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Becoming less grey

bet-at-home 15 March 2021 Outlook
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bet-at-home

Becoming less grey

FY20 results and outlook

Travel & leisure

15 March 2021

Price

€41.35

Market cap

€289m

Net cash (€m) at 31 December 2020 (excluding client money)

50.9

Shares in issue

7.0m

Free float

45.1%

Code

ACXX

Primary exchange

XETR

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.3)

28.9

36.2

Rel (local)

(5.3)

16.5

(14.0)

52-week high/low

€48.90

€18.28

Business description

Founded in 1999, bet-at-home is an online sports betting and gaming company with c 300 employees. It is licensed in Malta and headquartered in Düsseldorf, Germany. Since 2009 bet-at-home has been part of BetClic Everest a privately-owned gaming company.

Next events

Q121 results

3 May 2021

H121 results

2 August 2021

Q3 results

8 November 2021

Analysts

Russell Pointon

+44 (0)20 3077 5700

Sara Welford

+44 (0)20 3077 5700

bet-at-home is a research client of Edison Investment Research Limited

bet-at-home (BAH) is an established European online sports betting and e-gaming provider. It largely operates in unregulated grey markets that are characterised by strong cash flow, although they also carry commensurately higher regulatory risks. BAH enters FY21 with less regulatory uncertainty than it has for a number of years, as its largest market, Germany (c 36% of revenue) transitions to a fully regulated market. Following better than expected FY20 results we upgrade our FY21 EBITDA estimate by 54%; we now assume some underlying growth from sporting events in FY21 and a more positive outlook for Germany than previously. The dividend yield of 4.1% looks attractive given the strong (net cash) balance sheet.

Year end

Revenue (GGR**) (€m)

EBITDA*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/19

143.3

35.2

4.26

2.00

9.7

4.8

12/20

126.9

30.9

3.32

2.50

13.4

6.0

12/21e

112.0

21.2

2.21

1.70

18.7

4.1

12/22e

123.2

26.2

2.79

2.20

14.8

5.3

Note: *EBITDA and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **GGR is gross gaming revenue.

Regulatory uncertainty lower than for some time

BAH’s main markets are Germany (c 36% of gross gaming revenue (GGR)) and Austria (c 30%), with other exposure in eastern and western Europe. In FY20, the mix of GGR (ie gross wagered less won by customers) was sports betting 41% and e-gaming 59%. The majority of its markets have no formal licensing and BAH pays taxes and VAT. However, Germany, its largest market, will become fully regulated in FY21; following a rebasing of forecasts in November 2020, it enters FY21 with lower obvious near-term regulatory risk than it has for some time.

Upgrading FY21 EBITDA by 54%

We upgrade our FY21 EBITDA estimates by 54% to €21.2m to reflect the better than expected FY20 results, and we take a less negative stance on the potential effects of German regulation than previously, as evidenced in Q420. We also assume some y-o-y underlying growth to reflect a more favourable sporting environment than FY20. Our revenue forecast of €112m is in the middle of management’s new guidance (€106–118m), the bottom end of which is in line with BAH’s initial worst-case scenario in Germany, suggesting conservatism in the guidance. We assume largely unchanged taxed environments beyond this. We continue to assume a dividend payout ratio of 75–80%, in line with recent years.

Valuation: 4.1% dividend yield for FY20

On our upgraded forecasts, BAH trades at a P/E of 18.7x, which is towards the top of the peers that are not subject to takeover. The dividend yield of 4.1% is attractive relative to the peer group, which is well covered by earnings and looks conservative relative to BAH’s free cash flow (FCF) generation and its strong balance sheet with net cash (excluding client money) of €50.9m.

Investment summary

Well-established online gaming operator

BAH is an online sports betting and gaming company, licensed in Malta and headquartered in Düsseldorf, Germany. It was co-founded in 1999 in Austria by Franz Ӧmer and Jochen Dickinger. Franz Őmer currently has a 1.0% shareholding. The company listed in Germany in 2004 and in 2009, BetClic Everest, a private French online gaming and sports betting group, acquired a 49.2% stake; by the end of FY20 it had a 53.9% stake.

BAH’s core markets are Germany, Austria and Eastern Europe. Most of the countries have limited formal regulation, although Germany is moving to a regulated market in FY21, and BAH operates through its sports betting and gaming licences issued in Malta. Under EU law, Maltese licences are effective in all EU member states due to the freedom of movement within the EU, as long as online gaming and sports betting are legal in their respective member country. BAH also aims to obtain additional national licences in the individual EU member countries in which it operates. The company pays tax and VAT as applicable, but regulatory risks are very high as evidenced by recent changes to regulations on German e-gaming. We provide a fuller analysis from page 7.

