royalty rate depending on the operator- generated GGR. Depending on the service the customer may also be charged set-up fees and dedicated table fees. The first customer agreement was signed in 2007, which was a year when customers such as Gala Coral, PartyGaming, William Hill, Blue Square, Gaming VC, Expekt and VC Bet were signed up. In 2009, 888, Sportingbet, Ladbrokes, Unibet, Paddy Power and Sky Bet all became customers. Ladbrokes, Paddy Power and Sky Bet were lost to Playtech in 2013- 14, which usually demands exclusivity from its operators. Gala Coral merged with Ladbrokes in 2016 but is not a major customer of Evolution Gaming. Gala Coral appears to use Playtech for its dedicated environments.
Customers – a selection of the 100+ customers signed
Source: Company data
Top five customers made up 47% In 2014, the largest customer accounted for 14% of total revenue, and was most of revenue in 2016 likely William Hill, while the top five customers represented 53% of revenue. The top five customers' share declined to 47% in 2016 as customer growth has been strong over the past few years, making Evolution more diversified.
New customer signings are likely to stem from geographical expansion, state monopolies (the Netherlands' state lottery, the Bulgarian state lottery and British Columbia Lottery Corporation have already been signed with Evolution and will be rolled out in 2018-19), emerging European operators as well as land- based casino operators that are going online through Evolution Gaming's Dual Play solution.
Three state monopolies signed in 2017 – more to come? Successfully signing state In 2017, Evolution Gaming has been successful in signing state monopolies – monopolies Bulgaria’s National Lottery, British Columbia Lottery Corporation and the Netherlands' National Lottery have all chosen Evolution Gaming as their live casino provider. All these customers will offer a full suite of live casino games and Bulgaria’s National Lottery is already live under the 7777.bg brand, British Columbia will go live by the end of Q4 2017 at Playnow.com while the Netherlands' National Lottery is expected to go live in connection with Dutch
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reregulation, which is expected in 2019 but still to be decided. We believe Evolution Gaming has a fair chance of signing the Swedish monopoly Svenska Spel as well as ATG as new customers ahead of the Swedish regulation expected in 2019.
The United States is slowly opening up – a long-term opportunity? No operations in the US at present At the moment, only Nevada, New Jersey and Delaware accept online gambling, but Pennsylvania recently approved its online gambling bill. Evolution Gaming has no operations in the US at present but has undergone the first stage of approval (“transactional waiver”) for a licence in New Jersey (NetEnt already has a transactional waiver) and is currently in the process of evaluating whether to go ahead and build a studio or not in New Jersey. Both New Jersey and Pennsylvania are expected to grow considerably in the coming years, according to H2GC. New Jersey is expected to grow by a 14% CAGR, reaching USD 429m in GGR by 2022 and Pennsylvania is expected to grow by a 40% CAGR to USD 330m in GGR by 2022.
Tax rate for table games in The interactive tax rate in New Jersey is 15% of GGR (higher than land based at Pennsylvania speaks in favour of 8% GGR tax + 1% licensing fee) and operators needs land-based operations to live casino if it is included in this hold a licence. The interactive tax rate in Pennsylvania is set to be 54% for slot category revenue and 16% for table games (including live casino, we assume). A 54% tax rate seems unattractively high and will most likely hamper the market size for slot games in Pennsylvania. 16% for table games on the other hand is more attractive and speaks in favour of live casino if it is included in the table games category.
There is only limited information available on Pennsylvania so far but it is rumoured that a total of ten operator licences will be handed out. As New Jersey and Pennsylvania have a combined population of ~17m, i.e. less than the Netherlands, the short-term effects should not be overstated, especially since casino players need to get used to playing online. Over the long term the US market offers attractive potential if other US states open up, as land-based casino revenue in North America represented about ~50% of total global casino revenue in 2016, according to H2GC.
Competition Number of competitors has The strong growth trend seen in the live casino market in Europe has increased rapidly in recent years encouraged more system providers to develop live casino solutions as the barriers to entry are relatively low, while the barriers to success are much higher. Evolution says that the number of competitors has increased from less than five in 2008 to more than 30 at present. However, live casino is a highly complex product that in addition to a technical solution requires both a certain volume of customers and players and outstanding operational excellence to be profitable and perform satisfactorily over time. Evolution Gaming says it mostly competes with suppliers that offer a broader spectrum of casino products to operators, with live casino usually being a minor part of their total offering and not a focus product as it is for Evolution Gaming.
In June 2017, Evolution Gaming was awarded the EGR B2B Live Casino Supplier of the Year Award for the eighth consecutive year, still the only winner of this award. The EGR 2017 award was won in competition with short-listed live casino providers such as Authentic Gaming, Extreme Live Gaming, Ezugi, MediaLive, NetEnt and Playtech. It is quite confusing reading live casino comparison sites like livecasinocomparer.com, etc, as there seem to be at least 15 suppliers (including the names above) that at a minimum provide live casino for the three large European casino games of Roulette, Black Jack and Baccarat and a variety of technical features. Some of these also provide other kind of games, such as Keno. We think it is difficult to evaluate competitors' technical set-ups and operational skills, which seem to be some of Evolution Gaming's key strengths. Investors should try playing while relaxing at home.
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Playtech Evolution Gaming sees Playtech as Playtech, listed on the London Stock Exchange with a market cap of GBP 2.7bn, its main competitor was founded in 1999 and is one of the leading casino software developers in the world, providing online and land-based gambling operators with software platforms and game content as well supplementary services. Evolution Gaming sees Playtech as its main competitor and it is believed to hold a 20-25% market share of the European live casino market compared with 50-60% for Evolution Gaming while a dozen minor suppliers make up the remainder. On a global scale, the difference in market share to Evolution Gaming is less than suggested by the relative European market share as Playtech also seems to be one of the largest content providers for the Asian operators. In Europe, Playtech is the live casino provider for tier 1 customers such as Bet365, PaddyPowerBetfair, Ladbrokes Coral, Sky Bet and Titan Casino.
At first glance Playtech seems to offer a quite similar HD-streamed live casino product as Evolution Gaming with a few games differing. Playtech also offers an omnichannel live casino product as well as generic, dedicated and VIP table environments. Players using Playtech's live casino are able to access an extensive live product offering, manned by native-speaking dealers, including all the casino classics such as Black Jack, Baccarat and Roulette in addition to innovative new variants including Unlimited Black Jack, Prestige Roulette and Baccarat and Casino Hold’em. Dedicated tables with native-speaking dealers are offered for the UK, Italy, Spain and Romania, and many other countries due to increasing demand in newly regulating markets. Playtech has three major global production studios, all overseen by a highly advanced mission control room 24/7. In February 2017, Playtech opened its new 8,500 sqm Riga studio, employing 500 dealers who speak a range of languages. The new production studio was shown to investors at the CMD in Riga in October 2017. At the CMD Playtech claimed that it will continue to expand its games portfolio to strengthen its position as well as invest in innovative products and experiences such as augmented reality and video walls. Playtech also sees opportunities in offline operators moving online but we don't know if it has any products to offer them yet.
Evolution's 'widen the gap' After conducting a basic competitor screening we conclude that there certainly strategy is crucial seems to be enough good competitors that collectively can challenge Evolution Gaming, which is why its 'widen the gap' strategy is crucial as a market leader always needs to innovate and be a first mover to stay at the top over the long term. From an operator’s perspective, price and overall performance should be the deciding factors in which live casino provider to choose in the long term.
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Financial estimates
Forecasts for Evolution Gaming Evolution Gaming's growth has been very strong over the past few years and we are difficult to set expect it to stay high – we factor in revenue and EBIT CAGRs of 23% and 25% over the period 2017-20E. In this section we explain the reasoning behind our estimate profile for Evolution Gaming for the period Q4 2017E to Q4 2020E. To start with it should be noted that Evolution Gaming is a quiet, “secret” company that only provides a few KPIs in addition to its quarterly financial statements. These KPIs are total employees, full-time employees (FTEs) and most recently, since Q4 2015, total bets per quarter. In addition, Evolution Gaming usually communicates approximate levels for the number of tables and the number of customers as of each year-end, e.g. the number of tables was reported at ~300 as of year-end 2016 and the number of customers was said to be 100+, without the company being more specific. By end 2017 Evolution Gaming has indicated that it will have around 400 tables in operation but we will not get the exact number or distribution of these tables, or whether they are generic or dedicated, or the type of games they are for. With only a few quarterly KPIs and the number of tables and new customer signings being rarely reported we need to make a lot of assumptions to explain why Evolution Gaming has been developing as strongly as it has and what the drivers are for the years to come. Let´s start with live casino market growth and Evolution Gaming's market position.
Live casino market growth The European live casino market grew by a CAGR of 41% over the period 2008- 2016, according to H2GC data, while the global live casino market grew by a CAGR of 30% as the Asian market started the period from a higher level.
European and global live casino markets, market size in EURm and yearly growth rates
Source: Pareto, H2GC
The company has a dominant Over this specific period of time the overall European interactive casino market position in the European live grew by a CAGR of 15%, clearly helped by the strong growth seen for live casino casino market products as random number generator (RNG) casino games grew at a CAGR of 11.8%. In 2016, live casino represented ~24% of total European online casino revenue, up from ~4.7% in 2008. Over this period, Evolution Gaming grew its revenue from a low base by a CAGR of ~58%, implicitly gaining a dominant position in the European live casino market; we estimate a market share of ~48% in 2016, which looks like it will have increased to 55% in 2017E.
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European total interactive casino, live casino and RNG growth y/y, and live casino and RNG relative shares, 2008/09-2021E
Source: Pareto, H2GC
Growth rates for European and H2GC estimates CAGRs of 16% and 13% for the European and global live casino global live casino through to markets through to 2022, which is a substantial slowdown in market growth. 2021E are still solid We think these estimates could prove cautious even though they were recently revised significantly upwards as operators obviously seem very keen to add more tables to their live casino offerings and land-based casino operators (representing the majority of the total casino market) are increasingly moving to expand online (e.g. the Evolution Dual Play product), with widespread geographical expansion of the concept very likely, which has already started (e.g. Canada and possibly the US too). H2GC's estimates have proved overly cautious before, e.g. its 2014 European market estimate was ultimately increased by ~5%, and its 2016 estimate was recently increased by 10%, indicating that it sets its market growth forecasts cautiously. Anyway, H2GC data is all that we and the industry have access to, for better or for worse.
Global casino gross gaming revenue (GGR) for land-based and interactive, and the land-based split by region
Source: Pareto, H2GC
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Market share and royalty rate We estimate around 70-80% of To be able to calculate a market share for Evolution Gaming some assumptions Evolution Gaming's annual need to be made as we have limited insight into the real facts. First, Evolution revenue is commission based... Gaming's average royalty rate on operator generated GGR needs to be estimated as H2GC's market size estimates are based on generated GGR. Second, we need to calculate the share of Evolution Gaming's revenue stemming from commission (the royalty rate times the operator's generated GGR) as other revenue sources such as dedicated table fees and set-up fees are not included in H2GC's estimates. We estimate that around ~64-78% of Evolution Gaming's annual revenue has been commission based over the years, depending on the number of new dedicated tables being rolled out during a ...with a royalty rate of 11% on specific year, which in turn triggers the table set-up fees. With regards to the average GGR royalty rate we have limited insight about its true level but believe it is in the range of 10-15%, depending on the size of customer with the average a couple of percentage points higher than the ~9% (GGR) operators are normally charged for slots games (our estimate assumes 10% bonuses on average and does not account for possible tax effects). We estimate a royalty rate of ~11% on average (equal to 12.2% of net gaming revenue (NGR)) for Evolution Gaming, and for simplicity we keep it flat in our market share simulation in the chart below.
Evolution Gaming's commission share of revenue, and estimated global and European market shares, GGR based
Source: Pareto, H2GC
Using the fact that Evolution Gaming believed it had a European market share of around 50% in connection with its IPO (March 2015), our estimates in the charts above seem to be broadly correct. It is also likely that Evolution lost some market share in 2014 as it lost Paddy Power, Ladbrokes and Sky Bet to Playtech in 2013-2014. Playtech is a multiproduct supplier that is known to use its size to demand exclusivity with operators, so therefore we don't interpret this as Playtech having a better product. The drop in share seen in 2016 relates to our assumption that the average set-up fee increased by 10% due to strong demand for dedicated tables; this effect could have been counteracted by a lower average royalty rate. Anyway, it seems as though Evolution has clearly outperformed the market since its IPO in 2015 and we estimate a European market share of 55% in 2017.
However, the true European market share could actually be a couple of percentage points lower than what we currently estimate as we find it likely that Evolution indirectly receives revenue from other parts of the world (even though Evolution prohibits customers marketing its products in some markets, e.g. Australia, to be compliant with local regulators), considering Evolution Gaming's impressive client list, which also hosts a number of platform providers such as industry giant Microgaming. A lower market share leaves room for additional market share gains if Evolution continues to excel, however.
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Going back to the commission royalty rate, as a specific customer grows it will reach higher tiers, which usually warrants a lower royalty rate. Evolution's contracts normally have 3-5 levels and are signed for 1-3 years. A high inflow of new customers can counterbalance this effect as they usually start on a higher royalty rate if they are not a major operator. The high inflow of new customers in 2015-2016 diluted the top five customer share of total revenue, although it might have protected the average royalty rate to some extent.
Top five customers' share of total revenues, 2012-2016
Source: Company data
Average royalty rate expected to As we expect customer growth to slow over the next few years the average decrease somewhat in the years royalty rate is likely to decrease somewhat as customers will reach the higher ahead tiers. We are not that worried that price pressure will derail the investment case as this seems unlikely as the royalty rate is only 200bps higher than what operators are charged for slot games and Evolution Gaming doesn´t seem to charge higher commission rates than its peers either. Of course, however, we can never rule out Playtech, Novomatic or NetEnt becoming irrational in terms of pricing of their live casino products to gain market share as they have broader product portfolios and are not just focused on live casino products. Even so, price is only one part of the equation and we don´t believe Evolution's success is built on being cheap; it is built on being innovative and providing the best product for the operators and end consumers, which over time yields the highest return for operators. As we have limited insight into the true royalty rate, revenue per live casino table and table growth will be used to model future possible revenue growth as revenue per table captures both the volume and price component of the equation.
Customer growth Estimated to have around 120 Evolution Gaming said it had some 70 customers as of the end of 2014 (in customers at present connection with the IPO in 2015) and 100+ customers by year-end 2016. We believe Evolution has ~120 customers at present but this is just a guess as the company doesn't issue a press release for every customer signing. We expect customer growth to slow over the next few years as the company has already signed up most of the large European online gambling operators except for PaddyPowerBetfair, Bet365, Ladbrokes and Sky Bet, which are exclusive customers of Playtech. New customer signings are likely to stem from geographical expansion, state monopolies (the Netherlands' state lottery, the Bulgarian state lottery and British Columbia Lottery Corporation have already been signed and will be rolled out in 2018-2019), emerging European operators as well as land-based casino operators that are going online through Evolution Gaming's Dual Play solution. We factor in 170 customers in total in 2020E.
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Customers and revenue per customer, and tables and tables per customer, 2013-2020E
Source: Pareto, company data
We estimate that revenue per customer has increased over the past few years, with Revenue per customer has strong live casino market growth and Evolution Gaming being able to increase its increased over the past few years market share likely to be the main explanations. We believe that as Evolution Gaming seems to offer a highly regarded live casino product, has expanded to new markets as well as introduced new core and side products, it has been able to capture a higher share of the customer wallet, causing its market share to soar.
Tables per customer have also Note that tables per customer (the right-hand chart above) have increased every been increasing year since 2013 as Evolution Gaming's customers are increasingly adding dedicated tables and also as Evolution has been adding new generic tables and introducing new games. 2016 seems to have been an inflection year for when a high share of the customer base decided to deepen their engagement with Evolution by adding new live casino tables, which in turn affected revenue per customer in a positive way on top of market growth. As we expect customer growth to slow, the number of tables per customer will gain in importance as a revenue driver. We find it fair to assume that customers will increasingly continue to add dedicated tables for Black Jack, Baccarat and Roulette and, over time, possibly also for other games and new products that Evolution Gaming introduces.
One last reflection on new customer signings – a higher rate of customer signings will of course have positive effects on total revenue but larger clients should also be more likely to use more tables, including in dedicated environments, which might affect Evolution's margins in the short term (as set- up fees and dedicated table fees are most likely margin dilutive and it takes some time before commission scales), while smaller operators should be more likely to only use generic tables, which should be highly margin accretive for Evolution Gaming, even in the short term.
Tables and revenue per table Strong correlation between To be able to calculate future possible group revenue we need to estimate the number of employees and number number of tables in operation over a specific quarter before deciding on the of tables... revenue per table and its growth. As there is a strong correlation between total employees/FTEs and the number of tables we find it reasonable to use total ...and we use this as the basis for employees/FTEs as the core driver for our table growth estimates, especially our table growth estimates since it is a regularly reported KPI.
Total employee and FTE growth has been high over the past few years as increased staffing has been needed to support the growth in new customer signings, a higher share of dedicated tables, new game tables as well as the increased number of production studios. FTE growth started to accelerate in 2015 with 35% y/y, reaching 61% y/y in 2016 and the first nine months of 2017 points to FTE growth of 45-50% as demand for new tables has continued at a high pace.
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Quarterly total employees and FTEs, historical and estimated, Q1 2014-Q4 2020E
Source: Pareto, company data
Going forward, as mentioned, we expect customer growth to slow as Evolution Gaming has already signed up most of the major European online gambling operators. This doesn´t imply that table growth will slow by as much, however, as we expect new games to be introduced by Evolution Gaming as well as increasing interest in dedicated tables to keep table growth at a high level. We forecast FTE growth of 45% in 2017, 34% in 2018, 18% in 2019 and 13% in 2020.
Historical annual average FTEs, and distribution per function, 2012-2020E
Source: Source: Pareto, company data
The charts above depict the annual average FTEs based on function. Note that the majority of staff work within operations, which we believe is a good but simplified proxy for the total number of Evolution Gaming's dealers. Over the period 2014-16 Evolution Gaming ramped up its tech team to handle new game products as well as opening new production studios in Malta, Belgium and Romania. Going forward, we expect tech staff to grow slightly slower than FTE growth overall as we expect Evolution to scale on these costs. The ongoing expansion to Tbilisi, Georgia, British Columbia and possibly New Jersey as well as possible new games will of course demand some additional tech staff, but we find it reasonable to assume that some tech investment already made should be scalable even though a possible US expansion will most likely require a stronger local presence. In 2016, 77% of all FTEs worked in Latvia and 20% in Malta. In addition, 86% of all FTEs worked within operations and this share should increase somewhat over time as we find it reasonable that its FTE dealers will grow faster than overall FTE growth.
30 Nov 2017 Pareto Securities Research 40(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
Quarterly number of dealers, and quarterly cost per FTE, historical and estimated, Q1 2014-Q4 2020E
Source: Pareto, company data
However, as we have limited insight into how staffing actually works within the operations we set the operations' share of FTEs at 87% going forward to be on the cautious side. Salaries for staff within operations are likely substantially lower than for the tech staff, which is why there might be downward pressure on the average cost per FTE in the coming years; especially since salaries in Tbilisi are most likely substantially lower than salaries in Riga, Latvia and even lower again than in Malta. In the short term, dilutive effects from lower salaries in Tbilisi will offset higher costs per FTE in Vancouver, which is likely to be a small production studio in the short term, as Tbilisi is to be a third large production studio in addition to studios in Riga and Malta that is expected to support growth over the next 2-3 years. There is certainly some wage inflation for FTEs within operations but we assume cost per FTE to remain flat versus the last eight quarters as operations will increase their share of total FTEs.
As mentioned earlier, we have limited information on the number of tables that have contributed to the revenue generation at a specific point in time. We only know that Evolution Gaming had ~100 tables in operation at the beginning of 2013 and that figure has increased to 120+ (reported in the IPO prospectus of March 2015) and to 300 by year-end 2016 (reported in its annual report and list change prospectus). By interpolating the number of tables between data points for 2013 and 2016 and dividing the assumed number of dealers with our number of tables profile we estimate that the number of dealers seems to hover around six dealers per table, which is an estimate we use to drive our estimates of live casino table growth with estimated FTE growth as the ultimate driver. As all dealers have intensive training and have to meet Evolution Academy standards (about 100 hours of training) we think it is reasonable to assume a time-lag in FTE growth of one quarter to estimate the number of tables in operation for a specific quarter.
Live casino tables and revenue per table – Pareto estimates, Q1 2014-Q4 2020E
Source: Pareto
30 Nov 2017 Pareto Securities Research 41(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
Revenue per table We estimate revenue per table has Revenue per table is dependent on a number of factors such as table game mix, started to increase again player volume and bet sizes. All games except for Black Jack are fully scalable, i.e. they allow for an almost unlimited amount of concurrent players while Black Jack is restricted to seven seats per table although the bet behind function adds some scalability. A generic high-stakes Roulette table should offer the highest revenue per table as player volumes can be very high, while a dedicated low- stakes Black Jack table should have the lowest revenue per table. A table with higher bet sizes is more scalable per time unit compared with a table with lower bet sizes as the game round should take an equal amount of time for a specific game. To complicate things further Evolution Gaming also offers speed versions of some games, e.g. speed Roulette, which is another scalable game feature. Note in the graph above that revenue per table increased through to 2016 when a massive expansion of tables started; we believe a large part of these new tables was dedicated tables with a tilt to Black Jack tables, which caused revenue per table to fall.
It normally takes some time before a new table scales at the operator level (depending on the size of the operator and their marketing skills) and this is probably an effect that has come into play in 2017 as we estimate that the commission share of revenue per table has started to increase again. An increasing share of Black Jack tables will most likely have some dilutive effect on revenue per table while new, fully scalable games, general market growth, higher bet sizes, speed game rounds and Evolution Gaming remaining the prime supplier of live casino games all support higher revenue per table, especially as we expect table growth to slow except for a temporary effect ahead of FIFA 2018. For 2019-2020 growth in revenue per table will be held back by implemented betting duties in Sweden and the Netherlands, which we expect as of Q3 2019. In total, we expect revenue per table to remain flat over the period 2016-2020 but commission will increase its share of total group revenue by seven percentage points. Remember that a new customer using a generic scalable table is highly margin accretive, even in the short run. An entry into the US market, e.g. New Jersey and Pennsylvania, will most likely increase demand for Black Jack tables, as Black Jack is the most played casino game in the US, with Baccarat and Roulette being the second and third top. However, we don´t expect a possible US entry to have any material effect on margins over our forecast period through to 2020E.
