Corporate Research Gaming Innovation Group NOT TO BE DISTRIBUTED IN, OR TAKEN OR TRANSMITTED INTO, THE UNITED STATES, CANADA, JAPAN, AUSTRALIA OR IN ANY OTHER JURISDICTION WHERE TO DO SO WOULD BE UNLAWFUL. Results Preview Leisure Norway 17 April 2019 Results due: 8 May A tough start to 2019 We have cut our revenue estimates by 8% and 3% for 2019-20 due to a weaker gambling market in Sweden and the off-boarding of a major platform client. We expect revenues of EUR 32.7m and EBITDA of EUR 1.8m in Q1, down 12% and 60% y/y respectively. The stock trades at a PER of 22.1x for 2020E and 9.0x for 2021E on our estimates. The major drivers for the investment case in 2019 will be deal flow in GiG Core, we argue. Key Data (2019E) Price (NOK) 12.92 Estimate changes Reuters GAMIG.OL We have cut our revenue estimates 8% and 3% for 2019-20, and more on Bloomberg GIG.NO earnings, mainly from downgrades in the Gaming division where a tougher Market cap (NOKm) 1,157 operating environment in Sweden is affecting growth negatively. We have also Market cap (USDm) 136 adjusted for the off-boarding of a platform customer in GiG Core as of year-end Market cap (EURm) 121 2018. Net debt (EURm) 54 Net gearing 67% Investment case drivers and outlook Net debt/EBITDA (x) 4.6 A weak start to the Swedish online gambling market and the off-boarding of a Shares fully dil. (m) 895.7 major platform client make 2019 a bump in the road for GiG. We forecast Avg daily turnover (m) 0.0 positive EBITDA in 2019 but negative net profit, EBITDA of EUR 12m for the full Free float 54% year could triple to 2021 if GiG can improve operational leverage, driven by a mix of revenue growth in several business areas and a better cost profile. The major drivers for the investment case will be deal flow in GiG Core and the company has commented that it is in negotiation with a tier 1 client. Valuation The stock currently trades at a PER of 22.1x for 2020E and 9.0x for 2021E on our updated estimates. Our SOTP valuation of GiG suggests a value of SEK 25 per share and for the DCF valuation using a 10% WACC we get a valuation range of SEK 10-27, which yields a mid-point value of SEK 18 per share. We would argue that an SOTP valuation is the most relevant approach to valuing GIG as the different business areas have different growth and profit outlooks. Share Price (12M) Financials (EUR) Year end: Dec 2017 2018 2019E 2020E 2021E 70 Revenues (m) 120 151 147 167 180 60 Adj. EBIT 2 (4) (3) 11 20 50 Pre-tax profit (m) 1 (22) (8) 6 15 40 EPS (0.00) (0.03) (0.08) 0.06 0.15 30 Adj. EPS (0.00) (0.01) (0.08) 0.06 0.15 20 DPS 0.00 0.00 0.00 0.00 0.00 10 Revenue growth (%) 124.6 25.7 (3.0) 13.6 7.8 Apr Jun Aug Oct Dec Jan Apr Adj. EBIT growth (%) (41.9) n.m. n.m. n.m. 81.1 Adj. EPS growth (%) n.m. n.m. n.m. n.m. 144.0 Absolute (green) / Relative to Norway (purple). Adj. EBIT margin (%) 1.3 (11.6) (1.9) 6.5 