Investment considerations and sensitivities

Strong market positioning: as evidenced by its 5.4 million customers BAH benefits from strong brand recognition and an attractive product offering across its core markets. It has successfully cross-sold into e-gaming (casino), which now comprises 59% of GGR.

FY20 figures above recent guidance, but FY21 affected by regulation changes: BAH reported GGR of 126.9m, in line with guidance (€120–132m) and EBITDA of 30.9m was ahead of guidance (22–27m) as sports betting was better than expected, while the initial negative effects of regulation changes in Germany from October 2020, which flow through into FY21, were better than expected. Management’s new guidance for FY21 of revenue of 106–118m and EBITDA €18–22m implies, at most, a revenue decline of 16% and an EBITDA decline of 42%. The low end of the range is in line with management’s initial (made in November 2020) estimates of the impact of the regulation changes, and are struck conservatively (ie assuming no market share gains or switches from the black market, and no apparent incremental growth from UEFA Euro 2021).

Secular growth: European online gaming is a structural growth market, with an expected CAGR to 2024 of 7.4% (Source: H2 Gambling Capital). Following a more cautious outlook for FY21 due to the regulatory changes in Germany, we assume higher growth in FY22 due to the FIFA World Cup, before assuming 2% revenue growth thereafter.

High cash conversion and conservative estimate of 4.1% dividend yield: the online gaming industry is characterised by a capital-light model and high cash flow generation. BAH has historically delivered strong operating cash flow (operating cash/EBITDA has averaged 82% during the last five years). This is despite ongoing regulatory changes and increases in local taxes, which have affected revenue growth and EBITDA margins. The company ended FY20 with net cash of €50.9m (excluding customer balances) and we estimate operating cash flow of €17m in FY21 and c 22m in FY22. This underpins our FY21e dividend yield of 4.1%. In our view, the dividends are an important feature for BAH’s parent company, BetClic Everest, which has been investing heavily in technology. BAH does not have a stated dividend policy. Before recent years its payout ratio was greater than 100%, and also greater than FCF, but recently the payout ratio has dropped to 75%+ as the company was more cautious in the light of regulatory uncertainty. We continue to assume a payout ratio of 75% for FY21 and FY22, despite lower near-term regulatory risk, which is well covered by FCF.

Competitive markets: the online gaming market is highly fragmented and successful companies typically need to invest heavily in marketing. BAH has been no exception and marketing spend has historically been over 30% of revenues (high 20‘s more recently, with higher levels of spend ahead of critical sporting events (eg FIFA World Cup). To maintain its customer base, we would expect a high level of spend to continue. Management claims increasing efficiency on marketing spend, as shown by the decreasing spend relative to revenue while growing subscribers, so should be lower than historically. Online gaming is also maturing in many markets and there is a risk the company will not be able to grow at the expected rate without increasing marketing spend.

Regulatory uncertainty: the key sensitivity for BAH is regulatory uncertainty across all core markets. The most drastic scenario is a situation where governments implement IP blocking (eg e-gaming products in Poland and Switzerland) or where taxes are significantly increased. The recent regulatory overhang in Germany is clearing as it moves to a regulated market, and our forecasts had already been rebased for this. More generally, online regulators have been imposing bans, injunctions, or both on a number of companies for a variety of different reasons (social responsibility measure, anti-money laundering (AML), advertising breaches etc) and it is very likely BAH will continue to receive occasional fines.

Corporation tax increases: due to the Maltese operating structure, BAH has historically been able to pay an effective tax rate of c 8%. In September 2019, however, the company announced it was in tax discussions with the Austrian tax authorities, which culminated in 11.9m of back payments for 2013 to 2018, paid in 2019. In FY20 the effective tax rate was 19.1% and we assume 18.5% going forward.

BetClic majority ownership: at a corporate level, we note the company is majority owned by BetClic and although this certainly brings many benefits (in the term of purchasing power etc), it is important to note that a majority shareholder may not always have the same interests as outside investors.

Valuation: 4.1% dividend yield for FY21e

Year-to-date the share price has performed well, appreciating by 27% as the market reacted positively to FY20’s better than expected EBITDA.

The most straightforward way to value BAH is via a peer group comparison and Exhibit 9 compares it to many of the European gaming operators. For FY21e, BAH trades towards the top end of its peers, with a P/E multiple of 18.7x. The dividend yield of 4.1% looks attractive relative to its peers and given its strong balance sheet.