Concerning the current table mix we estimate Black Jack tables account for ~60- 70% of all tables, with Roulette at ~20-30% and other scalable games such as Baccarat and other card games making up the remainder. Revenue per table could be affected either way, depending on Black Jack or scalable games increasing their share of total revenue.
Table activity – bets Strong growth in total number of As of Q4 2015 Evolution Gaming started to report total bets per quarter on all live bets estimated in the first nine tables in operation. We estimate the total number of bets grew by ~76% y/y over months of 2017 the first nine months of 2017, compared with revenue growth of 58% y/y. The explanation for the deviation between revenue and bets growth is likely to be due to a combination of a lower GGR commission royalty rate, lower table set-up fees, lower average bets per table as table growth was very strong in 2016 and possibly other games taking share from Roulette (which seems to have the highest bet size). We believe it is a mix of all four but the major table expansion in 2016 is likely the main effect as it takes some time before a new table gains enough player volumes and new players are likely to start with lower bets. Bets per table have recently bounced back to the levels seen at the end of 2015 / beginning of 2016, pointing to operators gaining player volumes to their new tables.
30 Nov 2017 Pareto Securities Research 42(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
Number of bets and bets per table, Q4 2015-Q3 2017
Source: Pareto, company data
Revenue decomposition Revenue derived from three Evolution Gaming derives its revenue from three streams: commission on streams: commission on generated generated GGR, table set-up fees and monthly fees for dedicated tables. The GGR, table set-up fees and fees for latter two are priced at cost plus – to what extent remains unknown but we dedicated tables believe these revenue sources are margin dilutive while commission revenue on the other hand should be highly accretive to the group margin, especially when generated by mature customers and tables. We believe Evolution charges an average set-up fee of EUR 165k per dedicated table after an assumed price increase of 10% in 2016 and a monthly dedicated table fee of EUR 12k. We estimate that close to 75-80% of group revenue was commission based in 2014- 15 but this dropped to 64% in 2016 as the number of tables doubled over the year, which in turn triggered higher set-up fees and dedicated table fees. We estimate that commission revenue has gained back share in 2017 and this is likely the main reason behind the EBITDA margin expansion seen over the first nine months of 2017 as revenue has scaled on costs.
Revenue decomposition, in EURm, and percentage split
Source: Pareto, company data
Going forward, set-up fees are expected to lose share as table growth slows while an assumed higher share of new dedicated tables will keep the dedicated table fees' share of the total relatively stable. Commission per table is the most complex revenue stream as it is dependent on factors such as market growth, competition, renegotiation of customer royalty rates, table game mix and bet sizes, etc. We believe that underlying commission per table will grow over the next few years and as commission is the variable component we ultimately assume total bets or bet sizes per table will increase. We think this is reasonable
30 Nov 2017 Pareto Securities Research 43(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
to assume even though a large share of new tables is for the less scalable Black Jack product as Roulette and other games are highly scalable. However, in 2019 we expect implemented betting duties in Sweden and the Netherlands to have negative effects on revenue as increased tax pressure will lower total net revenue for the industry with Evolution also to be affected.
Revenue per table decomposition and commission per table growth y/y, Q1 2014-Q4 2020E
Source: Pareto, company data
Putting it all together Revenue Revenue growth to stay high over We estimate that Evolution Gaming will grow its revenue to EUR 178m in 2017, the next few years but not as high implying a growth rate of 54% y/y, and we expect growth to stay high in 2018- as in 2017E 2020E but at lower levels of 36%, 21% and 14%. In 2018, we expect to see some noticeable effect from the recent launch of the Bulgarian national lottery, which is operating a full suite of games under the 7777.bg brand, Codere in Mexico and British Columbia's lottery going live at the beginning of 2018 with ten live casino tables. We also expect some increased activity ahead of FIFA 2018 as operators targeting maximising cross-selling opportunities are likely to sharpen their live offerings ahead of the event. In 2019, growth should get some support from tables being rolled out in 2018 maturing and clients like the Netherlands' state lottery going live and potential contract signings with Swedish monopolies Svenska Spel (casino) and ATG (horse racing) must be seen as possible growth contributors to our 2019-20 estimates. In addition, New Jersey and Pennsylvania are two US states that could possibly start contributing on a small scale by the end of our forecast period.
Possible short-term negative effect There might be some short-term negative effect on growth in 2019-20E as we on growth in 2019-20E as Sweden expect Sweden and the Netherlands to reregulate their online gambling from and the Netherlands are expected mid-2019, which is why operators will need to start paying betting duties on to reregulate generated GGR – 18% in Sweden and 29% + 1.75% licence fee in the Netherlands. We don´t have Evolution Gaming's geographical exposure breakdown but the UK is rumoured to be its largest market with ~15% of revenue, which is why we believe Sweden and the Netherlands might represent a combined 30% of group revenue. Assuming a 50/50 split, average tax pressure will be ~24.5% on generated GGR from the two countries, which is why we calculate a possible negative effect to growth of ~8 percentage points if Evolution takes its share of taxes in line with its average royalty rate of ~11%.
30 Nov 2017 Pareto Securities Research 44(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
Annual revenue and EBIT, historical and estimated, EURm, 2011/12-2020E
Source: Pareto, company data
Quarterly revenue and EBIT and adj EBIT margin, historical and estimated, Q1 2013-Q4 2020E
Source: Pareto, company data
Margins Lower margin expansion expected As we expect a higher number of tables to be rolled out in 2018 (initially margin in 2018 versus 2017 due to a dilutive) as well as the British Columbia and Tbilisi studios going live, we expect higher number of tables being a slowdown in EBIT margin expansion of +60bps to 38%, from 37.4% in 2017E. rolled out and two production We have factored in the latest news from Latvia concerning an annual licence studios going live fee of EUR 400k. In 2019, scale effects should support continued margin expansion if commission revenue per table progresses as we expect, which should see EBIT margins hitting a new high of 38.7%, increasing to 39.1% in 2020E even though full-year tax effects should hold back the margin expansion to some extent.
We believe EBIT margins above EBIT margins around 40% might seem unrealistically high but we actually 40% are realistic believe they could be higher in 2020E or not long after this if revenue per table grows faster than that assumed in our estimates and cost per FTE turns out to be lower than we have assumed. Evolution Gaming has a very scalable business model, highlighted by the strong margins seen to date. The reported EBIT margin of 27.7% in 2015 was burdened by listing costs of EUR 3.8m, although the adjusted margin was 500bps higher at 32.7% (as seen in the graph above). 2016 was an investment year for Evolution Gaming with an EBIT margin that contracted to 30.2% as the average number of FTEs grew by 61% y/y, which was needed to support the strong customer demand for new tables. Note that the incremental EBITDA margin fell below the group EBITDA margin in 2016, which had a dilutive effect on the group margin. As these new tables have gradually gained player volumes in 2017, commission-generated revenue has followed, which in turn has pushed incremental margins to group margin accretive levels. As we expect a possible push for new tables among customers in 2018, we are
30 Nov 2017 Pareto Securities Research 45(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
likely to see a dilutive effect on incremental margins for a few quarters before these new tables start to scale on costs.
Incremental EBITDA margin and EBITDA margin, and commission revenue growth y/y
Source: Pareto, company data
Commission-based revenue As we expect FTEs and table growth to slow, commission-based revenue will expected to increase its share of increase its share of the total, which in turn will scale on cost. Every new player the total is highly accretive to the table margin on fully scalable game tables once the associated costs are covered. As Black Jack is becoming more scalable (due to the introduction of bet behind as well as the number of side bets), high growth for Black Jack tables should not be able to derail the margin expansion, in our view. Personnel costs and other operating expenses should correlate with the table growth, which is why revenue per table will be a deciding factor for margins. D&A cost are related more to the overall scale of the operations, where PPE investments should scale less than tech investments over time. We expect PPE capex to be slightly higher over the next few quarters as the Vancouver and Tbilisi studios are under construction.
Cost breakdown as a percentage of sales, quarterly and annual, 2013/14-2019/20E – adjusted for listing costs in Q1 2015
Source: Pareto, company data
Capex as a percentage of sales to After reviewing the historical intangible and tangible capex we think it is fair to decrease over the next few years assume that capex will decrease as a percentage of sales over the next few years as capex in absolute terms will continue on its upward trend. As depreciation & amortisation is following capex with a time-lag will there be minor positive effects on the group margin in our forecast period.
30 Nov 2017 Pareto Securities Research 46(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
Historical and estimated capex, and D&A as a percentage of sales, Q1 2014-Q4 2019E
Source: Pareto, company data
Operations to scale on costs In total, we expect Evolution Gaming to grow its revenue by a CAGR of 23.3% in the period 2017-20E with EBIT growing by a CAGR of 25% as operations will scale on costs. Evolution Gaming is debt free and we expect this to remain over our forecast period as operational cash flow will be strong, and sufficient to fund capex and higher dividends. We have assumed a tax rate of 8.5% over the forecast period but this could change due to the mix in operational jurisdictions, e.g. if Evolution Gaming were to build a substantial operation in the US and Canada this is likely to put some upward pressure on the group tax rate by the end of our forecast period.
Group estimates, quarterly and annual (EURm)
Q116 Q216 Q316 Q416 Q117 Q217 Q317 Q417E Q118E Q218E Q318E Q418E 2015 2016 2017E 2018E 2019E 2020E Revenue 24.8 27.1 29.2 34.3 39.7 42.3 45.7 49.8 54.0 57.9 63.3 66.0 76 115 178 241 292 332 y/y 59 % 50 % 47 % 53 % 60 % 56 % 56 % 45 % 36 % 37 % 39 % 32 % 56.5 % 52.0 % 53.7 % 35.9 % 21.2 % 13.7 % Personnel expenses -11.0 -12.6 -13.6 -16.0 -16.4 -17.6 -18.1 -20.9 -22.5 -24.3 -25.3 -26.3 -33.5 -53.2 -73.0 -98.5 -116.3 -131.1 Other operating expenses -3.5 -3.9 -4.9 -5.4 -6.3 -5.4 -5.8 -6.9 -7.3 -7.8 -8.5 -8.9 -11.6 -17.6 -24.4 -32.6 -39.5 -44.9 EBITDA 10.3 10.6 10.8 13.0 17.0 19.2 21.8 22.1 24.2 25.8 29.5 30.8 30.8 44.6 80.2 110.2 136.7 156.5 Margin% 42 % 39 % 37 % 38 % 43 % 46 % 48 % 44 % 45 % 44 % 47 % 47 % 41 % 39 % 45 % 46 % 47 % 47 % D&A -2.0 -2.3 -2.6 -2.9 -3.1 -3.3 -3.6 -3.8 -4.1 -4.5 -4.9 -5.1 -5.9 -9.8 -13.7 -18.6 -23.7 -26.4 EBIT 8.3 8.3 8.2 10.1 14.0 15.9 18.2 18.3 20.1 21.3 24.6 25.7 25 35 66 92 113 130 Margin% 33.3 % 30.6 % 28.0 % 29.4 % 35.2 % 37.7 % 39.9 % 36.8 % 37.2 % 36.7 % 38.9 % 38.9 % 32.7 % 30.2 % 37.4 % 38.0 % 38.7 % 39.1 % Net financial -0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 -0.1 -0.1 -0.1 0.0 -0.2 -0.2 -0.2 -0.2 -0.2 EBT 8.2 8.3 8.1 10.1 13.9 15.9 18.2 18.3 20.0 21.2 24.6 25.6 24.9 34.6 66.3 91.5 112.9 129.8 tax -0.6 -0.6 -0.7 -0.9 -1.1 -1.3 -1.4 -1.5 -1.7 -1.8 -2.1 -2.2 -1.0 -2.9 -5.3 -7.8 -9.6 -11.0 tax rate% 7.4 % 7.7 % 8.6 % 9.4 % 8.1 % 8.0 % 7.7 % 8.0 % 8.5 % 8.5 % 8.5 % 8.5 % 4.2 % 8.3 % 7.9 % 8.5 % 8.5 % 8.5 % Net profit 7.6 7.6 7.4 9.0 12.7 14.6 16.8 16.9 18.3 19.4 22.5 23.5 20.0 31.7 61.0 83.7 103.3 118.8 EPS 0.21 0.21 0.21 0.25 0.35 0.41 0.47 0.47 0.51 0.54 0.62 0.65 0.6 0.9 1.7 2.3 2.9 3.3 No shares 35.97 35.97 35.97 35.97 35.97 35.97 35.97 35.97 35.97 35.97 35.97 35.97 35.97 35.97 35.97 35.97 35.97 35.97 Source: Pareto, company data
Expectations ahead of Q4 2017E – due out 15 February 2018 Q4 a seasonally strong quarter Q4 is normally a seasonally strong quarter for most online gambling operators, which is why we expect continued sequential revenue growth in Q4 over Q3. During the Q3 conference call Evolution's management claimed it would have around 400 tables in operation by the end of Q4 and that the Q3 EBIT margin had been somewhat boosted by the fact that employment growth was tilted to the end of Q3, which is why it didn´t weigh on margins during the quarter. In addition it is fair to assume a step up in other operating expenses as: table growth seems to be strong, the Vancouver studio is close to being completed and the Tbilisi studio is staffing up ahead of its launch in Q2 2018. In total, we expect revenue to grow by 45% y/y to EUR 49.8m with a sequentially lower EBIT margin of 36.8%, although this is still 740bps higher than in Q4 2016.
30 Nov 2017 Pareto Securities Research 47(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
Pareto versus consensus estimates We are higher than consensus We are 0-3% above FactSet consensus on sales on average for the period 2017- expectations, apart from for the 19E. In terms of EBIT, we are 0-18.3% above consensus as we expect margins to 2018E dividend rise and not fall as consensus expects. Regarding dividends, we are marginally below consensus for 2017-2018E while above for 2019E. However, as the company is cash flow generative and holds a net cash position, a higher dividend than that stipulated by the financial goals seems reasonable to assume.
Pareto versus consensus expectations
Source: Pareto, FactSet
Consensus has been too cautious on estimates However, we have to admit that Evolution Gaming is not the easiest company to have concrete convictions on in terms of estimates as it is a rather complex business to understand and the market growth for live casino has even surprised the company itself with no one expecting EBIT margins of close to 40% just 18 months ago. As growth is expected to remain strong there is a fair chance that Evolution Gaming will continue to surprise on the upside.
Consensus current and historical revenue and EBIT margin expectations for 2018E
Source: FactSet
30 Nov 2017 Pareto Securities Research 48(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
Valuation Valuation summary We initiate coverage of Evolution We initiate coverage of Evolution Gaming with a Buy recommendation and a Gaming with a Buy target price of SEK 800 per share. We expect revenue and EBIT CAGRs for the recommendation and target price company of 28% and 30.5% in 2017-2019E as it is purely exposed to the live of SEK 800 casino segment, which is expected to show the highest growth. We think this warrants a premium to its closest peers NetEnt and Playtech as they are expected to grow at slower rates (see peer comparison table on page 21). Our target price of SEK 800 represents 25x EV/EBIT 2019E, which is slightly below the historical average NTM EV/EBIT, and a PEG ratio for 2018E of 1.15x, both of which are supported by a DCF value of SEK 788 per share.
Peer valuation It is difficult to look at peer valuations, as there are so few. The only comparable company is Evolution Gaming. Key competitor Playtech however is active throughout the iGaming value chain and despite good growth, it has never traded at high multiples – partly due to its Asian, non-regulated exposure, and conglomerate structure, we speculate.
Historical valuation ranges – EV/EBIT and EV/sales
Source: FactSet
Historical valuation ranges - P/E and FCF yield
Source: FactSet
DCF valuation Our discounted cash flow valuation suggests a value of SEK 788 per share, although due to its highly sensitive nature we only use DCF as a sanity-check of our multiples-based valuation approach. Given the growth and margin profile we expect, together with a WACC of 7.7% and terminal growth rate of 4%, at a 35% EBITDA margin (in line with current financial goals but significantly below current levels, implicitly allowing for margin pressure), we arrive at a DCF valuation of SEK 788 per share.
30 Nov 2017 Pareto Securities Research 49(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
DCF assumptions Metrics Growth CAGR 2017-2020E 23.3 % PV forecast period 827 Growth rate 2020-2026 10.0 % PV continuing period 2,023 Growth rate 2027+ 4.0 % Total value of operations 2,850 EBITDA margin 2020E 47.1 % Net debt -42 EBITDA margin 2021-2026 45.0 % Total equity value 2,892 EBITDA margin 2027+ 38.0 % Other non-operating assets 0 Tax rate 8.5 % Number of shares 36.3 Risk free rate 2.5 % DCF value per share 788.1 Equity risk premium 5.3 % Share price now 750 Industry un-levered beta 1.0 Potential 5 %
WACC 7.70 % Source: Pareto
DCF sensitivity EBITDA margin 28.0 % 30.0 % 32.0 % 34.0 % 36.0 % 38.0 % 40.0 % 42.0 % 44.0 % 46.0 % 48.0 % 6.2 % 677 720 762 804 846 888 930 973 1,015 1,057 1,099 6.7 % 652 692 733 773 813 853 894 934 974 1,014 1,054 7.2 % 628 666 705 743 782 820 858 897 935 974 1,012 WACC 7.7 % 605 642 678 715 751 788 825 861 898 935 971 8.2 % 583 618 653 688 723 758 793 828 863 898 933 8.7 % 562 595 629 662 696 729 762 796 829 863 896 9.2 % 542 574 606 638 670 701 733 765 797 829 861 Source: Pareto
30 Nov 2017 Pareto Securities Research 50(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
Management team and Board The management team is led by CEO Martin Carlesund, who joined Evolution Gaming in 2015; he holds both shares and warrants in the company. The CFO of Evolution Gaming is Jacob Kaplan, who joined the company in 2016; he also holds both shares and warrants in the company.
Chairman of the Board is one of the founders, Jens von Bahr, who also controls together with Fredrik Österberg 15.2% of the capital and votes.
Shareholders Evolution Gaming’s main shareholder is Richard Livingstone with two of the three founders, Jens von Bahr and Fredrik Österberg together, being the second-largest owner while Richard Hadida is the ninth-largest owner. The three founders control 16.4% of the votes and capital. Currently, there are no short positions in Evolution Gaming. The free float is ~63% (holdings.se).
Top ten shareholders in Evolution Gaming as of 31 October 2017
Owner Shares m Capital/votes % Country Date Richard Livingstone 5.95 16.5 % UK 2017-10-31 Grundbulten 22555 AB* 5.45 15.2 % Sweden 2017-11-21 Swedbank Robur Fonder 3.48 9.7 % Sweden 2017-10-31 Capital Group 1.94 5.4 % US 2017-09-30 Handelsbanken Fonder 1.64 4.6 % Sweden 2017-10-31 Avanza Pension 0.63 1.8 % Sweden 2017-10-31 Danica Pension 0.52 1.5 % Sweden 2017-10-31 Henric Wiman 0.49 1.4 % Sweden 2017-10-31 Richard Hadida 0.45 1.3 % Monaco 2017-10-31 Erik Selin 0.40 1.1 % Sweden 2017-10-31 Top 10 21.0 58 % Other 15.0 42 % Total 35.97 100 % Source: Holdings.se, *Jens von Bahr and Fredrik Österberg as of 21 November 2017
Insider holdings and transactions On 20 October 2017 Jens von Bahr and Fredrik Österberg sold ~1798m shares each for a price of SEK 557 per share, representing an 8% discount to the last closing price.
Options programmes In 2016, Evolution Gaming decided on an incentive programme for key employees, which is why 547,000 options were issued to the subsidiary Evolution Gaming Malta Ltd. 366,668 options have been granted to key employees, vesting the day after the decided date for the Q2 2019 report and until 30 September 2019. One option entitles the option holder to one share at a strike price of SEK 354 per share. The 547,000 options (not all granted) are currently in the money and if fully granted would result in a dilution of 1.5%.
30 Nov 2017 Pareto Securities Research 51(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
30 Nov 2017 Pareto Securities Research 52(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
NetEnt – The King of Slots
We initiate coverage of NetEnt with a Buy recommendation and a target price of SEK 70. We expect NetEnt to continue dominating 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 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.
Key figures SEKm 2016 2017e 2018e 2019e 2020e Revenues 1,455 1,657 1,899 2,109 2,296 EBITDA 675 775 914 1,019 1,116 EBIT adj 536 618 725 796 864 EBIT margin adj 36.8% 37.3% 38.2% 37.7% 37.6% EPS 2.10 2.36 2.76 3.03 3.29 EPS adj 2.10 2.36 2.76 3.03 3.29 DPS 2.25 2.15 2.35 2.50 2.65
EV/EBITDA 23.6 18.2 15.4 13.7 12.3 EV/EBIT adj 29.7 22.8 19.4 17.5 15.9 P/E adj 32.4 25.4 21.7 19.8 18.2 P/B 17.76 15.31 13.26 11.55 10.05
ROE (%) 61.6 60.4 64.7 61.7 58.2 Div yield (%) 3.3 3.6 3.9 4.2 4.4 Net debt (494) (443) (524) (640) (805)
Source: Pareto, company data
NetEnt will continue to dominate slots, although live casino is cannibalising We argue that NetEnt is the market leader in its niche and we expect a sales CAGR for 2017-2020E of 11.5% (after years of impressive growth rates showing a 31% CAGR in 2007-2016!). However, competitors' live casino revenues seem to be cannibalising on NetEnt’s sales. To keep the product top-notch we expect NetEnt to continue investing, with a resulting dampening effect on EBIT margins, with EBIT growing just slightly above sales through to 2020E, while EBITDA margins should climb from 46.8% in 2017 to 48.6% in 2020.
"Everyone" is already a client – smaller signings from hereon As NetEnt is the king of slots and virtually all the relevant operators are already its clients, future signings will be with smaller operators, and while existing clients continue to grow, new clients cannot make up for sales growth on a par with historical rates. However, with EBITDA margins of 47-48%, cash flows more than allow for dividend yields of around 4%.