11.0 ROE (%) (0.4) (23.0) (8.0) 6.5 14.3 ROCE (%) 1.1 (10.6) (1.8) 7.2 12.3 Marketing communication commissioned by: PER (x) n.m. n.m. n.m. 22.1 9.0 Free cash flow yield (%) n.a. 0.2 (4.3) 5.2 11.0 Gaming Innovation Group Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 P/BV (x) 41.34 23.61 1.49 1.40 1.21 EV/Sales (x) 37.78 14.01 1.19 1.01 0.86 EV/Adj. EBITDA (x) 363.4 131.9 14.8 6.6 4.5 EV/Adj. EBIT (x) 2,828.7 (545.1) (62.1) 15.4 7.9 Operating cash flow/EV (%) 0.2 0.8 5.0 12.3 18.3 Net debt/Adj. EBITDA (x) 4.34 3.03 4.56 1.87 1.00 Source for all data on this page: SEB (estimates) and SIX/Thomson Reuters (prices) research.sebgroup.com/corporate Important. All disclosure information can be found on pages 10 – 12 of this document Results Preview Marketing communication commissioned by: Gaming Innovation Group 17 April 2019 2 Estimate update We believe 2019 will become a bump in the road for GIG, mostly explained by a weak start to the year from the Swedish re-regulation. We have cut our revenue estimates by 8% for 2019, 3% for 2020, and 0% for 2021. We expect positive EBITDA in 2019 but negative net profit. We estimate that EUR 12m EBITDA for the full year could triple to 2021 if the company gets better operational leverage driven by acceleration in revenue growth in several business segments at the same time as the cost profile improves. Main estimate changes: ● GIG Gaming: We have cut our revenue estimate by 5% for 2019. This is mainly explained by weak development in the Swedish market. Incremental recovery in growth throughout the year should be possible as the market stabilizes and geographical expansion continues. We model negative EBITDA for 2019, EBITDA breakeven in 2020 with a swing to profitability in 2021. The negative contribution from the smaller underperforming brands in portfolio should diminish during 2019 which is beneficial for the growth profile and we raise our revenue estimates 5% and 9% for 2020-21. ● GIG Media: We have cut our revenue estimates 8% for 2019, 7% for 2020 and 7% for 2021 due to tougher operating conditions in Sweden, including absorption of the new gambling tax. We model a margin decline to 50% as of Q1 2019, down from 54% FY 2018. ● GiG Sport & Games: We have raised both revenue growth and cost assumptions. ● GiG Core: We have cut our revenue estimates 21% for 2019, 22% for 2020 and 19% for 2021, accounting for a major customer being off- boarded at year end 2018. We expect the revenue loss should be re- couped during the year, driven by new contracts. Deal flow in Core, Sport & Games and earnings recovery in Gaming will be the most important triggers for the investment case and estimate upgrades. Corporate NOT TO BE DISTRIBUTED IN, OR TAKEN OR TRANSMITTED INTO, THE UNITED STATES, CANADA, JAPAN, AUSTRALIA OR IN Research ANY OTHER JURISDICTION WHERE TO DO SO WOULD BE UNLAWFUL. Results Preview