We note that although its closest competitor in Germany is bwin (Entain), Entain’s bigger scale and retail business make the overall comparison slightly less relevant in our view. Within the group, we believe the nearest peers are the Scandinavian players (Kindred and Betsson), which operate throughout Europe and have relatively high exposure to grey markets (unregulated, but not illegal).

We have performed a discounted cash flow (DCF) analysis with annual growth of 2% beyond our forecast years (FY21 and FY22) and a terminal growth rate of 2% and a consistent EBITDA margin of 20% in every year following our forecast period versus 24.4% in FY20. Using a WACC of 8.0% produces a value per share of €49. Our core forecasts assume there are no further major negative changes (such as further IP blocking and/or higher taxes in core markets). If we flex the WACC to 9% to assume for a higher risk profile, our DCF would be €42.

Our core DCF valuation of €49 equates to an EV/EBITDA multiple for FY21 of 13.8x, P/E of 22.2x which is at the top end of the peer group, but still equates to a dividend yield of 3.5%.

Financials: Increasing FY21 EBITDA by 54%

We upgrade our forecasts for FY21 due to the better-than-expected performance in FY20, as well as assuming some y-o-y growth due to UEFA Euro 2021, and a slightly better outcome in Germany following the regulation changes as experienced in Q420, having incorporated management’s worst case scenario in our downgrade in November 2020.

For FY21 we assume a GGR decline of c 12% to €112m, in the middle of management’s guidance (€106–118m).

We assume an increase in overall marketing spend to 27% of GGR in FY21 (from c 24% in FY20) due to the delayed UEFA Euro competition from FY20. Our EBITDA of €21.2m compares with management’s guidance of €18–22m, a y-o-y decline of c 32%, and represents a margin of 18.9% versus FY20’s 24.4%. We estimate that EPS will decline by c 33% y-o-y to €2.21.

BAH ended FY20 with net cash of €50.9m (excluding client cash of €5.9m) and has proposed a dividend of €2.5 per share to be paid in May 2021, which is higher than our original estimate due to the better-than-expected results.

Following the publication of FY20 results, our changes to estimates are shown in Exhibit 1.

Exhibit 1: Estimate changes

GGR (€m)

EBITDA (€m)

EPS (€)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2020

127.9

126.9

(0.8)

26.1

30.9

18.3

2.79

3.32

19.0

2021e

107.8

112.0

3.9

13.8

21.2

53.6

1.35

2.21

63.7

2022e

N/A

123.2

N/A

N/A

26.2

N/A

N/A

2.79

N/A

Source: Company data, Edison Investment Research

Generating cash across Central Europe

BAH was founded in Austria in 1999 as a pure online sports betting operator. Benefiting from the growth in the online gaming market throughout Europe, its portfolio has expanded to include online casino, live casino, Vegas games, poker and virtual sports. The current mix of GGR in FY20 was 41% sports and 59% e-gaming, demonstrating successful cross-selling into gaming. The BAH brand name is very strong and its 5.4 million customers at the end of FY20 are testament to an attractive product offering and competitive odds. The company has continued to gain new customers despite occasional regulatory changes leading to the company’s activities being curtailed in certain countries eg Poland and Switzerland in recent years, and is relatively independent of the macro-economic conditions in the individual markets.

BAH has online gaming and betting licences in Germany, Malta, the UK and Ireland.

Exhibit 2: BAH’s quarterly registered users (million)

Source: Company data

In terms of technology, BAH has developed its own front-end (customer relationships management etc) capabilities and outsources much of the back-end to platform providers. These include Net Entertainment (casino, slots), Microgaming (sports), Evolution Gaming (live casino) and Playtech (poker). As is typical for gaming companies, these arrangements are based on a revenue-sharing agreement, with costs reflected in ‘other operating expenses’. One major advantage of the BetClic relationship we believe is that it achieves better purchasing power on third-party provider fees.

The company’s core markets are Germany (c 36% of GGR) and Austria (c 30% of GGR). A few of its smaller markets are fully regulated (eg the UK), but formal licensing has not yet been introduced in many of its markets, where it pays taxes and VAT as applicable and operates under its EU licence (Malta). Regulatory risks are high, as shown by 2017’s IP blocking in Poland for e-gaming and similar measures enforced in Switzerland from July 2019. We provide a fuller analysis of regulatory risks across the main markets from page 7.

Products: Successful cross-sell into e-gaming

For FY20, gaming and betting volumes declined by 16.1% to €2,699m, and GGR declined by 11.4% to €126.9m. The decline was due to the reduced sports betting as events were postponed or cancelled during the COVID-19 pandemic, the ongoing effects of the IP blocking in Switzerland from the middle of FY19, and the initial effects of the new German regulations for online casino games that began in Q420.