Initiate with a Buy rating and target price of SEK 70 The double-digit growth rates NetEnt used to report are falling, now starting with a number 1 from a number 2 or 3 just a year ago, and as we expect growth to slow (as does consensus, which should already be priced into the share) we cannot argue for multiples in line with historical averages. However, we do acknowledge the longer- term opportunities and thus cannot argue either for the current valuation fairly reflecting NetEnt’s prospects. Our 2019E EBIT multiple approach implies a discount to Evolution, capturing the relative play between the two growth stories.
30 Nov 2017 Pareto Securities Research 53(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
Company description Short company history NetEnt is one of the leading game NetEnt (formerly Net Entertainment) is one of the leading game developers for developers for online casino slot online casino slot games and was founded in 1996 as a part of Cherryföretagen games by Pontus Lindwall. In 2007 it was spun out and listed on NGM Equity, moving to the main list in 2009, and is now listed in the Stockholm Large Cap index. NetEnt is one of the largest game developers in Europe, with a 25% market share in 2016 (15% globally). As NetEnt has virtually all relevant operators as a client, its revenue streams are diversified in terms of client, brand, jurisdiction and demography. NetEnt has offices in Stockholm, Gothenburg, Malta, Alderney, Gibraltar, Kiev, Krakow and New Jersey, and also hires a sub- contractor in India for some development and testing. It goes without saying that NetEnt wins multiple awards annually in the industry, thanks to the innovative concepts and games it creates. Most recently, this summer NetEnt took home the Mobile Supplier of the Year, RNG1 Casino Supplier of the Year and Innovation in RNG Casino Software awards at the EGR B2B Awards.
Hit slots include Starburst (2012) and Gonzo’s Quest (2010)
Source: NetEnt, Pareto
Product and business model Not just games but whole solutions The company offers ~200 games NetEnt is a game developer, offering around 200 games to its around 200 to ~200 partners partners. The product portfolio consists of traditional random number generated (RNG) casino games, such as traditional slots, jackpot games, Black Jack and video poker. Another successful category is branded games, such as Planet of the Apes and the NetEnt Rocks series launched in 2016, with Guns N’ Roses, Jimi Hendrix and Motörhead. These music games have been a real hit. NetEnt's games are integrated directly with the operators´ platforms but also through platform providers. NetEnt has an in-house sales force and has also partnered with platform providers and networks to have its games promoted to new clients. NetEnt leverages its long heritage in the business through its frequent high-quality output to grow with existing clients and to sign new ones.
NetEnt has taken market share virtually every year in the past decade
Source: Company data
1 RNG: Random Number Generated games. The outcome of slot games is random.
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Live casino not yet a large part of In addition to traditional casino games, NetEnt has been offering live casino its sales since 2012, although this is not a large part of sales yet, as the largest competitors, Evolution Gaming and Playtech, have major market shares. At the moment, NetEnt is catching up with its live offering, to be able to at least offer the products that the competition do.
Since May 2015, all new games have been developed using HTML5 (instead of Java), which enables games to be launched on multiple channels simultaneously (desktop and mobile) but which also future proofs their development. Most of the portfolio has now been converted to HTML5 although not all games have been deemed worthy of the investment.
In October 2017, NetEnt launched a completely new service within marketing together with its partner Ve Global. Using the vast amounts of data collected, NetEnt, together with Ve, will package the information and use it to help operators with their media buying to drive down customer acquisition costs and increase retention rates. As NetEnt puts it, “The technology will achieve this by building an in-depth but anonymised understanding of online gaming audiences, and then harness this insight to serve display advertising that is more relevant to each user.” The Norwegian company Gaming Innovation Group is the first beta client to use the technology, with the service launching officially in 2018.
Revenue model Revenue is derived from NetEnt derives its revenue as a commission on the gross win from its games, commission on the gross win when played by its operators' clients, generally after betting duties. Betting (often adjusted for taxes) from its duties thus affect NetEnt’s growth and although it varies between markets, it games, when they are played by usually takes around 1-3 months to recoup added tax pressure. As NetEnt wants its operators' clients to grow in regulated markets, the overall tax pressure will rise. The royalty rates are not standardised and are set per customer and not per game, and as far as we understand it game royalties range from 8% to 12% with the average somewhere around 10%. In addition to this, NetEnt also charges a smaller set- up fee for new clients. While the royalty rates are tiered, and NetEnt's main growth driver is with existing clients, the weighted royalty rate could come down in the coming years, requiring higher played amounts in order to sustain high revenue growth, although as smaller new client signings have higher royalty rates, this should be mitigated somewhat – and to be fair, the royalty rate has been stable the last couple of years. In our revenue model, we don’t use royalty rates as an input as we don’t have the contract details, but we do keep an ear out for management comments on this.
Product offering at a glance
Games Live Casino Pooled Jackpots Branded Games NetEnt Engage Back Office Ve-collaboration
~200 games Launched in 2012 Four games NetEnt Rocks Promotional tools Web-based Added service ~95-98% payout ratios RouletteRoulette and & BlackJack BlackJack Progressive jackpots Planet of the Apes Cross-selling Player management Media buying Desktop, mobile, retail Expanding offering Marketing tool Emoji Planet, etc Enables retention Marketing tools Launch in 2018 Source: Company data
Games 52% of revenue from mobile The game portfolio consists of around 200 casino games (slots, Roulette, Black Jack, video poker and other games), which are available on all relevant channels (desktop, mobile, tablet and retail), and payout ratios are 95-98%2. As of Q3 2017, 52% of NetEnt's revenue was derived from mobile. The retail offering is more of a marketing tool for operators to cross-sell to the online channel, with NetEnt's royalties significantly lower on retail slots. Apart from regular slots, NetEnt offers four progressive pooled jackpots (player-funded jackpots that build over time with, often, big payouts) that are great promotional tools for operators, but also video poker and table games such as Black Jack and
2 Most of NetEnt’s slots have an RTP (return to player) of 97-98% with the range being 95-98% and the average around 96.6%.
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Roulette. The games come in more than 20 languages, and with a market- leading portfolio, relationships with the whole industry and a reputation for being the king of slots, NetEnt's games are close to a must when operating an online casino.
While not immediately tangible, what sets its games apart from competition are: 1) the visuals, 2) the sounds and 3) the mathematics. The games needs to be visually appealing, with fun and retention-inducing sounds and behaviour. It generally takes around six months to develop a new game, with more complex projects such as branded games taking a bit longer. The process involves game idea and concept, developing, testing, unique mathematical algorithms and unique volatility in hit frequency (wins) and payouts. No NetEnt game is alike, and every game is unique due to the above factors. NetEnt has a development partner in India but the core development is done in-house in Gothenburg, Stockholm, Krakow and Kiev.
Branded games We believe the royalty rate NetEnt has not only created games, it has created characters (or extended an charged to operators for branded existing character into its games and worlds, such as Gonzo, Jack and the games is higher than for regular Beanstalk and The Invisible Man (together with Universal Studios). The slots company also has a history of collaborating with established brands to make branded games, one of the more recent being Planet of the Apes (ahead of the forthcoming Hollywood production) and the NetEnt Rocks series, which started in 2016 with Guns N’ Roses, Jimi Hendrix and Motörhead. It is our understanding that the royalty rate for branded games charged to operators is higher than for regular slots, with the operator paying the brand royalty.
Gonzo, Jack the Beanstalk, The Invisible Man and NetEnt Rocks' title Guns N’ Roses
Source: Company data
NetEnt has some hit-slots such as Starburst (2012) and Gonzo's Quest (2010) that still are among the top revenue contributors, we estimate. Otherwise as a new slot generates most of its revenues in its first few months, the key is to get this to be as high a level as possible, as revenues peak a couple of months after release, then fade and tend to stick at a certain level. This is also why NetEnt aims to release 20-22 slots in 2018 (previous output has been 12-15 annually) as new games drive growth in their first year. We expect 20 new games annually to be the new minimum level. NetEnt says its revenue streams are diversified among its games and at the moment we deem new sales growth to be derived from newly released games, such as the progressive slot Divine Fortune and Jungle Spirit: Call of the Wild, although we believe Starburst to continue being a top-performer as it is consistently promoted among operators.
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Product split – slots ~90% of revenue (live casino included in table games*)
*Table games = Black Jack and Roulette Source: Pareto, company data
NetEnt live Late to the live party – lagging In 2012, NetEnt launched live casino with live Roulette and has since added market leader Evolution Gaming Black Jack. In the studio in Malta, NetEnt mainly has generic environments (i.e. they are not individually branded for operators), but branding is enabled by a blue screen technology that in theory makes it fully scalable (same production environment, dealer and game, but a fully customisable background that enables unique branding). NetEnt launched mobile live casino in Q3 2016 and now strives to be mobile first. Although not a new product for NetEnt it has clearly lagged market leader Evolution Gaming in the segment. Derived from table games' revenue (live revenue is reported under Roulette and Black Jack), at 9% in 2016, we estimate live casino to be around half that. However, NetEnt was a bit late to the live party, lagging competitor Evolution Gaming by around five years in terms of launch and was also some years behind it in mobile. NetEnt will continue to invest in live, and short term it wants to at least catch up with the competition in terms of its offering, having just launched mobile standard Black Jack. Large products to be released thus include other table games such as Baccarat and Texas Hold’em, we speculate. Another innovative live product is NetEnt Live Rewards, which is a promotional tool for operators that enables a smooth promotional journey for players, who are rewarded in cash, bonuses or free spins, and it is automated, which helps operators in respect of retention.
Other solutions In addition to games, NetEnt also offers its clients promotional tools with NetEnt Engage, which enables customisable bonus offerings to players. These tools could also be used for cross-selling between NetEnt's games and for keeping the player engaged, meaning higher retention rates could be had. The NetEnt Back Office is entirely web-based and enables its clients to monitor and track player activity as well as generate reports. Through NetEnt Back Office, its clients can tailor their marketing tools and promotions.
Mobile revenue A strong mobile offering key to NetEnt strives to have a superior mobile framework and around half of capture growth opportunities revenues are from mobile (new games have a higher share of mobile as the legacy client portfolio of desktop is being dilutive). With HTML5, all new games are optimised for mobile, although not all old games have been deemed worthy of the investment of porting. Having a strong mobile offering will be key in capturing growth opportunities ahead.
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Mobile share of revenue growing fast
Source: Company data
Product development Management views 2016 and NetEnt has developed a proprietary platform for which all the games are 2017 as investment years developed, and capex is driven by both platform investments and game development. Of late, capex has been driven by mobile live casino for Roulette and Black Jack, platform investments and virtual reality games, and management views 2016 and 2017 as investment years (although it expects capex as a percentage of sales to come down from the 2016 level going forward). Future investments into the platform include ensuring modularity and flexibility in order to develop (and modify) games for different regulated markets (which will drive capitalisations). NetEnt attributes its strong standing in the marketplace to its platform, functionality, stability and game quality.
Licences and certificates In addition to its operator clients needing licences in regulated markets, some jurisdictions also require suppliers to have licences or certifications. All of NetEnt’s games are certified by independent testing agencies which check that the games really are random and work as set out in the documentation. With an increasing regulatory burden for the industry, NetEnt has its own compliance department. Licences and certifications include Malta, Alderney, Gibraltar, Belgium, Denmark, the UK, Spain, Romania, Bulgaria, Portugal, Serbia, Italy, Estonia, Latvia, New Jersey, British Columbia and Mexico. As NetEnt is currently present in all the major markets, we expect further moves into markets such as the US (Pennsylvania next up) and Latin America.
Online gambling regulation impact Betting duties will have a negative As NetEnt’s share of revenue is often calculated on game win after some tax impact on growth deductions, the impact from betting duties will of course have a negative impact on growth (and the possibility to scale on fixed costs). Given its high market share in Sweden, which is set to regulate in 2019, NetEnt regards the Swedish gambling regulation proposal as good on the whole and believes that it will take two to three years before the large positive effects from regulation will arise. We speculate that it is hoping to sign ATG (horse racing) and Svenska Spel (casino), as these seem to be aspiring for growth in a regulated environment, something that in practice entails offering NetEnt's games.
In the US, there are only a few states that allow online gambling (Nevada, New Jersey and Delaware), with NetEnt already being live in New Jersey. Pennsylvania has now also opened up. However, the tax rate for online slot revenue will be 54% albeit for table games (including live casino, we assume) a more reasonable 16%. We believe this could hamper the market size for slot games in Pennsylvania.
Clients – timing of larger signings will determine the share price trajectory The company does not regularly publish the exact number of active clients, but adding client launches to earlier statements we arrive at it having around 200
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clients. NetEnt has never lost a client. The company states it currently has maximum capacity to roll out 30-40 new clients per year but wants to increase this rate. With a diversified customer base, the largest client accounted for 8% of revenues in 2016. The top three accounted for 19% of revenues in 2016.
Signings and client base - fairly diversified with virtually every relevant operator a client
Source: Company data
The most important markets The UK, Sweden and Norway are While not regularly reported, we believe the UK, Sweden and Norway to be the believed to be the largest revenue largest revenue contributors as NetEnt has large market shares in these contributors countries. Thanks to its heritage, size and quality of its games, its Swedish market share could be as high as 40-50% with NetEnt having signed all the major operators in this market. As Sweden is set to regulate online gambling in 2019 (first taxes to be paid in Q3 2019 we estimate) we believe the two monopolies Svenska Spel and ATG will branch out into online casino offerings as well.
Competitor Playtech is the market leader in the UK due to its long history in the country and because it often demands exclusivity. Playtech has a 30-50% market share in the UK while NetEnt could have around 10-15%, we estimate. However, it looks as though NetEnt could get more out of the UK as some of the large operators it has signed have had a slow development. As example, although signed as clients, we have not seen NetEnt games promoted extensively at Ladbrokes or PaddyPowerBetfair.
In order to be compliant (and to not ruin its chances to be active in the market when it regulated), NetEnt withdrew temporarily from Canada in 2016 and have since applied for and been awarded a licence in British Columbia. As NetEnt aims to grow in regulated markets, this is another testament of the company's market leadership as it embraces online gambling regulations.
The US seen as a growth The company deems the US as a growth opportunity ahead, and has a current opportunity ahead presence in New Jersey. Now that Pennsylvania has also opened up, the snowball effect could potentially move faster, with north-eastern states potentially speeding up their reviews and stance on online gambling.
Other important markets for NetEnt are Italy and Spain, but the company is already present in virtually all the markets its operator clients are. However, there are also some markets that are explicitly off limits for NetEnt, and while the company can’t control what markets its clients operate in, if it sees player revenue from a restricted area such as China, North Korea or Russia etc (for jackpot games), it tells the client to not promote its games.
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Financial targets NetEnt has some soft financial targets, which for sales is: “NetEnt’s overall objectives are to further strengthen its market position, drive developments and grow faster than the market.” For dividends its target is: "A minimum of 60 percent of net profit after tax."
Market data supports the growth case for the market leader although slots are losing market share to live casino H2GC estimates the global online casino market (in terms of gross gaming revenue (GGR) for operators) at EUR 9.5bn and the European market at EUR 5.8bn. In order to arrive at relevant numbers for NetEnt, the figures have to be adjusted for bonuses, betting duties and royalty rates. In its recent listing prospectus, Cherry (the majority owner of competitor Yggdrasil) estimated the market for game development in Europe at EUR 500-600m in 2016, and referred to H2GC's estimate that this number will grow by around 10% annually in the coming years. The stated market size roughly corroborates NetEnt's stated market share of around 25% in Europe in 2016. Below is the GGR per market for online casino although this is not game development per se.
Global online casino market of EUR 9.5bn in 2016, of which European online casino EUR 5.8bn, with live casino growing fast
Source: Pareto, H2GC November 2017
Europe is by far the most developed online casino market, with a penetration rate of 37% in 2016 (for RNG games and live casino but excluding poker). While H2GC expects the European online penetration rate to grow, other markets are trailing behind and are only expected to grow slightly from lower levels. After Europe, we deem North America as the most important market for NetEnt, not least to the investment case due to the market potentially opening up. In North America, H2GC expects the online penetration rate to grow from 2% in 2016 to 3% in 2022. However, keep in mind that online gambling is prohibited in the majority of US states and only some Canadian provinces allow it. The open markets in the US are New Jersey, Nevada and Delaware, with Pennsylvania now also opening. In New Jersey, there are only a few licence holders and it is the land-based casinos that also have started operating online. The tax rate is 15% of the gross win. NetEnt went live in New Jersey in Q3 2016. The market is growing fast (from low levels), and grew by 26% and 23% respectively in September and October 2017 to USD 20.6m. October revenue growth was driven by Golden Nugget, Resorts Digital, Borgata and Tropicana (all NetEnt clients).
Plenty of long-term growth Given the low penetration rates and our confidence in online taking share, opportunities for NetEnt there are plenty of long-term growth opportunities for NetEnt worldwide. worldwide However, given the slowness in countries becoming regulated, the largest opportunities probably lie beyond 2020.
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Online penetration rate already high in Europe but considerably lower worldwide, giving long-term growth opportunities
Source: Pareto, H2GC November 2017
While H2GC expects the European online casino market to grow by a CAGR of 7.8% through to 2022, the expected growth rate for RNG games is 4% with live casino at 16%. In 2016, RNG games had a 76% market share in Europe and by 2022 this is expected by H2GC to have gone down to 62%. This puts pressure on NetEnt to catch up in terms of its live casino offering, in order to capture the market growth.
European online market growth rate and CAGRs per market
Source: Pareto, H2GC November 2017
Competition Main competitors are Playtech NetEnt's main competition is from Playtech and Microgaming. Playtech is listed and Microgaming on the London Stock Exchange with a market cap of GBP 2.7bn and is active throughout the iGaming value chain as a platform provider (casino and sportsbook), and a games developer in slots and live casino, among other things – often with a strategy of exclusivity, fencing off the competition. Microgaming is another iGaming behemoth with both a platform offering (casino and sportsbook) and games. Other large competitors are Play’n Go and Novomatic. The main competition does not therefore come from pure game developers but developers that also offer whole solutions with back office and hosting.
As it is virtually impossible to have a detailed view on NetEnt’s share of every market (and client) we have looked at the casino comparison site AskGamblers.com (owned by Swedish Catena Media) for its relative position among the competition. When we checked in November 2017, AskGamblers listed 1,187 online casinos (brands), of which 561 brands used NetEnt games, 120 Playtech, 515 Microgaming, 163 Play’n Go and 25 Novomatic. Of course, this is not a definitive statistic as not all brands are represented, or all games. Also, Playtech and Novomatic's business models are to have the whole iGaming
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ecosystem, and they could thus capture a larger share of the wallet of operators than from just games.
On AskGamblers, we counted in Other competitors include Amaya, Quickspin (owned by Playtech), Yggdrasil, excess of 170 game developers Nolimit city, ELK Studios, Thunderkick, Habanero, Realistic Games, Scientific (with NetEnt top billed, followed Games (which is in the process of acquiring NYX) and iSoftBet. On AskGamblers, by Microgaming and Playtech), we counted in excess of 170 game developers (with NetEnt top billed, followed offering thousands of games by Microgaming and Playtech), offering thousands of games. Most recently, Norwegian Gaming Innovation Group announced their own in-house games studio that will launch its first games in Q3 2018. Within live casino the competition is basically Evolution Gaming and Playtech, which basically owns the market with a combined market share of around 70-80%, we believe. In the US, the main competition would be Scientific Games and IGT as they have legacy positions with land-based gambling in the market and thus already have their client lists.
Some would argue the product differentiation among traditional slot games is low, with subsequent low barriers to entry. Certainly, there has been a large number of smaller entrants in the past couple of years (maybe most notably in Scandinavia with Yggdrasil, founded by former NetEnt people). However, slots are more unique than at a first glance and competition tools include royalty rates, promotional tools, loyalty programmes, CRM tools, branded games, heritage, games and platform quality, uptime (i.e. platform stability), and platform and game functionality. Differentiating factors within the games are return-to-player ratios, volatility, the sounds and visuals as well as the number of languages and currencies it can handle – i.e. the games need to be as attractive as possible for operators to promote.
With increasing betting duties, operators' gross margins will come under pressure and one risk for NetEnt could be that operators want to boost their Hold (NGR/deposits) and thus promote lower RTP games than that of NetEnt. Another risk could be platform suppliers not promoting NetEnt's games, or exclusive deals and content (such as the strategy of Playtech) that limits the addressable market for NetEnt. Another risk to NetEnt could be major games such as Starburst or Gonzo’s Quest churning due to another studio generating a new hit game.
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Financials Financial history NetEnt is a successful growth story NetEnt is a successful growth story, with a sales CAGR of 31% between 2007 with a sales CAGR of 31% in 2007- and 2016. Sales growth has been driven by new game launches, new market 16 entries, new client launches and growth within existing clients. Ten years ago, the opex base was smaller but margins have now stabilised, with the R12m EBITDA margin at 46.5% and R12m EBIT margin at 36.9%. The EBITDA and EBIT margins converged somewhat in 2016 due to timing effects of amortisations of intangible investments.
Sales and margin history
Source: Company data
Sales Virtually every major operator is a NetEnt has shown impressive sales growth at an average annual rate of 30% client since 2007 and of a CAGR of 31% in 2007-2016. As seen overleaf, NetEnt has signed a large number of operator clients and virtually every major operator is a client. Among clients are Unibet, Betsson, William Hill, 888 and Bwin. Of course, the lowest-hanging fruit has now been gathered and more recent signings are mainly smaller operators. Signings do not equal immediate growth as after launch it usually takes a couple of months for them to reach a normalised revenue contribution. The underlying activity could be measured by the number of transactions generated by NetEnt's games at the operators, and these also show a high correlation with sales in local currency for NetEnt. The number of annual transactions is in the billions and grew 29% in 2016, with revenue in EUR growing by 27%. The company aims to roll out 30-40 new clients per year, and in the past three years the average roll-out rate has been 33 per year.