Marketing communication commissioned by: Gaming Innovation Group 17 April 2019 3 Estimate update Updated forecasts Old Revisions (%) Group P&L Q1/19E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Revenues 32.7 146.8 166.8 179.8 160.4 171.2 179.2 -8% -3% 0% Gross profit 25.6 115.7 132.7 144.4 129.3 139.6 147.1 -11% -5% -2% EBITDA 1.8 11.8 25.5 34.4 25.7 36.2 38.8 -54% -30% -11% EBIT -1.9 -2.8 10.9 19.8 4.0 16.0 21.0 -170% -32% -6% Net results -2.7 -6.5 5.7 13.6 3.6 15.1 18.5 -281% -62% -27% GiG Core Revenue 5.4 25.2 30.0 33.8 31.8 38.2 42.0 -21% -22% -19% EBITDA -0.3 2.8 8.4 10.1 9.6 11.5 12.6 -70% -27% -19% Margin (%) -5.0% 11.2% 28.1% 30.0% 30.0% 30.0% 30.0% GiG Sport & Games Revenue 0.4 2.6 4.0 5.8 2.7 3.3 4.0 -6% 23% 44% EBITDA -0.7 -2.5 0.0 2.1 -2.2 1.0 1.3 13% -100% 64% margin (%) -170.0% -97.5% 0.1% 37.0% -81.5% 30.3% 32.5% GiG Gaming Revenue 21.6 97.3 110.0 116.5 102.5 104.6 106.7 -5% 5% 9% EBITDA -1.1 -4.5 -0.2 4.0 1.0 5.2 5.3 -554% -104% -25% margin (%) -5.0% -4.7% -0.2% 3.4% 1.0% 5.0% 5.0% GiG Media Revenue 8.0 33.7 36.3 38.2 36.4 38.9 41.1 -8% -7% -7% EBITDA 4.0 16.8 18.2 19.1 18.2 19.5 20.5 -8% -7% -7% margin (%) 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% Source: SEB Interim financial forecasts (EURm) Q1/18 Q2/18 Q3/18 Q4/18 Q1/19E Q2/19E Q3/19E Q4/19E 2017 2018 2019E 2020E 2021E GiG Media Revenue 8.2 8.7 8.4 8.7 8.0 8.3 8.6 8.9 22.4 34.0 33.7 36.3 38.2 EBITDA 4.4 4.7 4.3 4.9 4.0 4.1 4.3 4.4 14.9 18.3 16.8 18.2 19.1 GiG Core Revenue 6.8 6.3 6.8 7.2 5.4 6.0 6.5 7.3 21.0 27.1 25.2 30.0 33.8 EBITDA 1.5 1.1 1.7 1.6 -0.3 0.3 1.0 1.8 10.0 5.9 2.8 8.4 10.1 GiG Sports & Games Revenue 0.2 0.6 0.2 0.5 0.4 0.6 0.7 0.9 1.1 1.5 2.6 4.0 5.8 EBITDA -1.7 -1.4 -2.1 -1.8 -0.7 -0.6 -0.7 -0.5 -3.2 -7.0 -2.5 0.0 2.1 GiG Gaming Revenue 25.4 24.2 24.4 25.8 21.6 23.7 24.9 27.1 86.0 99.8 97.3 110.0 116.5 EBITDA 0.1 -2.8 1.4 0.8 -1.1 -2.0 -1.1 -0.3 -9.0 -0.5 -4.5 -0.2 4.0 Eliminations Revenue -3.34 -2.90 -2.57 -2.30 -2.65 -2.89 -3.05 -3.31 -9.9 -11.1 -11.9 -13.5 -14.6 EBITDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 0.1 0.0 0.0 0.0 Group Revenue 37.3 36.9 37.3 39.9 32.7 35.7 37.6 40.8 120.4 151.4 146.8 166.8 179.8 COGS -6.9 -6.4 -6.3 -7.8 -7.2 -7.5 -7.9 -8.5 -20.5 -27.4 -31.1 -34.1 -35.4 Gross profit 30.5 30.5 30.9 32.1 25.6 28.1 29.7 32.3 99.9 124.0 115.7 132.7 144.4 Marketing cost -11.9 -13.2 -10.6 -11.6 -8.7 -11.2 -11.1 -11.8 -47.1 -47.2 -42.9 -46.8 -47.8 Marketing cost/revenue (%) -32% -36% -29% -29% -27% -32% -30% -29% -39% -31% -29% -28% -27% Other OPEX -14.3 -15.7 -15.3 -15.4 -15.1 -15.3 -15.3 -15.3 -40.3 -60.7 -61.0 -60.4 -62.2 Other OPEX/revenue (%) -38% -43% -41% -39% -46% -43% -41% -37% -33% -40% -42% -36% -35% EBITDA 4.3 1.7 5.0 5.0 1.8 1.6 3.3 5.2 12.5 16.1 11.8 25.5 34.4 EBITDA (%) 12% 5% 14% 13% 5% 4% 9% 13% 10% 16% 28% 31% 131% EBIT -0.4 -3.2 0.0 -14.1 -1.9 -2.1 -0.4 1.6 1.6 -17.7 -2.8 10.9 19.8 EBIT (%) N.A.