Exhibit 3: Betting and gaming volume (m)

Exhibit 4: Gross betting and gaming revenue (m)

Source: bet-at-home

Source: bet-at-home

Exhibit 3: Betting and gaming volume (m)

Source: bet-at-home

Exhibit 4: Gross betting and gaming revenue (m)

Source: bet-at-home

Sportsbook (41% of GGR)

Bet-at-home is one of the largest sports-betting providers in Europe. In 2020, the sportsbook generated GGR of €52.5m, a decline of 11% from FY19, and comprised 41% of total group GGR. During the year, sports bets were placed on more than 606,000 events in over 50 types of sport, ranging from football to tennis, volleyball and ice hockey to motorsports. Bets range from single bets to combi-bets and c 60% of the sportsbook is from in-play. BAH’s products are available in 11 different languages.

E-gaming (59% of GGR)

E-gaming generated GGR of €74.4m in FY20, representing 59% of total GGR, indicating a successful strategy to cross-sell from sports to e-gaming. This strategy is similar to peers such as bwin (Entain) and, by contrast, pure casino operators are rarely able to meaningfully replicate the cross-sell in the other direction (from casino to sports). The product suite includes casino, poker, Vegas games and virtual sports.

Casino (over 50% of GGR): after the introduction of sports betting, casino was launched in 2005 as the second product. Casino includes classic games such as roulette, blackjack, baccarat, slots and jackpots. Live casino was introduced in 2011 on the Evolution Gaming platform.

Virtual sports: BAH launched virtual sports betting in April 2015, a type of betting that revolves around virtual simulations on various sports types. This includes high-quality 3D videos as well as authentic teams for a realistic gaming experience. A random generator ensures reliability of the results. Products within this segment include virtual football league, virtual basketball league, virtual tennis open, virtual dog racing and virtual horse classics.

Vegas: this offering replaced the Games channel in 2017 and is intended to be an introduction to online gaming, requiring limited experience or skills. Products include table and card games, slots and real casino classics. Slots that are based on well-known TV shows or Hollywood blockbusters are especially popular.

Poker: through a second-tier subsidiary, BAH is part of one of the world’s largest poker network (i-Poker, Playtech). Games include Texas Hold’em, Six Plus Hold’em, Omaha High, Omaha Hi/Lo and Speed Poker. From this product, BAH also effectively cross-sells into casino, with slots and blackjack available on the poker software.

European gaming markets

7.4% CAGR in European online gaming

According to H2GC, the European online sports betting and gaming market is expected to grow at a 7.4% CAGR between 2019 and 2024, while the offline market is predicted to grow at a lower CAGR of 0.7%. Europe comprises approximately half of the global online and gaming market.

Exhibit 5: Development of European gaming

Source: H2 Gambling Capital (BAH presentation March 2021)

As shown in Exhibit 6 below, a key driver for online gaming has been increased mobile and tablet penetration rates and H2GC estimates mobile usage in Europe for gaming will rise from 42% in 2019 to 68% in 2024. BAH launched its mobile services in 2013 and it has grown quickly since then, they represented c 63% of GGR in FY20 so it has been a clear beneficiary from increased mobile penetration.

Exhibit 6: Development of European online and mobile gaming

Source: H2 Gambling Capital (BAH presentation March 2021)

bet-at-home’s key markets

Gaming regulation varies widely across Europe and BAH is focused mainly on grey markets, which are characterised by ambiguous regulation. BAH’s geographic exposure for its betting and gaming volumes in FY20 will be published with the annual report later in March 2021. In FY19, the breakdown of betting and gaming volumes was Germany 37%, Western Europe 48% and Eastern Europe 15%. In terms of GGR, we estimate that Germany comprises c 36% and Austria a further 30%.

Given the lack of formal regulation across most of its markets, BAH typically operates through its sports-betting and gaming licences issued in Malta. Under EU law, these licences are effective in all EU member states due to the freedom of movement within the EU, as long as online gaming and sports betting are legal in their respective member country. BAH also aims to obtain additional national licences in the individual EU member countries in which it operates.

In some markets (such as Poland), BAH has been subject to IP blocking for e-gaming, which is generally considered a violation of EU law. Switzerland has also blocked online gaming and BAH exited the market in 2019. Because Switzerland is not part of the EU, it is therefore not bound by the EU free-trade laws and international operators are not likely to dispute the legality of this ruling. It is possible that other countries initiate similar blocking measures to suppress gaming offers, that could negatively affect BAH’s profitability in the medium term while it seeks legal redress, but there are no known issues for FY21.