Number of transactions (billions) measures the underlying activity among NetEnt’s clients
Source: Company data
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Growth supported by strong A high-paced output of new slot games by NetEnt every year has helped fuel output of new slot games and growth, together with some major operator launches. Below, we outline some of major operator launches the growth drivers over the past five years. In Q1 2012, the largest market was said by the company to be Sweden, followed by Norway and Italy. Growth drivers in 2012 included Italy, launch of the newly regulated Danish market, mobile games, signings with BoyleSports and Paddy Power, launch of a live casino games offering (although this has not been a growth driver to date) and launch of the successful slot game Starburst. In 2012, NetEnt signed 16 clients and rolled out 13. The largest events in 2013 were the signing of giants Ladbrokes and William Hill, and in 2014 we believe NetEnt had signed almost all of the large UK operators after Bet365 and BSkyB launched. That same year NetEnt signed Betfair and bwin.party, among others, and by the end of the year, the company had signed virtually all of the larger European operators, we believe. In 2013 and 2014, NetEnt signed 27 and 31 clients and rolled out 20 and 28 clients, respectively. In Q2 2015, NetEnt had a 10% market share in the UK and in Q3 2015 NetEnt launched in the US for the first time, with New Jersey going live. In Q4 of that year the company launched in Spain. In 2015, NetEnt signed 43 clients and rolled out 37. In early 2016, the NetEnt Rocks series of slot games was launched with Guns N’ Roses first out, and in Q4 2016 the UK became the group's largest market for the first time. In 2016, NetEnt signed 45 clients and rolled out 34. In 2017, NetEnt launched in Mexico and recent growth drivers have been the UK, Italy, Spain and, of course, mobile. In Q2 2017, NetEnt said the UK was its largest market and we speculate that Sweden and Norway were numbers two and three. For the first nine months of 2017, NetEnt had signed 29 clients and rolled out 24.
Sales growth has been driven by new but mainly existing clients – total client base (LHC) and annual revenue growth (RHC)
Source: Pareto, company data
While NetEnt has signed an average of eight clients every quarter since 2012, launch times have gone up somewhat with average quarterly launches of seven. As of Q3 2017, NetEnt had a backlog of 33 clients still to be launched.
As the large operators are mostly already NetEnt's clients, smaller signings and launches mean that the revenue per client will fall. Of course this ratio is somewhat misleading as newly launched clients do not get up to normalised revenue run-rates immediately, which is why we have chosen to look at R12m revenue per client. With the impressive growth in the number of clients in recent years, the R12m ratio is falling. For the first nine months of 2017, the average ratio was -9%. Due to timing effects of the roll-outs, we deem it not prudent to look at this metric on an annual basis but on a quarterly basis instead as the R12m method catches some of the timing issues. However, bear in mind that this metric is based on our estimate of the number of clients (derived from the number of launches).
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Signings, backlog and launches – revenue per client is falling (as smaller clients are diluting the ratio)
Source: Pareto, company data
FX exposure A strengthened EUR against the Most of NetEnt's revenue is invoiced in EUR, then GBP, SEK, NOK and USD, SEK is positive for revenues while a among others. Players deposit money in their local currency, which is then weak GBP has a negative effect on translated into EUR and then into SEK for reporting. A large part of costs are in revenues SEK and thus a weaker SEK has a positive impact on margins. However capitalisations and amortisations are in EUR and then translated to SEK, thus having an opposite effect. A strengthened EUR against the SEK is positive for revenues while a weak GBP has a negative effect on revenues. Even adjusting for the FX tailwind in the past three years, organic growth (in EUR) has been really impressive at an average rate of ~28%.
FX effects on reported growth rate
Source: Pareto, company data
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Seasonality Q4 the largest quarter Q4 is the largest quarter for NetEnt, showing an average sequential growth rate of ~14% in the past five years. As a rule of thumb, the Q4 level of revenues sets the baseline for the year ahead. Q1 tends to show similar revenues to Q4 while Q2 and Q3 are slower quarters, with Q3 normally the weakest (with southern Europe on holiday and the Nordic population outside if the weather is warm (the growth in mobile mitigates this slightly but not by much). As can be seen below, for natural reasons growth rates are starting to slow (i.e. they are coming from higher levels).
Seasonality – Q4 is the largest quarter and sets the baseline for the upcoming next year
Source: Pareto, company data
Another growth perspective – is the live casino vertical in general cannibalising on NetEnt's slot revenues? Although NetEnt has been posting impressive growth quarter after quarter, we have noticed a trend of falling growth rates when looking at the added sales in absolute numbers. Given the strong client base, with strong growth both within existing clients and from new clients, one would naturally expect added sales to grow. However, as seen below on a R12m basis, since 2016 growth rates have been falling. We speculate that this is due to the explosive growth within the live casino vertical that most operators (who offer it) are seeing. And given that NetEnt lags the competition in the area, we believe some of the potential growth has been “stolen” by other players such as Evolution Gaming and Playtech (market leaders in live casino). Below we have plotted H2GC estimated market share of RNG (random number generated games such as slots) and live casino in Europe. Clearly Live is taking share of online casino, and as H2GC expect the total market to grow at a CAGR of 7.8%, with RNG at 4.2%, it is clear that Live cannibalizes on slot revenues.
Growth in absolutes slowing, possibly due to cannibalisation from live casino (mainly Evolution Gaming), we speculate
Source: Pareto, company data
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Cost structure Personnel the largest cost item As for other software companies, the largest cost item is personnel, corresponding to 28.1% of sales in 2016. By the end of Q3 2017, NetEnt employed 763 people with an average of 746 over the quarter. However, as it also employs external consultants (reported in other expenses), the total headcount was 974 at end of Q3. On average over the years, external consultants have added some 30-35% extra people to the headcount figure. Since the end of 2013, the total headcount has roughly doubled. Among the staff, most notably developers, IT personnel and live casino employees are growing. If we were to assume the same cost per employee for consultants as for the group (although it is most likely higher for consultants), the cost of consultants within other expenses would make up around 25-30% with other costs being related to IT and data centers.
Tangible assets are written off over 1-7 years and amortisation of intangibles over 2-5 years. Investments in intangible assets are for new games development and technical adjustments to the platform. Since the Malta office orders and owns the development work done in other offices, the capitalisations are consolidated in EUR and then translated to SEK for reporting purposes. PPE investments are servers, computer equipment and offices.
Cost base – while growing in absolutes, NetEnt has been able to scale on its opex since 2012
Source: Pareto, company data
Operating margins Since 2012, the EBITDA margin has trended slightly upwards thanks to scale effects while the EBIT margin has risen considerably although last year these margins converged somewhat due to timing effects of amortisations. However, given recent investments into the platform, games development, and investment into live casino and mobile, amortisations should rise in absolute terms going forward.
Quarterly (R12m) and annual margins
Source: Pareto, company data
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Cash flow As NetEnt is debt free and corporate tax rates have been around 8% over the past couple of years, the capex-adjusted cash conversion3 rate has been fantastic, averaging 52% over the past five years. Working capital is relatively neutral (and mainly affected by the timing of bonus payouts from progressive jackpot games – the funds deposited by operators on behalf of their clients that play these games are accounted for in funds held on behalf of licensees on NetEnt's balance sheet). As NetEnt is a cash cow, distributions to shareholders have been high, with increased dividends every year since 2011 and no reductions in it, at least not since 2007. The 2016 dividend was increased to SEK 2.25 per share (from SEK 1.33 in 2015), corresponding to SEK 540m and a payout ratio of 107%. As of Q3 2017, NetEnt had a net cash position of SEK 287m (adjusted for a Maltese tax reimbursement of SEK 142m), corresponding to -0.4x EBITDA.
Cash flow and net debt/EBITDA ratio (LHC), and investments (RHC)
Source: Pareto, company data
3 Free cash flow as a percentage of EBITDA.
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Estimates Sales CAGR of around 11% in We estimate a sales CAGR of 11.5% for 2017-20 with the EBITDA margin scaling to 2017-20 48.6% in 2020 from an estimated 46.8% in 2017. Meanwhile we expect the EBIT margin to improve by only 35bps over the same period due to investments, partly into the live offering but mainly into game and platform development. With NetEnt being a giant in its field with a 25% European market share, the number of potential new (larger) client signings is somewhat limited. However, as some new markets are opening up, such as Pennsylvania in the US as well as in Latin America, we expect a continued high pace of signings and launches, although with a lower revenue contribution per new client.
CAGRs, 2017-20E 14.0 % 12.9 % 11.5 % 11.8 % 11.7 % 12.0 % 10.0 % 8.0 % 6.0 % 4.0 % 2.0 % Sales EBITDA EBIT EPS Source: Pareto
Sales and market share Numerous growth drivers ahead We see the growth drivers as existing clients (the main driver), new products and services (more consultative services could drive margins but we have not included this in our estimates), and new markets (with regulated markets in focus such as the US, with Pennsylvania just opened up)). We believe volumes will continue to grow, driven by further mobile penetration within the client base and a continued release of top-class games from NetEnt, although with prices (royalty rates) slightly down as existing clients grow larger and reach lower commission tiers. NetEnt says its short-term growth drivers are the UK, other regulated markets, mobile and North America. Long-term growth drivers are Asia, live casino, retail and Latin America.
With already a large footprint in Europe (it is present in the UK, Denmark, Italy, Belgium and Spain among the regulated markets), Sweden and the Netherlands opening up would possibly fuel growth with Swedish ATG and Svenska Spel probably entering the stage, but also from the markets possibly becoming larger when regulated (as is common). As Sweden is set to regulate in 2019, we would not expect revenue streams from Svenska Spel or ATG until late 2019, with the 2020 effect hard to reflect in our estimates. NetEnt already has a presence in North America (New Jersey) and Pennsylvania has now opened up too, although we deem the tax rate on slots to be too high to feel comfortable expecting too much in the near term. There are also talks about Michigan, Illinois and New York regulating and it would not be a surprise if the regulation of online gambling in the US now begins to pick up speed. Furthermore, Latin America (Colombia and Mexico, among others) have opened up and could present growth opportunities, albeit while they have large populations, the expected ARPU levels from players would be considerably lower than for Europe. NetEnt is already live in Mexico and just signed a second client in the market.
Most of the large operators have already been signed up, although there is still room for NetEnt to grow within some (such as Ladbrokes). We believe the Asian opportunity to be huge although further into the future as regulation doesn’t look like it will be happening there anytime soon. We believe the company's long-term expectations regarding the retail vertical are due to NetEnt seeing
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the ongoing shift from offline to online, and it wants to be with its clients as they transform onto online (and mobile), until then using retail as a cross-selling tool to online.
M&A NetEnt has no history of acquiring, and has not made public any ambition to acquire, but as we sense somewhat of a commoditisation of slots (although in general NetEnt is still releasing top-quality slots), we expect consolidation also within this vertical. This is already happening among the operators and Playtech have been acquiring game developers.
Falling per client revenue As we expect NetEnt to continue to sign new clients, albeit small and mid-sized ones, we have to assume the trend of y/y falling revenue per client will continue. With more customer launches, the per client revenue dilution could accelerate, although with existing clients continuing to grow, it could be mitigated (NetEnt also receives setup fees from new clients, regardless of size). Also, as NetEnt signs smaller clients, it receives higher royalty rates, meaning that the average royalty rate could turn out to be rather stable. We expect the decline in R12m revenue per client to stabilise at around 4%. NetEnt aims to be able to launch 30-40 clients per year, and while we cannot name each and every one we expect it to sign, we believe there is enough operators out there that it could sign this amount annually through to 2020 and we expect 36 new yearly.
Detailed breakdown of actuals and estimates SEKm Q1´16 Q2´16 Q3´16 Q4´16 Q1´17 Q2´17 Q3´17 Q4´17E Q1´18E Q2´18E Q3´17 Q4´18E 2015 2016 2017E 2018E 2019E 2020E Sales 345 351 356 400 396 401 405 451 456 468 465 510 1,129 1,452 1,653 1,899 2,109 2,296 Other revenue 1 1 1 1 2 6 -3 0 0 0 0 0 3 3 4 0 0 0 Total sales 345 352 357 400 398 407 401 451 456 468 465 510 1,132 1,455 1,657 1,899 2,109 2,296 Growth (y/y) 33.7 % 29.8 % 27.7 % 23.9 % 15.2 % 15.5 % 12.3 % 12.7 % 14.7 % 15.0 % 15.9 % 12.9 % 33.0 % 28.5 % 13.9 % 14.6 % 11.1 % 8.9 % Growth (q/q) 6.9 % 1.9 % 1.5 % 12.0 % -0.6 % 2.2 % -1.3 % 12.5 % 1.1 % 2.5 % -0.5 % 9.6 % Personnel expenses -98 -105 -98 -108 -114 -118 -109 -121 -127 -130 -127 -139 -334 -409 -461 -524 -584 -642 Other operating expenses -86 -91 -95 -100 -111 -104 -97 -108 -114 -115 -113 -119 -258 -371 -420 -461 -506 -537 Total opex -184 -196 -193 -208 -225 -222 -205 -230 -241 -245 -240 -259 -593 -780 -882 -985 -1,090 -1,180 Opex growth (y/y) 28 % 35 % 38 % 26 % 22 % 13 % 6 % 11 % 7 % 10 % 17 % 13 % 28.4 % 31.7 % 13.0 % 11.7 % 10.7 % 8.2 % Opex growth (q/q) 11 % 7 % -1 % 7 % 8 % -1 % -7 % 12 % 5 % 1 % -2 % 8 % EBITDA 162 156 164 193 173 185 196 222 215 223 225 251 540 675 775 914 1,019 1,116 EBITDA margin 46.8 % 44.4 % 45.9 % 48.1 % 43.5 % 45.4 % 48.8 % 49.1 % 47.1 % 47.6 % 48.4 % 49.3 % 47.7 % 46.4 % 46.8 % 48.1 % 48.3 % 48.6 % Depr., amort. and impair. -34 -34 -35 -37 -37 -40 -40 -41 -44 -46 -48 -50 -138 -139 -157 -189 -223 -252 EBIT 128 122 129 156 136 145 156 181 171 176 177 201 402 536 618 725 796 864 EBIT margin 37.1 % 34.8 % 36.2 % 39.0 % 34.2 % 35.7 % 38.9 % 40.0 % 37.4 % 37.7 % 38.0 % 39.4 % 35.5 % 36.8 % 37.3 % 38.2 % 37.7 % 37.6 % Net financials 4 1 0 4 -2 2 -2 0 0 0 0 0 2 10 -2 0 0 0 EBT 132 123 130 160 134 147 154 181 171 176 177 201 403 546 616 725 796 864 EBT margin 38.3 % 35.1 % 36.3 % 40.0 % 33.8 % 36.2 % 38.4 % 40.0 % 37.4 % 37.7 % 38.0 % 39.4 % 35.6 % 37.5 % 37.2 % 38.2 % 37.7 % 37.6 % Tax -11 -10 -10 -10 -10 -13 -12 -15 -15 -15 -15 -17 -29 -41 -51 -62 -68 -75 Tax rate 8.0 % 8.1 % 8.0 % 6.4 % 7.7 % 9.0 % 7.6 % 8.5 % 8.5 % 8.5 % 8.6 % 8.6 % 7.3 % 7.5 % 8.2 % 8.6 % 8.6 % 8.7 % Net profit 122 113 119 150 124 134 142 165 156 161 162 184 374 504 566 663 727 789
EPS 0.51 0.47 0.50 0.62 0.52 0.56 0.59 0.69 0.65 0.67 0.67 0.76 1.56 2.10 2.36 2.76 3.03 3.29 EPS full dil. 0.08 0.47 0.49 0.62 0.51 0.55 0.59 0.68 0.64 0.66 0.67 0.75 1.56 2.09 2.33 2.73 2.99 3.24
FX growth y/y -1 % 0 % 1 % 5 % 2 % 5 % 0 % 0 % 0 % 0 % 0 % 0 % 4 % 2 % 2 % 0 % 0 % 0 % Organic growth y/y 35 % 30 % 27 % 19 % 13 % 11 % 12 % 13 % 15 % 15 % 16 % 13 % 29 % 27 % 12 % 15 % 11 % 9 % Total sales growth y/y 34 % 30 % 28 % 24 % 15 % 15 % 12 % 13 % 15 % 15 % 16 % 13 % 33 % 28 % 14 % 15 % 11 % 9 %
EBITDA growth y/y 40 % 23 % 17 % 22 % 7 % 18 % 19 % 15 % 24 % 21 % 15 % 13 % 38 % 25 % 15 % 18 % 12 % 10 % EBIT growth y/y 57 % 32 % 23 % 28 % 6 % 18 % 20 % 16 % 25 % 22 % 14 % 11 % 53 % 33 % 15 % 17 % 10 % 9 % EPS growth y/y 64 % 31 % 22 % 30 % 2 % 18 % 19 % 10 % 26 % 21 % 14 % 11 % 53 % 35 % 12 % 17 % 10 % 8 %
EBITDA margin 46.8 % 44.4 % 45.9 % 48.1 % 43.5 % 45.4 % 48.8 % 49.1 % 47.1 % 47.6 % 48.4 % 49.3 % 47.7 % 46.4 % 46.8 % 48.1 % 48.3 % 48.6 % EBIT margin 37.1 % 34.8 % 36.2 % 39.0 % 34.2 % 35.7 % 38.9 % 40.0 % 37.4 % 37.7 % 38.0 % 39.4 % 35.5 % 36.8 % 37.3 % 38.2 % 37.7 % 37.6 %
Number of clients 142 148 156 168 174 182 192 204 212 221 230 240 134 168 204 240 276 312 Client signs 9 12 11 13 15 6 8 10 9 9 9 9 43 45 39 36 36 36 Client launches 8 6 8 12 6 8 10 12 8 9 9 10 37 34 36 36 36 36 About to launch 25 31 32 31 39 36 33 31 32 32 32 31 24 31 34 34 34 34 Source: Pareto
Organic growth in 2018 expected 2018 organic growth should pick up thanks to new markets and the increased to pick up overall operator activity from FIFA 2018 during the summer. We expect a fully regulated environment in the countries that NetEnt is present in to result in
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around 20% tax pressure overall, and assuming NetEnt takes its share (corresponding to an assumed blended royalty rate of 10%), the company would have to absorb 2% of this tax pressure, weighing on NetEnt's revenue growth, which is one reason why we expect a slowdown in growth rates in 2019 and 2020. Another reason we expect a slowdown in growth is due to live casino taking share of the online casino market.
We expect continued growth although a slowdown due to tougher comparatives, tax pressure and signings of smaller companies
Revenue per R12m clients, SEKm Growth y/y Sales, SEKm Growth y/y 3.0 0% 2,500 60% -2% 50% 2.5 -4% 2,000 -6% 40% 2.0 1,500 -8% 30% 1.5 -10% 1,000 -12% 20% 1.0 -14% 500 10% 0.5 -16% -18% 0 0% 0.0 -20% Q1 Q1 Q1 Q1 Q1 Q1E Q1E Q1E 2013 2014 2015 2016 2017 2018 2019 2020 Revenue per R12m clients Growth y/y Sales Growth y/y Source: Pareto, company data
Market share We expect NetEnt to increase its For a market leader, it all comes down to market share and how to retain it. market share NetEnt reported its 2016 European online market share was 25% with 15% globally. While not an input into our revenue model, the implied market share (derived from H2GC's forecasted market size) serves as a sanity-check to our estimates.
As H2GC reports gross gaming revenue (GGR) estimates for market size and NetEnt’s revenue is derived from operators' NGR, after some tax deductions, we have had to make small adjustments with regards to bonuses, the tax rate and the royalty rate to consolidate the two. This is why we show both the implied market share (according to our estimates) and the historical reported market share. As per our estimates, NetEnt would have a European market share of 34% in 2020 and 21% globally. However, just as with Evolution Gaming, we regard the H2GC data as rather conservative (and not definitive as it is often updated), which could skew the implied market share upwards. It should be noted that H2GC expects a CAGR of ~8% for North America (i.e. higher than the global average) through to 2020, within the global market data.
Market share – looking at H2GC's estimated market sizes, our estimates imply a European market share of 34% in 2020 Europe online market share. Implied Global online market share. Implied 40 % 25 % 35 % 20 % 30 % 25 % 15 % 20 % 15 % 10 % 10 % 5 % 5 % 0 % 0 %
Implied Reported Implied Reported Source: Pareto, H2GC
Cost structure and margins While harder to determine the exact quarterly numbers, we are of the opinion that the margin trend will be slightly on an upwards trajectory as NetEnt has still has some scaling on opex to come through.
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Personnel costs We expect continued recruitment and with consolidation and regulations some wage inflation also, although wages should be somewhat capped as lower-wage countries could take their share of the increased headcount. NetEnt is trying to phase out external consultants and to hire them on a permanent basis instead, which would shift costs from other expenses (where consultant costs are currently booked) to personnel costs (which currently only includes its own hires). This shift should see cost per total employees move downwards. An area of staff we expect to grow is compliance as NetEnt aims to go into more regulated markets, although, of course, it will also aim to keep up the high output of games and innovations. As can be seen below, we expect NetEnt to take some consultants in-house, resulting in personnel costs increasing the share of costs from other expenses, although the net effect is rather neutral. In all, we expect total headcount to grow by a CAGR of ~9% until 2020.
Other expenses NetEnt has just expanded the Stockholm office, which is now sized for five years of growth at least. It is also just about to get a new office in Malta, and also in Gibraltar (although smaller). This cost item also includes IT costs and data centre costs and as one of NetEnt’s key selling points are the stability of the platform, we expect it to drive costs as transactions grow. In all we expect other costs as percent of sales to come down 200bps from 25.4% until 2020.
Depreciation and amortisation We expect continued investments into the platform (we forecast slight growth in absolute capex annually). Both games development and platform costs are capitalised. In order to retain a high grow rate, we expect NetEnt to continue innovating and developing new concepts, which will drive capitalisations and investment in intangibles. While management believes the increase in investments will fade we believe the current landscape of rising competition (not least within and from live casino) will require a high-paced output and thus increased investments. In the past three years, NetEnt has reinvested ~9-10% of sales in intangibles, and we expect some scaling on this. We estimate tangible investments at around 4%. We don’t expect D&A and capex to match entirely although D&A should start to grow from stalling in 2016. This in turn will make EBITDA and EBIT spread apart going forward.