Germany: Uncertainty cleared

Germany is BAH’s largest market, we estimate c 36% of total turnover. There is, finally, some clarity on regulation following years of uncertainty given confusing legislation and disagreement among the 16 Lander, or member states, which each have to implement regulations into their own state law. Please see our BAH initiation note Consistent cash generation and online gaming regulation note Diversification and scale for online success for commentary on the uncertainty that has persisted.

Germany has been a grey market but is transitioning to a fully regulated market when the new gambling regulations, the Interstate Treaty on Gambling 2021 (effective from 1 July 2021) comes into force. Until then, transitional requirements became effective in October 2020, in which existing operators that are applying for/or already have a licence must comply with the new regulations as if they were already in place, otherwise it would be counterproductive to the ongoing licence approvals.

The new regulations formalise the licencing structure and provide clarity. Some operators have already exited the market and the requirement to hold a local licence may make it more difficult for new entrants to enter the market. It is possible that money shifts from the black market, enhancing the market size. In total, management originally estimated, in November 2020, that the regulatory changes highlighted below would lead to a revenue and EBITDA decline of €20m and €13m in FY21.

Sports betting: BAH licence awarded

The granting of sports betting licences began in 2012, but was ‘suspended’ in 2014, as 15 unsuccessful applicants in the process contested the awarding of licences of 20 successful companies including BAH. The supervising authorities allowed the successful sports betting companies at that time to continue operating so long as they fulfilled the requirements of the regulations. In January 2020, a new application procedure for an unlimited number of sports betting licences including opening the market for international providers began, versus 20 licences prior to that (found to be incompatible with EU law). BAH applied for a sports betting licence and received notification that it had been awarded a licence in November 2020, along with 15 other companies at that time and the process is ongoing, following a delay as the process was also contested legally as in prior instances. The new State Treaty on Gaming introduces significant changes and restrictions to protect customers and ensure responsible gaming, including a monthly deposit limit of €1,000 per customer that may be increased to €10,000 and €30,000 for a limited number of customers; abolition of in-event betting; as well as limitations of live bets.

E-gaming: Licence application

Prior to the new regulations, there was a federal ban on German operators hosting an online casino gaming site, however it was legal for companies outside of Germany to host online gaming sites and offer their games into the country. At the start of 2020, the regulations legalised both online poker and slot games by the awarding of a limited number of online casino licences, subject to ratification by the Lander by the end of March 2021. However, online table games such as roulette and blackjack are banned. The new regulations also include strict measures to protect customers and minimise gambling problems, such as limits on stakes and advertising by brands. These measures, along with the banning of the aforementioned games, were expected to have a significant impact on revenues for all companies that operated them: BAH’s management initially estimated in November 2020 that these new regulations would reduce FY21 revenue by €20m and EBITDA by €13m.

Austria: Business as usual

We estimate that Austria is c 30% of GGR. There is limited formal gaming regulation in Austria and online gaming is dominated by Casino Austria, which is partially state owned. In February 2018, the Austrian Ministry of Finance published a draft bill on the amendment of gaming laws. This draft envisaged that online gaming providers without an Austrian licence would be blocked by ISPs from October 2018. However, the draft was subsequently repealed days later and no amendment has since been published.

The government intends to include online sports bets in the gambling law, with the tax income directed towards sport. A new regulation for online casinos in Austria is also being discussed but there is no clarity on when a new draft law will be published.

Netherlands: New licensing process

From March 2021 operators are able to apply for an online gaming licence in the Netherlands where online gaming is illegal, following the approval of The Bill on Remote Gambling by the Senate in February 2020. It is believed that it could take up to six months for licences to be approved, and as in other countries, there will be conditions with respect to protecting consumers and monitoring their gaming habits.

Management and group structure

BetClic Everest is majority shareholder

bet-at-home.com was founded in 1999 in Austria and listed on the Frankfurt Stock Exchange in 2004, with the founders selling 3.5m shares. In 2009, BetClic Everest (BetClic) acquired a 49.21% stake from the founders and it now holds a 53.9% stake. BetClic is a leading French group specialising in online gambling and sports betting, for whom BAH provides regional strength in Central/Eastern Europe.

Structured to operate via Maltese licence

BAH is based in Düsseldorf. The company holds 100% of bet-at-home.com Entertainment, which is based in Linz, Austria, and is essentially the main operating company in charge of the technology. The business in Malta is part of bet-at-home.com and Maltese licences enable BAH to operate throughout the EU, due to freedom of trade.