Cost structure and EBITDA and EBIT margin projections
% of sales Margin, SEKm 100% 55.0 % 80% 35.5 % 36.8 % 37.3 % 38.2 % 37.7 % 37.6 % 48.6 % 50.0 % 46.8 %
60% 12.2 % 9.5 % 9.5 % 9.9 % 10.6 % 11.0 % 45.0 %
40% 22.8 % 25.5 % 25.4 % 24.3 % 24.0 % 23.4 % 40.0 % 37.3 % 37.6 %
20% 35.0 % 29.5 % 28.1 % 27.9 % 27.6 % 27.7 % 28.0 % 30.0 % 0% 2015 2016 2017E 2018E 2019E 2020E 25.0 % Personnel expenses Other operating expenses D&A EBIT margin 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E EBIT margin EBITDA margin Source: Pareto, company data
Net income/EPS As NetEnt is debt free, net financials are only affected by FX driven balance sheet revaluations between quarters (non-cash) and only by smaller nominal amounts. With an increased physical footprint we expect the corporate tax rate to rise somewhat in the coming years. We expect an EPS CAGR of 12% through to 2020.
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Cash flow We model net working capital to be essentially flat, a continued investment into games development and the platform, however coming down from 9.5% of sales in 2017 to 8.5% in 2020, and expect a continued high cash conversion rate (FCF of EBITDA), of an average of 66% through to 2020. This enables NetEnt to be able to continue increasing its dividends.
Investments, depreciations and amortisations (LHC), and cash flow (RHC)
SEKm Cash flow, SEKm Net debt/EBITDA 300 1200 0.0x 250 1000 -0.1x -0.2x 200 800 -0.3x 600 -0.4x 150 400 -0.5x 100 -0.6x 200 -0.7x 50 0 -0.8x
0 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E Cash flow before delta WC Free cash flow Net debt/EBITDA Investments in tangibles Investments in intangibles D&A Source: Pareto, company data
Dividends and dividend yield NetEnt's financial targets stipulate a payout ratio of at least 60% of earnings after tax in dividends although, given the historical net cash positions and great cash flow generation, this policy have been surpassed every year since at least 2007. In 2016, DPS was 7% larger than EPS, and the company used the high dividend to adjust the capital structure for excess cash. This is also why we expect the 2017 dividend to be lowered somewhat, to SEK 2.15 per share and then DPS to be raised annually until 2020 with accumulated distributions since 2009 to shareholders to surpass SEK 3bn in 2020. But given that we expect NetEnt to hold a net cash position of SEK 805m in 2020, we might be proven too cautious on dividends.
Free cash flow and FCF yield (LHC), and accumulated dividends and dividend yield (RHC) Accumulated dividends, SEKm Div. yield FCF FCF-yield 3,500 7.0 % 900 5.3 % 6.0 % 800 4.7 % 3,000 6.0 % 4.1 % 5.0 % 700 2,500 5.0 % 3.9 %4.1 % 600 3.3 % 4.0 % 3.5 % 500 2,000 4.4 % 4.0 % 2.4 % 3.0 % 400 1,500 3.0 % 300 2.0 % 1,000 2.0 % 200 1.0 % 100 500 1.0 % 0 0.0 % 0 0.0 %
FCF FCF-yield Source: Pareto, company data
Expectations ahead of Q4 2017E – due out 15 February 2018 Q4 is the strongest quarter of the With Q4 being the strongest quarter of the year, we expect NetEnt to report year – solid growth and margins growth of 12.7% y/y to SEK 451m with an EBIT margin of 40%, up 100bps y/y expected and 110bps from Q3. We expect growth drivers to be newly launched games, the UK, Italy and mobile. While probably not a large part of sales as yet, new data from New Jersey suggest market growth of above 20% y/y for Q4, with us expecting NetEnt to grow faster than the market. The annual industry conference ICE will be held the week before the Q4 report and we expect NetEnt to present new games and maybe some news on its live casino offering.
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Pareto versus consensus estimates In line with consensus on sales but We are in line with FactSet consensus on sales for 2017-209E while for EBIT we below on EBIT are slightly lower. The spread within consensus between low and high sales and EBIT expectations is around 10-15% for 2018-2019E. We are in line with consensus on dividends.
Pareto versus consensus expectations
Revenue, SEKm EBIT margin EBIT, SEKm EBIT margin 2,400 39.0 % 900 39.0 % 38.0 % 800 38.0 % 2,000 37.0 % 700 37.0 % 1,600 36.0 % 600 36.0 % 35.0 % 500 35.0 % 1,200 34.0 % 400 34.0 % 800 33.0 % 300 33.0 % 32.0 % 200 32.0 % 400 31.0 % 100 31.0 % 0 30.0 % 0 30.0 % 2017E 2018E 2019E 2017E 2018E 2019E Consensus Revenue PAS Revenue Consensus EBIT PAS EBIT PAS EBIT margin Cons EBIT margin PAS EBIT margin Cons EBIT margin Source: Pareto, FactSet
Consensus estimates has been slowly trending downwards We have to admit that NetEnt is not the easiest company to have concrete convictions on regarding quarterly estimates, and over the past year, 2018 consensus sales estimates have been revised down by ~8% while EBIT has been revised down by 4%. However, Q3 saw consensus increase 2018 EBIT margin expectations from 36.8% to 38% (we are at 38.2%) with NetEnt hinting at scaling effects in the Q3 report.
Consensus sales and EBIT expectations (PAS in light blue) – considerable upward revisions to 2018E EBIT margin after Q3
2018 sales consensus, SEKm 2018 EBIT consensus, SEKm 2200 800 2100 750 2000 1900 700 1800 650 1700 600 1600 550 1500 500 1400 1300 450 1200 400 31 Oct '14 31 Oct '17 31 Oct '14 31 Oct '17
Source: Pareto, FactSet
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Valuation Valuation summary We initiate coverage of NetEnt We initiate coverage of NetEnt with a Buy recommendation and a target price with a Buy recommendation and of SEK 70 per share. The double-digit growth rates are coming down to start target price of SEK 70 with the number 1 from 2 or 3 just a year ago, with the valuation responding accordingly. NetEnt's multiples started to grow in 2013 when growth and margins shot up; however, margins have stabilised and now seem to be trending up only slightly. We believe investors need to look at NetEnt's valuation in a longer-term perspective and think the analysts that make up consensus are unwinding their valuation approaches / target prices after the strong share price performance and subsequent “over-shooting” multiples at the end of 2015 / beginning of 2016.
We cannot argue for multiples in As we expect a slowing down of EPS growth (as do consensus, which should line with historical averages... already be priced into the share) we cannot argue for multiples in line with historical averages. We do acknowledge the longer-term opportunities however and thus could not either argue for the current valuation fairly reflecting its prospects. Due to the inherent reinvestment needs into games and the platform, we believe looking at EBIT multiples when valuing the company is a prudent approach, and with 2019 soon enough to become the next estimate year we argue that 20.5x 2019E EBIT, or SEK 70 per share, is a fair value for NetEnt, corresponding to ~15% upside from the current share price. Our target price is somewhat supported by our DCF approach, which yields SEK 68 per share.
Peer valuation (please find a peer table at page 21) It is difficult to look at peer valuations for comparison purposes, as there are so few. The only comparable company is Evolution Gaming. Key competitor Playtech however is active throughout the iGaming value chain although, despite good growth, it has never traded at high multiples – partly due to its Asian, non-regulated exposure and conglomerate structure, we speculate. Peer Evolution Gaming’s live casino product is taking market share from NetEnt’s slots we speculate and we expect Evolution Gaming to show a sales CAGR of 23% through 2017-2020. Evolution Gaming is trading at ~21x the consensus 2019 EBIT expectation but ~17.5x our 2019 EBIT estimate. Our target price on Evolution Gaming implies 25x 2019E EBIT. Our approach of 20.5x 2019E EBIT for NetEnt thus captures the relative performance between the two companies.
...although believe the company is We have found that NetEnt's share price correlates with the expected EBIT justified in trading at relatively margins, and the sharp rerating of the share between 2013 and 2015 was when high multiples still EBIT margins started to trend up sharply from less than 30% to 35-36%. Since then margin growth has been more muted with a subsequent revaluation to current levels of ~20x NTM EBIT. As we expect further EPS growth (EPS CAGR of 12% through 2017-20E) together with continued high profitability (ROE >60%) and cash conversion from FCF (~65%) we think NetEnt is justified in trading at relatively high multiples still. This can be seen in other software companies with high cash conversion as well. However, due to the stalling growth profile we expect (partly due to it already having signed most of the big names) and also because of the strong growth in competitors' live casino revenues, which seem to be cannibalising on NetEnt's growth, we cannot argue for multiples in line with the three-year average.
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Multiples expansion in 2013-2015 when margins shot up – we expect more modest EPS growth going forward
EBIT margin, NTM estimate NTM EV/EBIT EPS growth y/y 39.0 % 50.0x 60 % 45.0x 37.0 % 40.0x 50 % 35.0 % 35.0x 40 % 33.0 % 30.0x 25.0x 30 % 31.0 % 20.0x 29.0 % 15.0x 20 % 10.0x 27.0 % 5.0x 10 % 25.0 % 0.0x 11/28/2012 02/21/2014 05/19/2015 08/11/2016 11/06/2017 0 % 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E EBIT margin NTM EV/EBIT Source: FactSet, Pareto
In the past three years, the average NTM EV/EBIT multiple has been ~30x but this was during the years of 40-50% EPS growth. Since the recent share price decline to around SEK 60, the current consensus NTM EV/EBIT valuation is ~20x, a historical discount of 35%. Looking at the expected EPS growth and valuation, the PEG ratio (2019E P/E over EPS CAGR 2017-2019E) of 1.5x suggests expectations are still fairly high.
Historical valuation ranges – NTM EV/EBIT coming in at a 35% discount to three-year average seems fair as growth has slowed
Source: Pareto, Factset
The share price decline has resulted in yields going up, with FactSet consensus expecting a 4.0% NTM FCF yield and 4.0% NTM dividend yield. We thus believe the share price territory of around SEK 60 could be an attractive entry point, although there is limited upside to our target price of SEK 70 per share.
Historical yields have come up of late
Source: FactSet
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DCF valuation Our discounted cash flow valuation suggests a value of SEK 68 per share, although due to its highly sensitive nature we only use the DCF as a sanity-check of our multiples-based valuation approach. Given the growth and margin profile we expect, together with a WACC of 7.75% and terminal growth rate of 4%, at a 36% EBITDA margin, we arrive at a DCF valuation of SEK 68 per share.
DCF assumptions: Metrics Growth CAGR 2017-2020E 11.5 % PV forecast period 5,808 Growth rate 2020-2026 8.0 % PV continuing period 10,176 Growth rate 2027+ 4.0 % Total value of operations 15,984 EBITDA margin 2020E 48.6 % Net debt -494 EBITDA margin 2021-2026 45.0 % Total equity value 16,479 EBITDA margin 2027+ 36.0 % Other non-operating assets 0 Tax rate 9.0 % Number of shares 243.2 Risk free rate 2.5 % DCF value per share 68 Equity risk premium 5.3 % Share price now 61 Industry un-levered beta 1.0 Potential 12 % WACC 7.75 % Source: Pareto
DCF sensitivity EBITDA margin 26.0 % 28.0 % 30.0 % 32.0 % 34.0 % 36.0 % 38.0 % 40.0 % 42.0 % 44.0 % 46.0 % 6.3 % 76 82 88 95 101 108 114 121 127 133 140 6.8 % 65 70 75 80 85 90 95 100 105 110 115 7.3 % 57 61 65 69 73 77 81 85 89 93 97 WACC 7.8 % 51 54 58 61 64 68 71 74 78 81 84 8.3 % 47 49 52 55 58 61 63 66 69 72 75 8.8 % 43 45 48 50 53 55 57 60 62 65 67 9.3 % 40 42 44 46 48 51 53 55 57 59 61 Source: Pareto
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Management team and board The management team is led by CEO since 2012, Per Eriksson, previously CEO of Dustin Group. CFO Therese Hillman joined NetEnt in 2017, after previously being CEO of Gymgrossisten. Other senior management include: Chief of European Market Operations Enrico Bradamante (2012), HR Karin Palmquist (2015), Chief Product Officer Simon Hammon (2011), Chief Development Officer Åsa Bredin (2015), Chief Information Officer Ludvig Kolmodin (2009), Communications Director Anna Romboli (2014) and Head of IR Roland Glasfors (2014).
The Board is led by Chairman Vigo Carlund, member of the Board since 2008 and elected Chairman 2011. Board members include: Fredrik Erbing (2008), Peter Hamberg (2009), Pontus Lindwall (2011), Michael Knutsson (2012), Maria Redin (2012), Jenny Rosberg (2015) and Maria Hedengren (2017).
Shareholders NetEnt’s main shareholders include families of founders of Cherryföretagen (which NetEnt sprung from) with the main shareholder Michael Knutsson holding 6.5% of the shares and 12.8% of the votes, Per Hamberg holding 6.2% of the shares and 19.6% of the votes and Rolf Lundström 6.0% of the shares and 14.1% of the votes. Currently, the only known short position (above 0.5% of the shares) of NetEnt is of 0.9% of the B shares. The free float is ~75%.
Shareholders Shareholders, as of 2017-09-30 A-shares B-Shares Capital Votes Michael Knutsson 6.0 9.6 6.5 % 12.8 % Per Hamberg 10.2 4.6 6.2 % 19.6 % Rolf Lundström 6.9 7.4 6.0 % 14.1 % Svenska Handelsbanken AB for PB 2.8 9.1 4.9 % 6.8 % Lannebo Fonder 0.0 9.3 3.9 % 1.7 % Livförsäkringsbolaget Skandia 0.0 8.5 3.5 % 1.6 % Avanza Pension 0.0 4.8 2.0 % 0.9 % Handelsbanken Fonder 0.0 4.6 1.9 % 0.9 % Berit Anita Lindwall 3.6 0.7 1.8 % 6.8 % Nordea Fonder 0.0 4.3 1.8 % 0.8 % Others 4.2 143.6 61.5 % 34.1 % Total 33.7 206.5 100.0 % 100.0 % Source: Holdings.se
Insider holdings and transactions There are considerable insider holdings among the Board members. CEO Per Eriksson holds 143,538 shares and 462,400 share options. Over the past year, there have been three insiders (Board members) selling shares for a total of SEK 31m and one insider (the Chairman of the Board) acquiring shares for a total of SEK 1.4m.
Option programmes, currently out of the money, possible dilution of only ~1% NetEnt has three outstanding option programmes. The 2015-2018 programme of 0.94m shares has a strike price of SEK 71.07 per share and vests between 1 August and 1 October 2018. Currently out of the money but this would only result in a possible dilution of 0.4%. The 2016-2019 programme of 1.44m shares has a strike price of SEK 109.7 per share and vests between 1 August and 1 October 2019. Currently out of the money but this would only result in a possible dilution of 0.6%. The 2017-2020 programme of 0.72m shares has a strike price of SEK 92.40 per share and vests between 1 August and 1 October 2020. Currently out of the money but this would only result in a possible dilution of 0.3%.
30 Nov 2017 Pareto Securities Research 78(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
30 Nov 2017 Pareto Securities Research 79(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
Kambi – The Prince of Sports
We initiate coverage of Kambi with a Buy recommendation and a target price of SEK 97 per share as 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 2017-20 with EBIT margins scaling further, from 7.7% in 2017 to 13.0% in 2020. 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.
Key figures EURm 2016 2017e 2018e 2019e 2020e Revenues 56 59 71 78 89 EBITDA 16 13 18 20 24 EBIT adj 9 4 8 9 12 EBIT margin adj 15.7% 7.4% 11.9% 11.9% 13.0% EPS 0.25 0.11 0.23 0.27 0.33 EPS adj 0.25 0.11 0.23 0.27 0.33 DPS - - - - -
EV/EBITDA 25.0 18.4 12.3 10.8 8.8 EV/EBIT adj 44.3 - 26.6 23.2 18.0 P/E adj 55.3 - 36.9 32.3 26.2 P/B 10.39 5.86 5.06 4.37 3.75
ROE (%) 20.8 7.9 14.7 14.5 15.4 Div yield (%) - - - - - Net debt (25) (26) (32) (40) (49) Source: Pareto, FactSet
Premium sportsbook supplier with the chance of signing new clients Kambi is regarded as one of the best sports book suppliers in the market with some prestigious clients such as Kindred and 888 Sport to prove it. We find it likely that Kambi will sign new clients ahead of FIFA 2018 and with regulation in Sweden coming up in the next couple of years. The reason we refer to Kambi as the prince of sports is due to Bet365 being the giant in the field – the good thing though is that Bet365 doesn’t outsource its platform.
Scalable business model could result in even higher margins than we expect Operating a sportsbook is headcount and opex heavy and while we believe Kambi will continue investing in the platform offering with headcount forecast to grow ~9% annually, we expect revenue growth to scale on costs. We have examined a theoretical example of the cost scaling of a potential client the size of what we believe ATG could bring to Kambi and have found that our 2020 EBIT margin estimate could prove to be ~300bps too low, taking down the implied valuations by some 5-23%.
We initiate with a Buy rating and target price of SEK 97 On our 2019 estimates Kambi trades at 23.3x EBIT, but given that we expect further signings (we are just unsure of the timing and size) and due to the scalability of the business model if more operators were to sign with Kambi, we argue a 10% premium to the three-year average NTM EBIT multiple is fair, at ~27x 2019E EBIT.
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Company description Short company history A B2B supplier of full-scale sports Kambi is a B2B supplier of a full-scale sports betting platform to clients such as betting platform to sports betting Kindred, 888 and LeoVegas. Kambi was established as a subsidiary of Unibet and casino operators (now Kindred Group) in 2010 and spun off to Unibet’s shareholders, listing it on Nasdaq First North in June 2014. The company is mainly based in London, with additional offices in Bucharest, Malta, Manila, Stockholm and Sydney. Total headcount as of September 2017 was ~600 and the largest shareholder is Veralda, the investment vehicle of Anders Ström, founder of Kindred.
Prior to being spun out in 2014, Kambi was the in-house supplier of Unibet´s sportsbook platform solution. Since then, Kambi has signed a net of 13 additional clients – mainly in Europe but also in South America and Asia. As of 2016 Kindred and 888 accounted for 78% of Kambi´s revenue, while we believe other clients such as Mr Green and LeoVegas are set to increase their share.
Product and business model Kambi handles everything, for Kambi is a B2B provider of a full-scale sports betting platform to online casino and which it is paid a tiered sports betting operators. After integration, which takes a couple of weeks to commission fee on player losses months, Kambi handles everything from setting the odds to risk management, as well as the front-end and the back office. For this, Kambi charges a tiered commission fee (revenue share) on player losses (gross gaming revenue adjusted for some deductibles), as well as some smaller fixed fees (~10% of revenue) and fees depending on the number of live events offered. While we don’t know the exact royalty rates, based on what we have heard (and roughly back-tested) we arrive at a range of 10-20%, with the larger clients at the lower end of the scale. Kambi makes the lion’s share of its revenues from commission. Kambi focus on regulated markets and as of Q3 2017, 49% of revenues was derived from regulated markets.
Of the ~600 staff, around half are odds traders, who, with the help of data- driven odds models, set the odds for games and events. The cloud-based product is compliant in several regulated markets and is built on HTML5, which enables bettors to play on desktop, mobile and tablet. Kambi also offers solutions for retail (platform for physical betting machines). The company covers 65 sports and throughout a year offers odds on ~300,000 pre-match and ~185,000 live events, with the most important sport being football, followed by, among others, tennis, horse racing, ice hockey, etc. In addition to odds, Operators can also present match and player statistics to its players in order to encourage betting. In order for operators to differentiate themselves Kambi offers them the opportunity to differentiate the odds on certain events (within certain limits). The front-end solution is also customisable, providing further opportunities for operators to brand themselves through new features (recently, Mr Green has launched its own features built on the Kambi solution). Kambi's stated aim is to create the best B2B sportsbook in the market and throughout the industry it is considered a premium sportsbook supplier, with its solution a bit more pricy than competitors' offerings.
Kambi product in action, here at Unibet.com
Source: Unibet.com
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As developing and maintaining a sportsbook is opex and capital heavy, Kambi offers the operators the opportunity to scale on their own costs by turning opex into cost of sales – especially going into more regulated environments, which we believe will be a driver for operator consolidation but also for pushing pure- play operators onto third party platforms. Kambi strives to: 1) be the secure choice, 2) committed to player experience, 3) data driven, 4), empower operators, 5) drive financial performance for operators. The solution has won several awards and most recently, six of its clients were among the top 40 of the EGR Power 50 rankings. Kambi supplied 75% of the operators on the list that outsourced their sportsbook.
To understand sports betting revenue, we start with the odds The underlying product is odds and Odds and odds setting is the underlying product that Kambi offers. In short, the odds setting operators generally want to see non-favourite wins as this results in lower payouts to players overall (the odds on favourites are set such that the payout is lower than the betted amount while the odds on non-favourites pay better (often more than the staked amount)4, but higher odds mean that an event is less likely. Bets are not just on outright wins or losses, penalties, number of goals etc but can be a combination of a number of events, called accumulators or multipliers (these have a higher, but more volatile, margin than single bets and can have large effects on a single quarter's betting margin).
The sports betting margin is the sports' top-line Kambi charges a royalty on the In total, payouts in sports betting are around 93-94% of the played amount on operator's sports betting revenue average, compared with online slot payouts of around 96-98%. The sports betting payout therefore corresponds to a sports betting (gross) margin of 6-7% of the played amount (stake). This is the top-line revenue that operators report and on which Kambi charges a royalty, after some deductions. However, as sports betting margins are dependent on sports results they can be volatile on a quarterly basis (although they even out over time). Investors should therefore focus on the sportsbook turnover that the Kambi product generates for its operator clients, as this is the true underlying metric of performance.
The inverse of the odds set is the gross margin for an operator For odds for a given event to be profitably set for the operator, the sum of the inversed odds needs to be above 100% as the odds reflect the probability of events. In the real world example below of a football match between Arsenal and Tottenham November 18, the sum of the pre-match odds is 102.6%, meaning that the operator theoretically would report a pre-match gross margin of 2.6% for the match given that the odds did not change and that the sports book was balanced. However, heavy one-sided stakes and poor odds can result in negative or low margins. Live betting odds are discussed below.
How odds and gross margins correlate - Pre-match and live betting example
Pre-match odds Live-betting odds 1 X 2 1 X 2 Odds 2.45 3.52 3.00 Odds 2.40 3.45 2.88 Probability 41 % 28 % 33 % Probability 42 % 29 % 35 % Sum 102.6 % Sum 105.4 % Gross margin 2.6 % Gross margin 5.4 % Source: Pareto, Unibet.com
Highly data-driven operations – odds set by data models and odds traders For every game and match, Kambi compiles odds based on historical statistics as artificial intelligence is used, but also by using soft factors, which are
4 Odds of >2.00 mean a higher payout than that staked if one wins, while odds of <2.00 mean the player gets their money back but with less profit than that staked if they win.
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determined by an experienced odds trader. Risk management is key and Kambi strives to set the odds as true as possible, adjusted for a margin and in order to balance the book (the risk). Using the vast amounts of data generated from its operator clients, Kambi profiles the players and tries to learn as much as possible from placed bets. The models and traders are able to detect “smart money”, and while these players can see their bet sizes being limited, Kambi uses them to adjust the odds, as it does not always have an information advantage. The information is based on odds feeds (third party data compiled by scouts on the ground at events or from remote screens) as well as Kambi’s own odds traders watching matches on screens. The skill of an odds trader (and what data models do) is to determine odds versus the real probabilities of something happening. Simply put, bookies try to set odds so that the book balances (so that in any event, the payouts would be fairly equal on either side) with a margin in between. In order to balance a book (as Kambi does not hedge or offload risk to third parties) it adjusts the odds, to encourage balancing bets in order to not get over-exposed to certain outcomes. At our recent iGaming seminar in November 2017, we learned that Kambi priced 280 million odds in October alone and the process is heavily automated. The vast amount of odds shows the importance of risk management. In order to be ahead of competition, Kambi aims to have markets open for as long as possible, only suspending them for a couple of seconds to adjust odds for new events such as penalties and then opening them up again, making for a more pleasant betting experience.
Pre-match odds are much lower than live betting odds to attract players As seen in the example above, there is a difference in the odds for pre-match and live betting, with the former being lower to attract players (lower odds but more likelihood of a payout) and live betting margins being higher to reflect the higher risk of setting odds in real time. Live betting odds are based on the pre- match odds, which are based on data models, statistics and to some extent how bets have been placed in the run up to the event. The live odds, based on the pre-match odds, are then mainly altered by Kambi’s algorithms, with some adjustments from the odds traders (based on new information or events).
Some argue that the long-term trend for margins is downwards, as the operator space is becoming increasingly competitive (lower odds is a marketing tool) and as punters become more knowledgeable and sophisticated. However, this view is not shared by Kambi, which instead sees a long-term margin in the range of 6.5-7.0% (the historical average is 7.2% and past eight quarters 6.8%) and has already adjusted sports betting margins downwards, i.e. odds upwards (1-X-2 markets for pre-match odds for Champions League and Premier League in Q3 2015). We have no clear view on the long-term development of margins but note that lower margins would also attract more bets and higher turnover, levelling out the effect on the revenue equation that Kambi bases its royalty on.
Kambi's historical sports betting margins have closely followed Kindred’s Kambi's sports betting margins As Kindred is its largest client, and until 2010 Kambi was de facto 100% Kindred, correlate strongly with Kindred's below we plot Kindred's margin after free bets versus Kambi's operator margin (the client weighted margin) from Q1 2013 to Q3 2017. However, as Kindred operates a proprietary sportsbook in France (for regulatory reasons, with a 15% margin by law), and also for the Stan James brand and Australian horse racing, the margins are going to differ somewhat, although they are still strongly correlated.
In the second chart, the lowest sports betting margin (before marketing deductibles) reported by Kambi is 6.2% (5.9% after deductibles) in Q1 2017 due to an unusual amount of player-friendly football results, with accumulators contributing further. The highest was 9.1% (9.0% after deductibles) in Q3 2014 due to bookie-favourable results in the last few matches of FIFA 2014.
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As a closing remark as to where margins will go in the future, there have been talks in the industry for over a decade of price pressure, however not necessarily seen among the operators. As an example, Kindred’s margins have seen quarterly volatility but over time evening out, with an average margin before free bets of 7.6% since 2008 and 6.7% after free bets, almost in line with the average margins the first three quarters of 2017. Although, keep in mind that Kindred operate their own sportsbook in France with a regulatory mandated margin of 15%, which could skew the group margin upwards.
Kindred's and Kambi's margins show a strong correlation Kambi's margin before and after free bets (marketing deductibles)
Source: Pareto, company data
Now that we understand how odds and sport betting margins and thus sports book revenues are correlated, we delve into the sportsbook turnover (the betted amount), which is the most important aspect as it measures the underlying development of operators and hence Kambi.
Operator turnover index Operator turnover index, the most Kambi reports a KPI that it calls the operator turnover index, which proxies the important KPI to keep track of as it sports betting turnover its operator clients report, rebased as an index starting tells how underlying activity at 100 in Q1 2014. In addition to this index, Kambi reports its aggregated clients' develops sports betting margin, detailed above.
As Kambi’s clients can make some deductions before paying commission, and as Kambi absorbs its share of betting duties, the company's top-line does not grow 1:1 with the turnover index, and the so called drop-through rate to Kambi revenue growth is an important KPI.
Operator turnover index and how together with the operator margin it correlates with Kambi's revenue
Source: Pareto, company data
30 Nov 2017 Pareto Securities Research 84(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
The drop-through rate from operator turnover growth to Kambi revenue growth is affected by some key components:
FX: Kambi reports in euros but operator clients' revenues are derived in GBP, SEK, NOK, etc. The weak GBP:EUR rate weighed on revenues in 2016. Operator turnover growth: This is the aggregated sports betting turnover (not revenue) that Kambi’s clients derive. Stated in euro terms. Sports betting margin: The operator margin impact is before free bets (deducted later on). The main sports are the major championships and leagues in football (Champions League, Premier League, La Liga, Bundesliga, FIFA, the EUROs, etc.). Of course, tennis and horse racing and other sports have an effect as well but football results are what to keep an eye on. Betting duties: Jurisdictions with gambling regulations often enforce gambling taxes and some countries, such as Belgium, charge a 21% VAT rate (since Q3 2016). As discussed in the Market Overview section above, betting duty pressure will rise in the coming years with more countries regulating online gambling. Marketing deductibles: Some client contracts have provisions that can deduct free bets before Kambi charges commission. Free bets are player incentives and used as a marketing tool. Volume-related commission tiers: Higher tiers of revenue come with lower commission royalty rates. Tiered levels run on a yearly basis depending on the contract year, not calendar year. However, it is our understanding that volume-related commission tiers and marketing deductibles are correlated, as for some contracts, if free bets are not adjusted for, they could instead be regulated in volume commission tiers, thus not really affecting net commission in absolute numbers.
Clients and signings Client signings are usually ahead Typically, Kambi signs new clients ahead of regulations and major sports events of regulations and major sports that occur in even-numbered years. The target clients are operators (with or events without sports betting), government-regulated lotteries and land-based gambling groups. Targets are tier one and “strategically important” tier two operators. Kambi focuses on regulated markets in Europe and Latin America but also has a client in Cambodia (for a retail product). Some markets are off limits due to regulatory reasons, such as France, Portugal, the US, Russia, Turkey and China. The US market is opening up slowly, on a state-by-state basis for online casinos, but sports betting seem to be ever further into the future.
Kambi's clients as of Q3 2017 and our estimates of Kambi's revenue by client
Source: Pareto, company data
Out of Kambi’s client list of 13 operators (14 if 32Red is included as it has been acquired by Kindred albeit is still on the Kambi platform) six were recognised in industry magazine EGR's “Power 50” list with Kindred and 888 in the top ten. Kambi has yet to launch newly signed Bulgarian National Lottery. In 2016, 78% of Kambi´s revenues were derived from its two largest clients Kindred and 888, and we believe Kindred accounts for more than 60% of revenues. As a
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reminder, we don’t know the respective royalty rates Kambi charges its clients but we believe the range is 10-20%.
Kindred: Since Kindred is by far Kambi´s largest client, and has been with the company since inception, we have to assume its royalty rate charged is near the lowest possible. Of course it is tiered so the weighted royalty rate for Kindred will not be 10%, but is probably around 12-13% (to arrive at the implied royalty rate we have used our estimate of Kindred's relevant sports revenue together with 888's sports revenue for 2016). Kindred acquired Kambi's client 32Red in 2017, which does not affect Kambi's revenues (although future renegotiated contracts could see 32Red's commission levels come down). Kindred has its own sports book platform in France, for Stan James and Australian horseracing. Kindred is due for a renegotiation in December 2018, although as we believe Kindred to be close to the lowest tiers, and since it is in Kindred's own interests that Kambi is doing well financially (in order to have a well-invested and state-of-the-art product), we believe the effects of a new contract will be only smaller.
888: In 2013, the British operator 888 signed with Kambi and relaunched its sportsbook with Kambi later that year. 888 went from competitor platform BlueSquare and at the time of its contract signing with Kambi, its sports revenue was not separately reported but has since grown exponentially (the sports activity and H1 revenue over the years are charted below), reaching R12m revenues of USD 61m, as reported by 888 in its half year report for 2017. 888 attribute its success in sports to an expanded product offering, including live-betting and increased penetration in regulated markets.
888's sports activity has increased exponentially since switching to Kambi
Changed to Kambi
Source: 888 2016 annual results presentation, 888 Half year 2017 presentation
888 extended its contract with Kambi in early 2017, but due to the success of the sports product, 888 had become a fairly large client and was able to put pressure on the commission rate with Kambi in the new deal (probably having shopped around among competitor platforms). This affects Kambi's 2017 revenues by ~EUR 2.7m we estimate. Furthermore, in 2016 Rank Group and 888 were rumoured to have wanted to merge with William Hill – with William Hill using the competitor platform OpenBet, it put pressure on the Kambi shares, due to the fear of it losing a large client.
Paf: This is the oldest client apart from Kindred, signed in 2010 and based on Åland. Probably one of the larger smaller clients. The contract was extended in Q3 2017. Napoleon Games: A Belgian operator, signed in 2012; we deem that its Kambi commissions are probably rather low. Nagaworld: The Cambodian casino operator signed in 2014, using Kambi for retail betting. Probably makes a small revenue contribution.
30 Nov 2017 Pareto Securities Research 86(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
LeoVegas: A Swedish operator, signed ahead of the 2016 EUROs. Less than 10% of LeoVegas's revenue from sports at the moment but growing fast. The contract was extended in Q3 2017. Mr Green: A Swedish operator, signed ahead of the 2016 EUROs. Less than 10% of Mr Green's revenue comes from sports at the moment but it is growing fast. Rank Group: The British operator signed in 2016, using Kambi for its grosvenorcasinos.com brand that is geared towards the UK online casino market. We believe the revenue contribution to be rather small. R. Franco: A Spanish multi-national group which provides gambling solutions, signed in 2016. The Kambi sportsbook is integrated into its online and retail offering in Spain and with an expansion in Latin America. Probably makes a small revenue contribution. Televisa: A Mexican media house signed in 2016 which has just launched the Kambi sportsbook on its online brand PlayCity in Mexico after having used Kambi in its retail offering. Greentube: Signed in 2017, part of NOVOMATIC. Some of Greentube’s brands offer sports betting powered by Kambi in regulated European markets such as Spain, Italy, the UK, Germany and Romania. Newly launched, which is why we believe it makes an inconsequential revenue contribution at the moment. It has only recently launched in Italy and Romania. Corredor Empresarial: Colombian operator network signed in 2017 which will use Kambi for its BetPlay brand that is now expanding into sports betting. The deal is a collaboration with fellow client R. Franco. Recently launched. Bulgaria´s National Lottery: Signed in 2017, this was the first National Lottery deal won by Kambi. Kambi will provide the brand 7777.bg with a sportsbook platform solution (a switch from competitor BetConstruct), launching in Q4 2017.
Throughout its history, Kambi has signed a number of clients but has lost some as well, leaving it with 13 clients currently (14 if 32Red were to be included). A common reason for client losses has been them being acquired (always a risk) and clients not performing (thus not affecting Kambi that negatively when they have left). It should be noted that clients NordicBet, Interwetten, Asianlogic, Tonybet and Fun88 was only pool betting customers, why their revenue contribution was negligible as the fixed-odds product is Kambi’s main revenue source. Momentum in signings have picked up after two slow years 2014 and 2015 and Kambi has signed at least one new client per quarter over the last seven quarters.
13 clients currently with signings usually ahead of even-numbered years n.a. 2010 2011 2012 2013 2014 2015 2016 2017 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Expekt Kindred Paf NordicBet (only pool betting, acquired by Betsson) Interwetten (only pool betting) Asianlogic (only pool betting) Acrismatic (Juegging) Egasa Group (Premier Apuestas, Luckia) Tonybet (only pool betting, acquired by Betsson) Fun88 (only pool betting) Napoleon Games Mediaset (only pool betting) Suertia (acquired by France Pari) 888 NagaWorld 32Red (acquired by Kindred, so still a Kambi customer) Iveriabet LeoVegas Rank Group (grosvenorcasinos) Mr Green R. Franco Apuestas (Televisa) Playcity Greentube (Novomatic) Corredor Empresarial (BetPlay) Bulgaria´s National Lottery (7777.bg) Source: Pareto, company data
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Potential new clients As investors are keen for Kambi to dilute its dependence on Kindred, new signings are vital to the investment case. As Kambi has signed the “low-hanging fruit” already, with some companies we deem out of the question, such as Betsson (due to its rivalry with Kindred), Kambi has an opportunity to sign new clients ahead of regulations and the sports year 2018.
Largest opportunities are ahead of The largest opportunities for platform providers such as Kambi are ahead of regulations being introduced and regulations being introduced and sports events. Regulations provide obstacles sports events for operators as they face an increased compliance burden and tax pressure, which could be an opportunity for third party platforms to help operators scale on their increased costs. It is also an opportunity for Kambi as some incumbents such as monopolies will be able to offer new verticals such as sports betting.
…in the Nordics Opportunity for two large clients Sweden is set to regulate gambling in 2019 (with first taxes paid in H2 2019, we in Sweden when the country estimate) and this opens the opportunity for two large potential clients – regulates Svenska Spel and ATG. Svenska Spel is proposed to split into two companies, one maintaining the monopoly for land-based casinos and some lottery products and the other opened up for competition. We are quite sure the other part of Svenska Spel will add online casino and sports betting in order to stay competitive in the future. Within the Swedish regulated market, Svenska Spel had a market share of 40% in Q3 2017 (including land-based casinos), according to Lotteriinspektionen, with non-licensed operators having a 25% market share. At the moment it cannot offer all products, although it offers a sportsbook with the products Oddset, Stryktipset, Europatipset, Måltipset and Topptipset, offering sports betting on both domestic and international sports such as football, ice hockey and tennis. In 2016, sports betting accounted for 19% of Svenska Spel's net gaming revenue, or SEK 1.7bn. If Svenska Spel were to sign with Kambi to extend its offering, we find it unlikely it would outsource the whole sportsbook. If Kambi were to get 20% of its offering, on 2016 numbers this would correspond to some EUR 4-5m in Kambi revenue, we estimate.
ATG (short for AB Trav & Galopp) has the Swedish monopoly for horse race betting although it is privately owned Svensk Travsport and Svensk Galopp), with the Swedish government appointing part of its Board. ATG has an explicit vision to become the largest and most profitable gambling company in the Nordics – this would mean it would also have to offer online casino and sports betting when Sweden regulates. Furthermore, its CEO has publicly implied it is looking to expand its offering. In 2016, ATG generated SEK 13.3bn in stakes, with an average payout of ~26%, netting ATG SEK 4.1bn in revenue. Of the stakes, 54% were generated online. Within the Swedish regulated market, ATG had a market share of 20% in Q3 2017, according to Lotteriinspektionen. If Kambi were to get 20% of its offering, on 2016 numbers this would correspond to some EUR 2-4m in Kambi revenue, we estimate.
Other potential clients in the Other potential clients in the Nordics include the hundreds of operators that are Nordics are the hundreds of active in the market, often within casino only but also sports operators that operators active in the market want to change supplier. However, the large ones are already spoken for, such as Danish Danske Spil (OpenBet) and operator ComeOn (SBTech). Moreover, the Finnish monopoly Veikkaus already offers sports betting and we deem Norwegian Norsk Rikstoto as having a low chance of expanding into sports betting as gambling is prohibited in Norway. Evoke Gaming (owned by Bonnier) and operating brands such as RedBet and Bertil Casino use SBTech for its sports product.
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…in the UK We are unsure if any of the large We also believe investors are hoping for Kambi to sign one of the large UK UK operators would sign with operators, such as William Hill or Ladbrokes Coral. However, William Hill use Kambi OpenBet for their sportsbook platform. OpenBet is owned by NYX, which is being tendered for by American gaming giant Scientific Games and, furthermore, William Hill owns part of NYX (and thus OpenBet), something that has complicated Scientific Games' tender for NYX. William Hill is using OpenBet both as a casino and sports platform, and theoretically it could sign with Kambi although intuitively this is unlikely as it would have to split and use two platforms. The same reasoning goes for Ladbrokes. Other large UK operators are BetVictor, Betfred (GVC), Boylesports, Sky Bet (OpenBet), Titanbet (Playtech) and Sportingbet (GVC). Although all of these would be really prestigious signings for Kambi, we have a hard time evaluating the chances of this happening as the UK market tends to be rather conservative.
…and elsewhere Overall, countries regulating, A large betting market, which is regulating in 2019, is the Netherlands. At the which have monopolies operating moment only the National Lottery is allowed to operate online, although Unibet in the market and want to and Betsson are large in the market. Intralot provides the National Lottery with continue competing with offshore its lottery platform until 2019. However, a potential positive for Kambi could be operators, will always be a target that the National Lottery would have noticed the performance of Unibet (thus for Kambi Kambi) in the market, and would want a piece of the action. Czech Republic's National Lottery Sazka has signed with Kambi's competitor SBTech. The German market is complex and there are no state-owned players we would expect to sign. The Italian market is also complex and mainly land based at the moment, albeit offering longer-term opportunities. In France, only sports betting is allowed and the market is dominated by a few players, Unibet being the largest and PMU is using OpenBet. However Unibet uses its own sportsbook in France for regulatory reasons. Latin America is regarded as a large opportunity and Kambi is already live in Colombia and Mexico and we would be surprised if others didn't sign with it (however, our core expertise is not on this market yet, which is why we have difficulty in determining potential signings). Overall, countries regulating, which have monopolies operating in the market and want to continue competing with offshore operators, will always be a target for Kambi (and other platform providers such as OpenBet and SBTech).
The above list of market players is far from complete as there are thousands of operators out there. We also expect Kambi to sign clients that do not operate a sportsbook at the moment, which in turn will make the revenue ramp-up time longer. In the estimates section, we set out three scenarios of client signings and the possible implications on Kambi's growth and margins.
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Market data supports the case Sports betting makes up around 40% of European online gambling The global sports betting market is estimated by consulting firm H2 Gambling Capital to have been worth ~EUR 50bn in 2016, with European online sports betting making up around EUR 8bn. The online penetration rate for European sports betting is climbing fast and reached 46% in 2016 and is expected to reach almost 60% in just five years.
The global sports betting market was worth ~EUR 50bn in 2016, of which European online betting accounted for ~EUR 8bn
Source: H2GC, Pareto
The European online sports betting market is expected to grow by a CAGR of 7.5% in 2016-2022 according to H2GC but the fastest-growing market is expected to be Latin America, growing at a CAGR of 9.2%. Kambi’s focus markets are Europe and Latin America (it has a retail presence in Cambodia although this is not that important to the growth case) – as these markets are, or are soon to be, regulated. With more markets opening up in Latin America we believe it could be an interesting growth opportunity for Kambi, although it should be stated that regulations tend to take time.
Annual growth rates and CAGRs – Kambi is positioned in the fastest-growing markets
Source: H2GC, Pareto
Kambi has just entered some new markets and here we list their respective online betting market sizes: Colombia (EUR ~23m in 2016, expected CAGR until 2022: 8%), Mexico (EUR 74m in 2016, expected CAGR until 2022: 10%), Bulgaria (EUR 30m in 2016, expected CAGR until 2022: 8%). While sports betting is federally banned in the United States (with just a few states having exceptions), the US Supreme Court will hear New Jersey’s case for legalising sports betting on 4 December 2017. We believe it will take years before a majority of US states allow sports betting, but it could be a huge opportunity for Kambi, although probably after our estimate period.
Below we plot the gross gaming revenue (GGR) per sports in the UK, and while dog races and cricket might not that widespread, the plotted markets could
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very well be the proxies for the market dynamics abroad. When tracking sports events to gauge a proxy for the sports betting margin for a given quarter, we focus on the major European football leagues.
Furthermore, mobile is huge in sports betting and is only expected to grow further in the coming years, and many of Kambi’s clients have outstanding mobile offerings, such as Kindred and LeoVegas.
Most important sports (in the UK; LHC); mobile sports betting is huge and the penetration rate is already high in Europe (RHC)
Source: H2GC
The main drivers for change to its platform are cited by Kambi as regulations, customer centricity and potential with data, digitalisation of retail, and pressure from competition and success of the outsourced solutions. Below is a print screen from a recent Kambi presentation, highlighting the opportunities ahead.
Kambi sees large opportunities of new signings ahead
Source: Company data
Seasonality Q1: Rather slow, with winter sports and the Winter Olympics every fourth year. Q2: Even-numbered years boosted by FIFA and the EUROs. June a slow sports month. Q3: FIFA and the EUROs' play-offs in Q3 boost revenue growth. Major European football leagues start ramping up although July and August are usually rather slow sports months in non-championship years. Q4: Continued high activity in the European football leagues as well as tennis, ice hockey and basketball with October often being the strongest month of the year with regards to sports activity. December can be slow with some leagues taking Christmas breaks.
Also, in even-numbered years, growth rates will be higher due to championships occurring.
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Competition As sportsbook makes up ~15% of global gambling and 41% of European online gambling, operator competition is fierce (hence expectations on the technical platform solutions are high). The solutions need to be well-invested, reliable and fast, and offer as many sports and events (pre-match and live) as possible.
Below is data from industry magazine Online Gambling Quarterly on a point-in- time offering from operators on the most relevant leagues in European football in August 2017. As can be seen, the major UK bookies are among the top, with Kambi's client Unibet at number three. William Hill, Ladbrokes, Paddy Power and Danske Spil use OpenBet's platform, while Bwin and Sportingbet use their own (GVC), as does Bet365 (proprietary platform).