Exhibit 7: Corporate structure

Source: bet-at-home

Management and board

BAH’s management board consists of two co-CEOs who report directly to a three-member supervisory board, some of whom are closely linked to the parent company, BetClic.

Unlike many of its European peers, BAH does not operate any share incentive schemes for employees and management and the only member of the board and management team that holds stock is Co-CEO Franz Ӧmer, with a 1% stake. Instead, BAH’s major shareholder (BetClic) has approved variable compensation for the members of the management board.

Exhibit 8: Board and management team

Name

Role

Background

Franz Ӧmer

Founder and co-CEO

Franz Ӧmer has founded several technology and gaming companies, including bet-at-home.com, and previously worked in international consulting for business process reengineering.

Michael Quatember

Co-CEO

Michael Quatember worked for 11 years at KPMG Austria focusing on auditing and business advisory. From February 2009 until October 2012 he was head of finance at bet-at-home.com and in November 2012 he was elected to the management board.

Martin Arendts

President of the supervisory board

Attorney Martin Arendts, M.B.L.-HSG, is the founder and owner of ARENDTS ANWÄLTE law firm. He specializes in capital investments as well as gaming and betting laws.

Véronique Giraudon

Deputy chairman

Véronique Giraudon is a senior finance and operations executive with proven leadership and track record of execution across start-ups and multinational companies. Since 2013, Véronique Giraudon has been Corporate Director and Group CFO of BetClic Everest Group covering the business areas of finance, operational performance, risk, fraud, compliance and legal.

Nicolas Béraud

Member of supervisory board

Nicolas Béraud is an entrepreneur and investor, founder of multiple digital companies. He is the co-founder of BetClic, one of the leading online betting companies in Europe. Nicolas Béraud serves currently as CEO of BetClic Group.

Source: bet-at-home

Sensitivities

As detailed above, the key sensitivity for BAH is the changing regulatory framework within the sector and across all markets. The most drastic scenario is where governments implement IP blocking (eg e-gaming products in Poland and Switzerland) or where taxes are significantly increased. Additional sensitivities include:

Injunctions and increased scrutiny by regulators: BAH has been subject to a number of injunctions in Germany and the Netherlands. Although the company is disputing the fines and continues to trade, there is a risk it could be forced to cease its product offerings in the respective regions. More generally, the gaming sector has been subject to increased scrutiny by regulators globally. This has been particularly seen in mature regulated markets such as the UK, which has been enforcing fines for social responsibility, know your customer, source of funds and AML. Although BAH is not heavily invested in the UK, there are signs that other countries could follow suit.

Online gaming growth is slowing in mature markets: BAH has historically grown its business across numerous unregulated markets, which continue to show signs of expansive growth. However, as these markets mature, it is possible that growth rates will slow (similar to the UK).

Competitive markets: BAH operates in highly competitive and fragmented markets and some of its peers have far greater scale (eg Entain, Kindred, Betsson). To maintain momentum, it is possible BAH will likely need to raise its marketing spend and thereby depress margins and cash flow.

Major shareholder: BAH is majority owned by BetClic Everest SAS, a private French gaming business. Although there are clearly many associated advantages (better purchasing power etc), there is a risk that BetClic’s interests may not be aligned with other shareholders. Another by-product is the relative lack of liquidity in the shares.

Valuation: 4.1% dividend yield

Peer group valuation

BAH’s share price has performed well year to date in response to more favourable FY20 results than guided by management. The most straightforward way to value BAH is via a peer group comparison and Exhibit 9 compares it to many of the European gaming operators.

Exhibit 9: Peer group valuation

Year

Share price

M cap

Sales growth (%)

EBIT margin (%)

EV/EBIT

P/E

Div yield

Company

-end

(local ccy)

Currency

(€m)

FY21)

FY22

FY21

FY22

FY21

FY22

FY21

FY22

FY21

FY22

888 Holdings

Dec

317.0

GBp

1,366

(5.3)

5.5

14.2

12.4

15.6

14.3

20.0

18.5

1.9

2.0

Betsson

Dec

72.7

SEK

868

10.5

9.7

23.2

23.6

8.1

8.5

9.8

10.4

5.1

4.8

Entain

Dec

1,480.5

GBp

10,121

19.6

7.5

19.4

13.1

19.7

14.8

25.3

16.9

2.3

2.7

Flutter Entertainment

Dec

15,815.0

GBp

32,349

17.9

10.2

8.2

9.4

39.6

30.8

50.9

36.7

0.0

1.2

Gamesys Group

Dec

1,542.0

GBp

1,969

21.6

19.9

12.8

13.6

10.7

9.6

9.9

8.8

2.7

2.8

Kindred Group

Dec

141.5

SEK

3,170

57.3

6.7

-4.6

2.3

10.0

13.8

12.0

16.8

3.8

3.1

William Hill

Dec

271.3

GBp

3,330

(17.5)