Football offering in August 2017 – Kambi’s client Unibet among the top
Source: Online Gambling Quarterly (www.quarterly.og-q.com)
Competitors with in-house solutions Kambi is not alone in offering a sportsbook platform, with competition from both other platform providers and also operators' in-house solutions (perhaps the largest competition). Of the largest operators that have their own in-house sportsbook solution, the most prominent is British private operator Bet365, which is regarded as having the best sportsbook in the market. This private company saw sales of more than GBP 2bn for its financial year 2016-17. Betsson, a key competitor to Kindred, also has a proprietary sportsbook, although it seems to be burdened by technical debt with Betsson investing heavily in order to catch up. Given the level of rivalry with Kindred, we find it very unlikely that Betsson would abandon its own platform for Kambi's. Other operators with their own platforms are Pinnacle (which claims to have the lowest margins, i.e. best odds, for punters) and GVC (Bwin and Sportingbet among others).
Platform competition The main platform competitor to Kambi is SBTech, with over 50 clients in 20 jurisdictions. SBTech is a private company but seems to be about the same size as Kambi, with 750 employees and working in over 15 regulated markets. The SBTech solution is allegedly a bit cheaper than Kambi’s on royalty rates and regarded as a good product, and some large operators such as ComeOn use SBTech as does RedBet (Evoke Gaming), and most recently Aspire Global launched a sportsbook in Portugal with SBTech. SBTech offer odds on more than 55 sports (Kambi: 65) and does more than 240,000 live events per year (Kambi: 185,000). Another platform competitor is OpenBet, owned by NYX (currently being tendered for by American company Scientific Games). OpenBet offers both a sports betting and casino platform. Customers include William Hill (also casino), Sky Bet (also casino), Ladbrokes Coral (also casino),
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PaddyPowerBetfair (also casino), British Columbia Lottery Corporation (also casino), PMU (French horse racing monopoly) and Danske Spil among others. iGaming giant Playtech also has a sports betting solution in addition to its casino platform, games content and other parts of the iGaming value chain. BetConstruct is another competitor offering software solutions for the iGaming sector with a sports betting platform, data feeds and own scouts at events. BetConstruct offers 360,000 live events per year and 480,000 pre-match events in more than 140 sports. BetConstruct mainly caters to smaller clients, including Royal Panda (acquired by LeoVegas), and Betsson will use the product instead of its own in Spain in order to be able to launch quicker (it is already licensed).
Other platform solutions include FSB Tech, Betgenius and EveryMatrix. Norwegian Gaming Innovation Group is about to launch an in-house odds solution called BettingCloud, first to its iGC clients then externally. GIG sets its own odds based on statistics and own trading in the market.
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Financial history Financials go back to 2013 Opex-heavy business means Kambi's revenues grew at a CAGR of 38% between 2013 and 2016, and although profits have not grown in line with a 2013 loss has been turned into profits, its profitability has not grown in line sales with sales. Managing a sportsbook is opex heavy with a large part of costs being staff. Opex has been rising steadily, driven by a continued higher headcount, having grown at a CAGR of 18%. The key to the investment case is whether Kambi is able to scale on its opex or not.
Historical revenue and operating results 2013 2014 2015 2016 2017 2013 2014 2015 2016 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
Revenue n.a. 4.8 5.6 6.1 7.7 9.5 9.5 9.3 10.0 10.7 12.8 14.2 13.3 13.7 14.8 14.3 14.2 14.1 14.8 21.1 36.0 47.7 56.0 y/y n.a. n.a. n.a. n.a. n.a. 97 % 68 % 52 % 29 % 13 % 35 % 53 % 33 % 28 % 15 % 1 % 7 % 3 % 0 % n.a. 70 % 32 % 17 % q/q n.a. n.a. 17 % 9 % 26 % 22 % 0 % -2 % 7 % 7 % 20 % 11 % -7 % 3 % 8 % -3 % 0 % -1 % 5 % Adj. EBITDA n.a. -0.3 0.0 0.2 1.4 3.0 2.6 2.1 2.4 2.3 4.0 4.9 3.5 3.6 4.8 3.6 3.3 2.2 3.2 -13.5 8.6 13.6 15.6 Margin n.a. -7 % 0 % 3 % 19 % 32 % 27 % 23 % 24 % 21 % 31 % 34 % 27 % 26 % 33 % 25 % 23 % 15 % 22 % -64 % 23.8 % 28.5 % 27.9 % Adj. EBIT n.a. -3.5 -3.2 -1.5 -0.1 1.4 0.9 0.6 0.8 0.8 2.5 3.3 2.0 2.0 3.1 1.8 1.4 0.3 1.1 -19.9 2.2 7.4 8.8 Margin n.a. -73 % -56 % -24 % -1 % 15 % 10 % 6 % 8 % 7 % 19 % 23 % 15 % 14 % 21 % 13 % 10 % 2 % 7 % -94.0 % 6.1 % 15.5 % 15.7 % Note: We lack Q1 2013 numbers Source: Pareto, company data
Contract renewal with 888 hurt Kambi's revenues amounted to EUR 56m in 2016, the majority derived from its revenues... two largest clients Kindred and 888 (together contributing 78% of revenues). In 2017 to date, revenues have been hurt by a contract renewal with 888 (discussed above) and R12m sales as of Q3 2017 amounted to EUR 57.4m. Adjusting for outliers, the average y/y quarterly growth rate has been slightly above 20%.
FX effects ...as did the lower GBP:EUR rate in Kambi reports in euros but transactional currencies include GBP, SEK, NOK, etc, 2016 with effects from non-euro operators. Clients Kindred and 888 report in GBP and USD respectively but derive their revenues in a variety of currencies. The lower GBPEUR in 2016 affected reported EUR sales negatively, but with staff in London, the earnings effect was mitigated somewhat.
Revenue, opex and EBIT margin
Source: Pareto, company data
Drop-through rate As discussed above, the drop-through rate is key to understanding what revenue growth Kambi will yield from its client operators' turnover growth. In 2017 growth has been hurt by the 888 renegotiation, which has seen 888 getting a considerably lower royalty rate (as it has seen its sports revenue soar since signing the original contract with Kambi), with the effect of turnover
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growth not trickling down. Through report comments we estimate 2017 will be affected by roughly EUR 2.7m but that the 888 effect will disappear after Q1 2018. This is the main reason for stalling sales in 2017 while opex has continued to rise (also in part because of ~60 new staff in the Bucharest office added at the beginning of the year). As the quarterly drop-through rate was above 100% in 2014 due to favourable sports betting margins, we look at the average drop- through rate after 2014, which have been 43%. Average quarterly drop-through rate 2015-2016 was 53%. Going forward, Kambi aims for the range 50-75%.
Drop-through rate as reported for Q3 2017
Source: Pareto, company data
Main opex component is staff costs Headcount drives opex As staff costs account for half of opex, headcount is driving costs as Kambi is growing, and as of Q3 2017, Kambi employed ~600 people, of which half are within operations (odds traders), with rest being developers, sales and business development. As shown in the chart below, headcount has roughly doubled in the past four years, although with the growth rate now slowing somewhat. Kambi maintains that the product is now well invested and that a slight slowdown in employee growth will be seen from here. However, while staff growth might come down, the mix of staff will probably not see staff costs slow down just as much – as Kambi will continue to invest in product development.
Headcount is the main opex driver – the last three quarters have seen delta employees (in absolutes) slow
Source: Pareto, company data
The second-largest cost item is “other costs”, which includes costs for live information feeds and office costs. Furthermore, as Kambi is a tech company, investment in the platform and product has driven, and will continue to drive, amortisation of intangibles. Until now, margins have been slightly boosted by net capitalisations, but this should level out in the future.
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Cost structure and staff composition
Source: Pareto, company data
Convertible bond In Q2 2014 Kambi issued a convertible bond for a nominal amount of EUR 7.5m to Kindred, repayable on 1 January 2019 and issued for Kindred to secure a sports book supplier for the remainder of its contract period (due for renewal December 2018 (no risk of leaving). The amount shown in the balance sheet is discounted by 4.3% to the NPV. The actual rate on the bond is 3%. Kambi has no other debts and has operated with a net cash position throughout its listed history. As of Q3 2017, net cash amounted to EUR 25m.
Cash flow Cash flow from operations has been positive quarterly since Q2 2013 and on a yearly basis working capital just about nets out. However, as Kambi is continuously developing its platform and product, investments in intangibles have been high, at around 13% of annual sales, while the tangible investment need is smaller at around 2% of sales. Since 2014, free cash flow has been positive and since that year Kambi has financed its operations with its own cash flow. Kambi invoices its clients monthly.
Cash flow and investments
Source: Pareto, company data
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Estimates Estimates summary Sales CAGR of 14% in 2017-20 with We expect Kambi to report a sales CAGR of 14% in 2017-20, above the expected further upside from potential new market growth rate of 7.9% over the same period, with our estimates solely signings based on the current client base. However, we note that as a premium sportsbook provider, Kambi stands a good chance of signing both smaller and larger clients in the years ahead, especially with countries regulating and significant sports years over the next few years. We expect the drop-through rate (i.e. from client operators' turnover growth) to vary between 63-76% through to 2020, within the range the company also expects of 50-75%, with betting duty pressure to weigh on drop-through rates in 2019E and 2020E especially. As we expect Kambi to continue to scale on costs, we expect the EBIT margin to climb from 7.7% in 2017 to 13.0% in 2020, resulting in an EBIT CAGR of 36%. If Kambi were to sign new clients, we expect a further scaling of opex and high incremental EBIT margins, with resulting higher profitability. We discuss this at the end of this chapter.
CAGRs, 2017-20E 50 % 41 % 40 % 36 %
30 % 23 % 20 % 14 % 10 %
0 % Sales EBITDA EBIT EPS Source: Pareto
Detailed breakdown of actuals and estimates (EURm) 2016 2017 2018 2013 2014 2015 2016 2017 2018 2019 2020 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4E Q1E Q2E Q3E Q4E
Revenue 13.3 13.7 14.8 14.3 14.2 14.1 14.8 16.1 16.4 17.3 18.1 19.1 21.1 36.0 47.7 56.0 59.2 70.9 78.4 88.5 y/y 33.1 % 27.9 % 15.0 % 0.7 % 7.3 % 3.2 % -0.1 % 12.9 % 15.4 % 22.8 % 22.6 % 18.1 % 70.3 % 32.4 % 17.4 % 5.8 % 19.7 % 10.6 % 12.9 % q/q -6.5 % 3.0 % 8.1 % -3.2 % -0.4 % -1.1 % 4.7 % 9.4 % 1.8 % 5.3 % 4.5 % 5.4 %
Staff costs -5.5 -6.1 -5.2 -6.0 -5.4 -6.5 -6.2 -6.5 -6.3 -7.2 -6.9 -7.3 -12.4 -15.3 -20.9 -22.9 -24.6 -27.7 -31.3 -35.4 Other costs -4.2 -4.0 -4.7 -4.6 -5.5 -5.4 -5.4 -5.6 -6.1 -6.2 -6.3 -6.4 -9.7 -11.5 -13.3 -17.5 -21.9 -25.0 -27.0 -29.5 Opex (ex D&A) -9.7 -10.0 -9.9 -10.7 -10.9 -11.9 -11.6 -12.3 -12.3 -13.4 -13.2 -13.8 -22.1 -26.9 -34.1 -40.4 -46.5 -52.7 -58.3 -64.9 D&A -1.6 -1.7 -1.7 -1.8 -2.0 -1.9 -2.1 -2.0 -2.4 -2.4 -2.4 -2.4 -6.3 -6.4 -6.2 -6.8 -8.2 -9.8 -10.7 -12.1 Write downs and EO 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -12.6 -0.6 0.0 0.0 0.0 0.0 0.0 0.0
Adj. EBITDA 3.5 3.6 4.8 3.6 3.3 2.2 3.2 3.9 4.1 4.0 4.9 5.2 -0.9 9.2 13.6 15.6 12.7 18.2 20.1 23.6 EBITDA-margin 26.7 % 26.5 % 32.7 % 25.5 % 23.4 % 15.3 % 21.6 % 24.1 % 25.2 % 22.8 % 26.9 % 27.4 % -4.4 % 25.4 % 28.5 % 27.9 % 21.5 % 25.7 % 25.6 % 26.7 %
Adj. EBIT 2.0 2.0 3.1 1.8 1.4 0.3 1.1 1.8 1.7 1.5 2.4 2.8 -7.3 2.8 7.4 8.8 4.5 8.4 9.4 11.5 EBIT-margin 14.7 % 14.3 % 20.9 % 12.7 % 9.7 % 1.9 % 7.2 % 11.4 % 10.4 % 8.7 % 13.4 % 14.6 % -34 % 7.7 % 15.5 % 15.7 % 7.7 % 11.9 % 11.9 % 13.0 %
Net financials -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 0.0 -0.4 -0.3 -0.3 -0.3 -0.3 -0.2 0.0 0.0 EBT 1.9 1.9 3.0 1.7 1.3 0.2 1.0 1.8 1.6 1.4 2.4 2.8 -7.6 2.5 7.1 8.5 4.2 8.2 9.4 11.5 Tax -0.1 -0.1 -0.3 -0.5 -0.2 -0.1 -0.2 -0.3 -0.2 -0.2 -0.4 -0.4 1.5 -0.9 -0.9 -1.0 -0.8 -1.2 -1.4 -1.7 Tax rate 6.1 % 4.9 % 9.6 % 28.7 % 16.9 % 37.7 % 21.0 % 15.0 % 15.0 % 15.0 % 15.0 % 15.0 % 7.6 % 49.5 % 12.8 % 11.7 % 18.0 % 15.0 % 15.0 % 15.0 %
Net profit 1.8 1.8 2.7 1.2 1.1 0.1 0.8 1.5 1.4 1.2 2.0 2.4 -6.1 1.5 6.2 7.5 3.5 7.0 8.0 9.8
No. Shares 29.74 29.74 29.74 29.74 29.88 29.88 29.96 30.02 30.02 30.02 30.02 30.02 27.74 28.74 29.74 29.74 30.02 30.02 30.02 30.02
EPS 0.06 0.06 0.09 0.04 0.04 0.00 0.03 0.05 0.05 0.04 0.07 0.08 -0.22 0.05 0.21 0.25 0.12 0.23 0.27 0.33
Operator turnover index 220 237 219 241 281 277 254 278 315 342 333 350 90 124 203 241 278 350 407 490 y/y 50 % 46 % 37 % 19 % 28 % 17 % 16 % 15 % 12 % 23 % 31 % 26 % 38 % 64 % 19 % 15 % 26 % 16 % 20 % q/q 8 % 8 % -8 % 10 % 17 % -1 % -8 % 9 % 13 % 9 % -3 % 5 % Drop through rate 67 % 60 % 41 % 4 % 26 % 17 % -1 % 84 % 127 % 97 % 73 % 70 % 186 % 51 % 93 % 38 % 76 % 65 % 63 %
Employees 467 493 512 525 571 594 602 607 623 636 648 665 307 350 417 499 594 643 698 757 Growth y/y 23 % 19 % 18 % 19 % 22 % 20 % 18 % 16 % 9 % 7 % 8 % 10 % 14 % 19 % 20 % 19 % 8 % 9 % 9 % Growth q/q 6 % 6 % 4 % 3 % 9 % 4 % 1 % 1 % 3 % 2 % 2 % 3 % Source: Pareto, company data
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Our forecasts do not take into account speculative signings Revenue Kambi's revenue growth is driven Kambi's revenue growth is ultimately driven by its client operators' turnover by its client operators' turnover growth, and as the large 888 renegotiation is behind the company we expect growth – the drop-through rate is the drop-through rate to bounce back again, starting from as early as Q4 2017. expected to bounce back from Q4 We expect growth for Kambi above the H2GC estimated market rates of around 2017 7-8% as Kambi’s clients are set to take market share ahead, in our view. Below we discuss the growth drivers, on top of the regular leagues and events, in the forthcoming years.
Operator turnover growth index 2018: The Winter Olympics and FIFA 2018 in Russia. Kindred, Kambi's largest revenue-generating client, has a large presence in the Netherlands (~20% of its sales, we believe), a country that has not qualified for FIFA 2018, which is a slightly negative data point. However, Sweden and Denmark have secured a spot. Although Italy, a large betting country, did not qualify, Kambi’s clients there do not have a large sports footprint in the country as yet (mainly land- based operators at the moment). In 2014 and 2016, the operator turnover index grew by 38% and 19%, respectively. We expect 26% operator turnover index growth in 2018 with sports expected to take share within the client base but mainly thanks to FIFA 2018, with Mexico and Colombia also qualifying – markets that Kambi has just entered. In addition to this, both Mr Green and LeoVegas have stated that they will focus and push their sportsbooks even more ahead of FIFA 2018. Turnover from new clients adds to the index, so it is not capped at the expected Kindred growth rate. 2019: No major sporting events and therefore we expect operator turnover index growth in line with a normalised 2017 of around 16%. Even without any large sporting events, the annual leagues will continue as usual and 2019 will reap some of the benefits from the customer inflow in 2018. 2020: The Summer Olympics in Tokyo and EURO 2020 will see the operator turnover index grow at a higher rate than in 2019E. We expect 20% turnover index growth.
Revenue and revenue growth rates Revenue, EURm Growth y/y Revenue, EURm Growth y/y 25 110 % 100 80 % 90 70 % 90 % 20 80 60 % 70 % 70 50 % 60 15 40 % 50 % 50 30 % 10 40 30 % 30 20 % 20 10 % 5 10 % 10 0 % 0 -10 % 0 -10 % Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1E Q3E 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2013 2014 2015 2016 2017 2018 Revenue Growth y/y Revenue Growth y/y Source: Pareto, company data
Drop-through rate Kambi aims for a revenue drop-through rate of 50-75%. While this historically has been rather volatile and on a steady decline since the end of 2015, it now appears to turn up sharply. As detailed earlier, the components affecting Kambi´s revenue growth are FX effects (we have to assume them to be flat), its clients' turnover growth (detailed above), the sports betting margin (we assume the annual average to be flat at 6.75%), betting duties and VAT, marketing deductibles (such as free bets) and volume-related commission tiers and fixed costs. The past couple of quarters have been a perfect storm with the 888 contract renewal, which put pressure on revenue, profitability and Kambi's share price through 2017. We expect the drop-through rate to vary between 63-76% in 2018-20.
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FX: Longer term, we have no view on FX effects and model them to be flat after 2018 (given current spot rates). Operator turnover growth index: We believe in continued strong growth in the operator turnover index (even without new signings, with stronger growth in even-numbered years, as detailed in the section above). Sports betting margin: A levelling-out of the sports betting margin over time at the long-term average of around 6.75% (Kambi expects long term margins at 6.5%-7.0%), but even if the sports betting margin were to fall due to competitive odds setting, we are of the view that this would result in a rise in turnover, netting out the effect on client net gaming revenue (NGR), which Kambi's revenue is based on. Betting duties: These will rise with the company going into regulated environments and we have accounted for the Netherlands and Sweden regulating in 2019 with the first tax paid in Q3 2019 – thus having a full year effect in 2020. We expect an additional 2.5% and 5.0% tax effect on drop- through rates in 2019 and 2020. The Belgian VAT that put pressure on revenue growth from Q3 2016 is no longer a problem. Marketing deductibles: Some contracts have provisions that the company can deduct free bets before Kambi charges commission and we expect this to have a larger effect in major sports years such as 2018 and 2020 when marketing competition will be fierce. Volume-related commission tiers: As we expect Kambi’s largest clients to grow, we have assumed a small amount of continuous pressure on commission levels, but as the tiered levels run on a yearly basis depending on contract year, not calendar year, we will not always capture the timing of this effect. However, as discussed earlier, it is our understanding that volume- related commission tiers and marketing deductibles are correlated, as for some contracts, if free bets are not adjusted for, they could instead be regulated in volume commission tiers, thus not really affecting net commission in absolute terms.
Drop through rate– operator turnover index growth and Kambi's subsequent sales growth
Growth rates Drop through rate Growth rate y/y Drop through rate 100 % 100% 70% 100% 90 % 90% 60% 90% 80 % 80% 80% 70 % 70% 50% 70% 60 % 60% 40% 60% 50% 50 % 50% 30% 40 % 40% 40% 30% 30 % 30% 20% 20% 20 % 20% 10% 10% 10 % 10% 0% 0% 0 % 0% Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4E 2015 2016 2017E 2018E 2019E 2020E 2015 2016 2017 Operator turnover index growth Kambi revenue growth Operator Turnover growth Kambi revenue growth Kambi sales drop through Kambi sales drop through Source: Pareto, company data
Operating costs As discussed earlier, the main opex driver is staff and while the sports book will always be headcount heavy, after visiting the Kambi office in London we are of the understanding that more parts of the operations can and will be automated in the coming years. And while it is impossible to capture the exact numbers in our estimates, we believe employee growth should come down due to this. We expect Kambi to add a net of around 155 employees each year until 2020, although with increasing sportsbook competition, the amount of odds traders will always grow we believe, albeit maybe in lower-cost locations (instead of London). With a more complex product we expect continued hiring within development and IT (which this would be in Stockholm). In all, we expect employee growth of 9% annually with some salary inflation. We expect continued investments into the platform and offering, with a continued high pace of investments in intangibles (tangible investments are expected to slow after the recent office moves). The platform investments will drive
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amortisations and we expect D&A to approach investment levels. Since Kambi is a tech company with investment needs, investors should focus more on EBIT margins as EBITDA does not cover the reinvestment needed to keep the platform top-notch.
Employee growth should slow in the coming years due to platform scaling and automation Employees Growth, y/y Opex, EURm Growth y/y 800 25 % 90 25 % 80 700 20 % 70 20 % 600 60 15 % 500 15 % 50 400 40 10 % 300 10 % 30 20 200 5 % 5 % 10 100 0 0 % 0 0 % 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2013 2014 2015 2016 2017E 2018E 2019E 2020E Employees Growth y/y Opex Growth y/y Source: Pareto
Investments, depreciations and amortisations
EURm EURm 3.5 14.0 3.0 12.0 2.5 10.0 2.0 8.0 1.5 6.0 1.0 4.0 0.5 2.0 0.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4E Q1E Q2E Q3E Q4E 0.0 2015 2016 2017 2018 2013 2014 2015 2016 2017E 2018E 2019E 2020E Investments in tangibles Investment in intangibles D&A Investments in tangibles Investment in intangibles D&A Source: Pareto, company data
Operating margins Margins bottomed out in Q2 2017 We expect margins to have bottomed out in Q2 2017 and expect rising margins ahead. With our estimates not including further signings we could prove to be too low on margins as we do expect Kambi to sign new clients in the years ahead (without having to add an equal amount of opex). Since we expect opex growth to slow somewhat, we expect the EBITDA margin to reach 26.7% in 2020, with revenues affected by a full year of regulated revenues from Sweden and the Netherlands. The EBIT margin should climb from an estimated 7% in 2017 to 13.0% in 2020, and somewhat lower in 2019 as opex continues to grow to be able to scale up in sports years. That margins are not expected to exceed the 2015-16 levels is due to the 888 renegotiation and the added betting duty pressure.
We expect rising margins ahead as Kambi will scale on costs 35% 35% 30% 30% 25% 25% 20% 20% 15% 15% 10% 10% 5% 5% 0% 0% -5% -5% Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1E Q3E 2014 2015 2016 2017 2018 2014 2015 2016 2017E 2018E 2019E 2020E EBITDA-margin EBIT-margin EBITDA-margin EBIT-margin Source: Pareto, company data
30 Nov 2017 Pareto Securities Research 100(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
Scalable business model As we do believe Kambi will be able to sign new clients ahead (although this is not included in our estimates as we are unsure on their timing and size), below we show a theoretical scenario of a new signing and what it would add. For illustrative purposes, we project three scenarios with either a small, medium or large size operator signing. We believe we use fairly reasonable royalty rate levels, and using a normalised sports betting margin of 6.75% and assuming reasonable lead times for signing, integration and ramp-up, we show the difference these signings could make to our 2020 estimates, as a client such as ATG could not go live until in 2019.
In the case of a large signing, added annual sales could be EUR 4m, which, with a normal sports betting margin and 13% royalty rate, would correspond to EUR 500m in stakes. A quick sanity-check suggests this to be reasonable, as Kambi´s largest client (~60% of Kambi's sales), Kindred, generated roughly EUR ~3,300m in Kambi-relevant5 stakes in 2016. In our scenario with stakes of EUR 500m and given a royalty rate of 13%, the potential client's sports NGR on which Kambi charges a commission fee would be EUR 34m, which is not insignificant.
Note that our definition of a large client does not reflect a signing in the magnitude of a large British operator such as William Hill. As for the additional opex, we believe only a marginal addition to opex would be needed, as most of the offering is already automated to begin with. Of course, we might be well off in terms of the absolute figures, but our thesis stands, that new signings would come at high incremental margins and with a completely different growth and margin profile. And, surely, with different growth and EBIT margin trajectories, the trading multiples would also respond accordingly.
Scalability – a simplified model given a small, medium or large signing Small Medium Large EURm 2020E 2020E 2020E 2020 revenue estimate 89 89 89 2020 EBIT estimate 12 12 12 2020 Opex estimate 77 77 77
Stakes, EURm 100 300 500 Margin 6.75 % 6.75 % 6.75 % NGR 7 20 34 Kambi royalty rate 15.50 % 14.00 % 13.00 %
Kambi added sales 1 3 4 % of sales base 1 % 3 % 5 % Added opex 0.4 0.7 0.9 Opex uptick 0 % 1 % 1 % Added EBIT 1 2 3 Incremental EBIT margin 62 % 75 % 79 %
Total EBIT effect 6 % 19 % 30 %
2020E growth rate (actual est.) 13 % 13 % 13 % Scenario growth rate 14 % 17 % 19 % 2020E EBIT margin (actual est.) 13.0 % 13.0 % 13.0 % Scenario EBIT margin 13.6 % 14.9 % 16.2 % Source: Pareto
5 Adjusted for Kindred’s own sportsbook in France, for the Stan James brand and for Australian horse racing.
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Net financials (convertible bond) We expect Kambi to repay the convertible bond in Q4 2018 at a face value of EUR 7.5m. Until then the bond will affect net financials only marginally.
Tax rate and net profit/EPS EPS CAGR of 41% in 2017-20E We expect a blended tax rate of 15% going forward after speaking to the company about its tax domiciles (weighted, between offices around the world). We expect an EPS CAGR of 41% in 2017-20.
Cash flow Given our estimated revenue profile with margin upticks we expect Kambi to continue building a cash pile, and with the EUR 7.5m repayment of the convertible bond to Kindred in Q4 2018, Kambi will be debt free. We model net working capital as being flat. However, we also expect continued investment in intangibles, at an unchanged rate of ~12% of sales, until 2020, with limited need for tangible investments. We expect net cash of EUR 50m in 2020, or -2.1x EBITDA.
Cash flow and free cash flow yield
Cash flow, EURm Net debt/EBITDA FCF yield 25.0 -0.4x 4.0 %
20.0 -0.6x 3.5 % -0.8x 3.0 % 15.0 -1.0x 2.5 % 10.0 -1.2x 2.0 % 5.0 -1.4x -1.6x 1.5 % 0.0 -1.8x 1.0 % -5.0 -2.0x 0.5 % -10.0 -2.2x 0.0 % 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2014 2015 2016 2017E 2018E 2019E 2020E Cash flow before delta WC Free Cash Flow Net debt/EBITDA Source: Pareto, company data
Pareto vs consensus estimates For 2018-2019 we are below consensus on sales, EBIT and margins but we believe the sports year 2020 will see continued growth and scaling and are thus above consensus on 2020. Most notably we expect an up-trending margin in 2020 over 2019. PAS vs consensus
Revenue EURm EBIT EURm 100 16.0 % 14 16.0 % 90 14.0 % 12 14.0 % 80 12.0 % 12.0 % 70 10 10.0 % 10.0 % 60 8 50 8.0 % 8.0 % 6 40 6.0 % 6.0 % 30 4 4.0 % 4.0 % 20 2 10 2.0 % 2.0 % 0 0.0 % 0 0.0 % 2017E 2018E 2019E 2020E 2017E 2018E 2019E 2020E Consensus Revenue PAS Revenue PAS EBIT PAS EBIT Cons EBIT margin PAS EBIT margin Cons EBIT margin PAS EBIT margin Source: Pareto, FactSet
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Expectations ahead of Q4 2017E – due out 14 February 2018 Solid revenue growth expected in We expect Kambi's revenue in Q4 to grow by 13% y/y to EUR 16.2m, helped by Q4 with a recovering drop-through bookmaker-friendly results thus far in Q4 and the Belgian VAT effect now gone rate although with a small negative effect from the 888 renegotiation. This corresponds to a recovering drop-through rate of 85% in Q4. With estimated opex growth of 4.4% q/q (guidance of 3-5%) we expect EBIT of EUR 1.8m and thus for the EBIT margin to drop from 12.7% in Q4 2016 to 11.4% in Q4 2017.
Drop through rate in Q4 2017E – Pareto estimates
Source: Pareto
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Valuation Valuation summary We initiate coverage of Kambi We initiate coverage of Kambi with a Buy recommendation and a target price of with a Buy recommendation and SEK 97 per share. Our estimates do not include additional signings but we target price of SEK 97 believe it likely that Kambi will sign new clients. With Kambi trading at 20x FactSet consensus 2019 EBIT expectations, we believe the market is also pricing this into the share. On our 2019 estimates, Kambi trades at 2.8x sales and 23.1x EBIT, falling to 2.4x and 18.0x, respectively, for 2020E. If we were to assume scalability (in line with the example of scalability in the Estimates section above) based on the three scenarios with a new small, medium or large client for 2020E, the 2020E EBIT multiples would change to a more attractive 13.8-17.0x (detailed below) or a 5-23% lower 2020E valuation than what our current estimates imply. Our target price of SEK 97 per share implies 26.8x 2019E EBIT, and looking at our scenario analysis it implies 16.2-19.9x 2020E EBIT. Our target price also implies a 10% premium to the average NTM EBIT multiple of the past three years, which is not that much given the possibilities of new signings ahead of FIFA 2018 and Swedish and Dutch regulations in 2019.
We also believe the share is rather rich on explicit consensus estimates as Anders Ström has been acquiring shares in the market since the Q3 report.
Scenario analysis
2020E Scenario analysis Small Medium Large EV/Sales given each scenario 2.3x 2.3x 2.2x Implied discount to current valuation 99 % 97 % 95 % EV/EBIT given each scenario 17.2x 15.3x 13.9x Implied discount to current valuation 95 % 84 % 77 % Source: Pareto
Peer valuation (please find a peer table at page 21) The company is trading at roughly The closest sports book peer is SBTech, although it is private at the moment. the same average 2019E EBIT The closest listed peer is Playtech, which, although active throughout the multiple as NetEnt and Evolution iGaming value chain and despite good growth, has never traded at high Gaming multiples – partly due to its Asian, non-regulated exposure and conglomerate structure, we speculate. Despite Kambi's rocky sales and margin development, we now expect an EBIT CAGR of 37% in 2017-2020 (but, to be fair, only 7% over 2016-2020E as 2017 was hit by the 888 renegotiation), and while it is not as scalable as NetEnt or Evolution Gaming, it could be appropriate to compare Kambi's valuation with these two due to sector exposure and expected growth profiles. Kambi is trading roughly at the same average 2019E EBIT multiple as NetEnt and Evolution Gaming.
During the past three years, the average NTM EV/EBIT multiple has been 24.4x, We believe a 10% premium to and after the share price recovery of late, the current consensus NTM valuation historical valuations is warranted is at the three-year historical level. Due to us not incorporating prospective signings into our into our estimates , we do not believe a significant discount to peers is warranted, as we do see additional Kambi signings as likely – it is just the timing and size of the client that we are unsure of. Therefore, we argue a 10% premium to historical valuations or ~27x 2019E EBIT to be justifiable, thus valuing Kambi at SEK 97 per share.
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Historical valuation ranges – EV/sales and EV/EBIT
Source: FactSet
DCF valuation Our discounted cash flow valuation suggests a value of SEK 89 per share, although due to its highly sensitive nature we only use DCF as a sanity-check of our multiples-based valuation approach. Given the growth and margin profile we expect, together with a WACC of 7.75% and terminal growth rate of 4.5%, at a 24% EBITDA margin, we arrive at a DCF valuation of SEK 88 per share.
DCF assumptions
Metrics Growth CAGR 2017-2020E 14.3 % Equity 72 Growth rate 2020-2026 7.5 % PV continuing period 169 Growth rate 2027+ 4.5 % Total value of operations 242 EBITDA margin 2020E 26.7 % Net debt -26 EBITDA margin 2020-2026 28.0 % Total equity value (EURm) 268 EBITDA margin 2027+ 24.0 % Other non-operating assets 0 Tax rate 15.0 % DCF value per share (SEK) 88 Risk free rate 2.5 % Share price now 85 Equity risk premium 5.25 % Potential 4 % Industry un-levered beta 1.0 WACC 7.75 %
Source: Pareto
DCF sensitivity EBITDA margin 14.0 % 16.0 % 18.0 % 20.0 % 22.0 % 24.0 % 26.0 % 28.0 % 30.0 % 32.0 % 34.0 % 6.3 % 38 61 84 108 131 154 177 200 223 246 269 6.8 % 37 54 71 88 105 122 139 157 174 191 208 7.3 % 35 49 62 76 89 102 116 129 142 156 169 WACC 7.8 % 34 45 56 67 78 88 99 110 121 132 143 8.3 % 33 42 51 60 69 78 87 96 105 114 123 8.8 % 33 40 48 55 63 70 78 85 93 101 108 9.3 % 32 38 45 51 58 64 71 77 84 90 96
Source: Pareto
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Management team and Board The management team is led by CEO Kristian Nylén who joined Unibet in 2000 and since 2003 has been responsible for the whole sportsbook operation. Kambi's CFO is David Kenyon, who joined Unibet in 2002 and has been CFO since 2011. Other senior management include Deputy CEO/CBDO Erik Lögdberg (2005), COO Jonas Jansson (2003), CIO Andreas Söneby (2006), CTO Jonas Demnert (2007), Executive Director State Lottery Business Joni Hovi (2016) and HR Kelly Hartman (2017).
The Board is led by Chairman Lars Stugemo (2014). Board members include co- founder and main shareholder Anders Ström, Susan Ball (2014), Patrick Clase, Cecilia Wachtmeister (2017).
Shareholders Kambi’s main shareholder is Veralda, the investment vehicle of Kindred founder and Kambi co-founder Anders Ström (member of the Board), holding 25.21% of the shares and votes. Currently, there are no >0.5% short positions in Kambi. The free float is ~74%.
Top ten shareholders in Kambi as of November 2017
Shareholders, as of 2017-11-10 No. shares % Veralda Investment Ltd 7,531,710 25.2 % Fidelity 2,665,490 8.9 % Swedbank Robur Fonder 2,552,414 8.5 % Brummer & Partners Fonder 2,206,848 7.4 % Keel Capital 1,845,629 6.2 % Andra AP-fonden 1,406,333 4.7 % Lannebo Fonder 821,187 2.8 % Anders Hedin 577,572 1.9 % SEB Fonder 529,511 1.8 % Kristian Nylén 465,000 1.6 % Others 9,353,503 31 % Total 29,955,197 100.0 % Source: Holdings.se
Insider holdings and transactions With Veralda (Anders Ström) holding 25.2% of the shares and votes, as well as senior management holding a large amount of shares, there are considerable insider shareholdings in Kambi. Veralda has acquired shares throughout 2017.
Option programmes Kambi has two outstanding option programmes with an exercise window in 2017-2023. The 2013 programme of 0.9m shares has a strike price of SEK ~13.7 per share. It is currently in the money and as ~0.3m options have already been exercised, the remainder being exercised would result in a dilution of ~2%.
The 2015 programme of 0.4m shares has a strike price of SEK 121.2 per share and is exercisable during 2018-2019. It is currently out of the money but would result in a possible dilution of ~1%.
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30 Nov 2017 Pareto Securities Research 107(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
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Appendix A
Disclosure requirements pursuant to the Norwegian Securities Trading Regulations section 3-10 (2) and section 3-11 (1), letters a-b
The below list shows companies where Pareto Securities AS - together with affiliated companies and/or persons – own a portion of the shares exceeding 5 % of the total share capital in any company where a recommendation has been produced or distributed by Pareto Securities AS.
C o mpanies No. of shares Holdings in % C o mpanies No. of shares Holdings in % Helgeland Sparebank 1,949,992 9.34 % SpareBank 1 Østfold Akershus 992,969 8.81 % Pareto Bank ASA 9,898,482 16.89 % Sparebanken Vest 4,097,368 6.94 %
Pareto Securities AS or its affiliates own as determined in accordance with Section 13(d) of the US Exchange Act, 1 % or moreof the equity securities of :
C o mpanies No. of shares Holdings in % C o mpanies No. of shares Holdings in % Brødbøksen 415,158 1.36 % SpareBank 1 SM N 1,836,692 1.41 % Helgeland Sparebank 1,949,992 9.34 % SpareBank 1 Østfold Akershus 992,969 8.81 % NHST M edia Group AS 21,475 1.85 % Sparebanken M øre 314,203 3.18 % Pareto Bank ASA 9,898,482 16.89 % Sparebanken Sør 472,999 3.02 % Selvaag Bolig ASA 2,065,624 2.20 % Sparebanken Vest 4,097,368 6.94 % SpareBank 1 BV 1,360,368 2.16 %
Pareto Securities AS may hold financial instruments in companies where a recommendation has been produced or distributed by Pareto Securities AS in connection with rendering investment services, including Market Making.
Please find below an overview of material interests in shares held by employees in Pareto Securities AS, in companies where arecommendation has been produced or distributed by Pareto Securities AS. "By material interest" means holdings exceeding a value of NOK 50 000.
A nalyst T o tal A nalyst T o tal A nalyst T o tal C o mpany ho ldings* ho ldings C o mpany ho ldings* ho ldings C o mpany ho ldings* ho ldings AF Gruppen 0 1,675 Høland og Setskog Sparebank 0 772 SalM ar 0 300 Aker 0 521 Jæren Sparebank 0 500 Sandnes Sparebank 0 39,032 Aker BP 0 625 Komplett Bank 0 65,500 Scatec Solar 0 38,790 Aker Solutions 0 1,307 Kongsberg Gruppen 0 3,700 Songa Bulk 0 2,290 Austevoll Seafood 0 6,130 Lerøy Seafood 0 31,947 SpareBank 1 BV 0 10,000 Avance Gas 0 15,488 M arine Harvest 0 804 SpareBank 1 Nord-Norge 0 30,000 Axactor 0 366,478 M onobank 0 1,355,000 SpareBank 1 SM N 0 15,490 B2Holding 0 12,200 NEXT Biometrics 0 1,647 SpareBank 1 SR-Bank 0 44,037 Bonheur 0 49,596 Nordic Semiconductor 0 4,000 SpareBank 1 Østlandet 0 641 Brødboksen 0 286,358 Norsk Hydro 0 86,101 Sparebanken M øre 0 9,014 BW LPG 0 9,592 Norwegian Air Shuttle 0 7,345 Sparebanken Sør 0 55,690 BW Offshore 0 2,708 Norwegian Property 0 162,000 Statoil 0 9,908 DNB 0 35,070 Ocean Yield 0 30,222 Storebrand 0 5,740 DNO 0 51,232 Odfjell Drilling 0 7,931 Subsea 7 0 7,006 DOF 0 916,624 Orkla 0 22,014 Tanker Investments 0 7,485 Entra 0 14,362 Pareto Bank 0 976,609 Telenor 0 2,186 Flex LNG 0 10,000 Petroleum Geo-Services 0 49,734 TGS-NOPEC 0 2,000 Frontline 0 15,303 Pioneer Property 0 4,100 XXL 0 6,138 Gjensidige Forsikring 0 8,641 Prosafe 0 5,984 Yara International 0 10,746 Golden Ocean Group 0 12,724 Protector Forsikring 0 14,085 Zenterio 0 78,865 Helgeland Sparebank 0 600 Questerre Energy 0 12,125 Höegh LNG 0 2,171 REC Silicon 0 172,972
This overview is updated monthly (last updated 15.11.2017).
*Analyst holdings ref ers to posit ions held by the Paret o Securit ies AS analyst covering the company.
$datetoday2$ Pareto Securities Research 110(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
Appendix B
Disclosure requirements pursuant to the Norwegian Securities Trading ST Regulation § 3-11, letters d-f, ref the Securities Trading Act Section 3-10
Overview over issuers of financial instruments where Pareto Securities AS have prepared or distributed investment recommendation, where Pareto Securities AS have been lead manager/co-lead manager or have rendered publicly known not immaterial investment banking services over the previous 12 months:
Africa Petroleum GASLOG Ovako AB
AINMT Gjensidige Forsikring Pareto Bank
American Tanker Glencore Pilbara Minerls
Austevoll Seafood Golar LNG Prosaf e Avida Holding AB Goliath Offshore Holdings Protector Forsikring
Axzon A/ S Gunnebo Indust rier Questerre Energy Corporation Beerenberg Holdco II AS HI BidCo AS Rødovre Port Holding A/ S
BKK Hospitality Invest AS Scorpio Tankers Blackbird Energy Huddly Sea Trucks
Boa Ice Group Shamaran
Boa OCV Klaveness Ship Holding Ski Eiendomdsinvest AS
Boa Offshore KNOT Of f shore Solvang
Boa SBL Knut sen LNG Solør Bioenergi
Borr Drilling Limited Komplett Bank Sparebanken 1 Øst landet
Brødboksen Master Marine St ingray
Denison Mines Mobylif e Tag Oil Dof Subsea AS Monobank ASA TiZir
Eidesvik Offshore Navig8 Product Tankers Transocean Eidsiva Energi Navigator Holdings TTS Group
Eland Oil & Gas Next Biometrics Vieo B.V.
Engie SA Nordic Trustee VV Holding
Etrion Corporation Norlandia Western Bulk Chartering Farstad Shipping Northern Drilling
Flex LNG Okea AS
This overview is updated monthly (this overview is for the period 31.10 .2016 – 31.10 .2017).
Appendix C Disclosure requirements pursuant to the Norwegian Securities Trading ST Regulation § 3-11 (4)
Distribution of recommendations
Recommendation % distribution
Buy 58 % Hold 35 %
Sell 7 %
Distribution of recommendations (transactions*)
Recommendation % distribution
Buy 73 %
Hold 18 %
Sell 9 %
* Companies under coverage with which Pareto Securities Group has on-going or completed public investment banking services in the previous 12 months This overview is updated monthly (last updated 15.11.2017).
$datetoday2$ Pareto Securities Research 111(112) This report is generated for Viktor Högberg iGaming Initiating Coverage
Appendix D
This section applies to research reports prepared by Pareto Securities AB.
Disclosure of positions in financial instruments The beneficial holding of the Pareto Group is 1 % or more of the total share capital of the following companies included in P areto Securities AB’s research coverage universe: None
The Pareto Group has material holdings of other financial instruments than shares issued by the following companies included in Pareto Securities AB’s research coverage universe: None
Disclosure of assignments and mandates Overview over issuers of financial instruments where Pareto Securities AB has prepared or distributed investment recommendation, where Pareto Securities AB has been lead manager or co -lead manager or has rendered publicly known not immaterial investment banking services over the previous twelve months:
Aspire Lehto Group Sedana M edical Vostok New Ventures Climeon Organoclick ShaM aran Petroleum
Isofol M edical Powercell Tobin Properties
Members of the Pareto Group provide market making or other liquidity providing services to the following companies included in Pareto Securities AB’s research coverage universe:
Africa Oil Delarka Holding NGEx Resources ShaM aran Petroleum
Byggmästare Anders J Ahlström International Petroleum Corporation Saltängen Property Invest Stillfront Group Byggpartner i Dalarna Isofol M edical SciBase Holding Tethys Oil
Cavotec Lundin Gold Sedana M edical Vostok Emerging Finance
Members of the Pareto Group have entered into agreements concerning the inclusion of the company in question in Pareto Securities AB’s research coverage universe with the following companies: None This overview is updated monthly (last updated 15.11.2017).
$datetoday2$ Pareto Securities Research 112(112) This report is generated for Viktor Högberg