14.1

12.0

12.5

23.0

18.2

33.9

24.9

0.0

2.2

Average

14.9

10.5

12.2

12.4

18.1

15.7

23.1

19.0

2.3

2.7

bet-at-home

Dec

41.4

290

(11.8)

10.0

17.1

19.6

12.4

9.9

18.7

14.8

4.1

5.3

Source: Refinitv. Noted: Priced at 11 March 2021

Although its closest competitor in Germany is bwin (Entain), Entain’s scale and retail business make the overall comparison slightly less relevant in our view. Within the group, we believe the nearest peers are the Scandinavian players (Kindred, Betsson), which operate throughout Europe and have significant exposure to grey markets. BAH’s dividend yield in FY21 is between that of Betsson and Kindred.

DCF

We have performed a DCF analysis with annual growth of 2% beyond our forecast year, a terminal growth rate of 2% and a consistent EBITDA margin of 20% following our forecast period, versus 24.4% in FY20. Using a WACC of 8.0% produces a value per share of €49. Our core forecasts assume there are no further major negative changes (such as further IP blocking and/or higher taxes in core markets). If we flex the WACC to 9% to account for a higher risk profile, our DCF would be €43.

Our core DCF valuation of €49 equates to an EV/EBITDA multiple for FY21 of 13.8x, and a P/E of 22.2x, which is at the top end of the peer group, but still equates to a dividend yield of 3.5%.

Financials

Earnings: FY21 affected by German regulation

FY20 results were in line with management’s guidance at the revenue line, but ahead of guidance at the EBITDA line. The revenue of €126.9m compared with management’s prior guidance of €120–132m, and represented a decline of c 11% from FY19’s €143.3m. EBITDA of €30.9m represented a decline of c 12% from €35.2m in the prior year, and was well above the prior guidance of €23–27m. The low end of FY20’s EBITDA guidance had already been achieved by the nine-month stage, when BAH reported EBITDA of €23.0m. In Q420, BAH surprised on the upside due to a better-than- expected performance in sports betting, and the anticipated Q420 impact of German casino regulation changes being not as negative as initially expected.

For FY21, management is guiding to revenue of €106–118m and EBITDA of €18–22m. For revenue, this implies a decline of €18.9–20.9m or 7–16% from FY20. At the bottom end of the range, the revenue guidance is in line with management’s initial estimate of the effects of the German regulation changes of €20m, made in November 2020. It therefore implies no year-on-year growth in revenue despite the shift of major sports events from 2020 to 2021 (eg UEFA Euro 2021). Also, we believe the low end of the revenue guidance assumes no market share gains in Germany, therefore any gains including from the black market may provide upside. The EBITDA guidance implies a decline of c €8.9–12.9m from FY20’s €30.9m, versus the November estimate of €13m; therefore, unless the bottom end of the range is achieved, the outturn would be better than initially estimated. The implied EBITDA margins of the guidance are 16.9–20.3%. The key features of the income statement are:

Revenue: the FY20 revenue decline was due to a combination on the lost revenue from IP blocking in Switzerland that began in Q319, the negative effects of the COVID-19 pandemic, which led to the cancellation or postponement of sporting events from Q220, and the initial negative impact on online casino revenues in Germany from Q420. For FY21, we assume a revenue decline of c 12% to 112m, in the middle of management’s guidance, and assume some benefit from UEFA Euro 2021.

Gaming taxes and VAT: gaming taxes and VAT amounted to 26.3m in FY20, which represented 20% of GGR, an increase from 18% in FY19 due to the mix. The key components are sports turnover taxes in Austria and Germany (2% and 5% respectively), a 40% GGR tax for Austrian e-gaming and 19% VAT on German e-gaming. Our forecasts assume these rates remain stable, although there could be increased taxes from other markets, as they begin to regulate and impose GGR taxes (eg the Netherlands from FY21).

Marketing costs: due to numerous targeted marketing campaigns, BAH has an impressive roster of 5.4 million registered customers and the company historically spent over 30% of revenue on marketing. In recent years, that is between FY17 and FY19, the level of marketing spend has reduced by a couple of percentage points to c 27–29% of revenue as it has become more efficient. It was lower again in FY20 at 24% of revenue due to the postponement of UEFA Euro 2020 and the cancellation of many sports events during the COVID-19 pandemic. We would expect continued high levels of marketing spend to sustain brand awareness albeit at lower rates than previous years due to ongoing efficiencies in marketing. For FY21 and FY22 we assume an increase in marketing spend to 27% of revenues, due to sporting fixtures UEFA Europa 2021 and the FIFA World Cup in 2022. In FY18, when the last UEFA World Cup was held, marketing represented 26.5% of revenue, and in Q218 it represented 40% of revenue, therefore we expect high levels in Q221.

Other operating costs: these include payments to third-party platform providers, such as Evolution Gaming and Microgaming. For FY20, total other operating costs (including other income) were €20.8m. We believe this level is lower than some peers, given the better purchasing power via BetClic. For FY21 we assume a modest decline in other operating costs to reflect cost savings following the German regulation changes as, for example, fewer games are offered, and low inflationary growth thereafter.

EBITDA: FY20 EBITDA of 30.9m represents a margin of 24.4%. For FY21, we forecast EBITDA of 21.2m, a margin of 18.9%. Looking ahead our forecasts assume a largely unchanged tax environment, marketing expenses of 25% and inflationary growth in other operating costs. Taxed markets are expected to become a higher percentage of the total and we forecast a lower long-term EBITDA margin of c 20%.

Tax: BAH reported total corporate tax of 5.5m in FY20, representing an effective tax rate of 19.1% and we forecast a similar level of 18.5% for future years.

Balance sheet and cash flow

Despite the historically high dividend payments, BAH has a robust balance sheet, with no debt and net cash of €50.9m at the end of FY20 (cash and fixed term deposits of €56.8m excluding customer deposits of €5.9m). The company will provide full cash flow details with the annual report in late March and therefore our FY20 cash flow figures are largely estimates at this point, and therefore our cash position does not reconcile exactly with management’s headline figure. The key features of the cash flow are:

Strong operating cash flow: assuming no further major changes in the regulatory environment (ie more IP blocking and tax increases), we forecast annual operating cash flow of c €17m in FY21. The company has low investment requirements, we assume c 1m, therefore FCF is very similar to operating cash flow.

Lower prospective dividends: including special dividends, BAH’s payout ratio was in excess of 150% between FY16 and FY18, and also greater than FCF. However, the company now appears to be taking a more cautious approach given regulation uncertainty and changes in recent years. BAH announced a dividend of 2.5/share for FY20, payable in May 2021, which represented growth of 25% from FY19’s dividend of 2. In both years the payout ratio was c 75–80% and below FCF. For FY21 we forecast a dividend of €1.70, a payout ratio of 77%. FCF generation would support a dividend of €2.3.

Exhibit 10: Financial summary

€'m

2016

2017

2018

2019

2020

2021e

2022e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

 

Revenue

 

 

138.7

145.4

143.4

143.3

126.9

112.0

123.2

Cost of Sales

(25.8)

(27.6)

(28.2)

(25.8)

(26.3)

(22.2)

(24.2)

Net Gaming Revenue

112.9

117.8

115.1

117.5

100.6

89.8

99.0

EBITDA

 

 

33.0

35.5

36.2

35.2

30.9

21.2

26.2

Operating Profit (before amort. and except.)

 

 

31.9

34.1

34.9

33.2

28.9

19.2

24.2

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Share-based payments

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Reported operating profit

31.9

34.1

34.9

33.2

28.9

19.2

24.2

Net Interest

2.2

1.5

0.0

(0.1)

(0.1)

(0.1)

(0.1)

Profit Before Tax (norm)

 

 

34.1

35.7

35.0

33.1

28.8

19.0

24.0

Profit Before Tax (reported)

 

 

34.1

35.7

35.0

33.1

28.8

19.0

24.0

Reported tax

(3.1)

(2.8)

(2.4)

(15.1)

(5.5)

(3.5)

(4.4)

Profit After Tax (norm)

31.0

32.8

32.6

29.9

23.3

15.5

19.6

Profit After Tax (reported)

31.0

32.8

32.6

18.0

23.3

15.5

19.6

Net income (normalised)

31.0

32.8

32.6

29.9

23.3

15.5

19.6

Net income (reported)

31.0

32.8

32.6

18.0

23.3

15.5

19.6

Average Number of Shares Outstanding (m)

7.0

7.0

7.0

7.0

7.0

7.0

7.0

EPS - normalised fully diluted (€)

 

 

4.42

4.68

4.65

4.26

3.32

2.21

2.79

EPS - diluted normalised (€)

 

 

4.42

4.68

4.65

4.26

3.32

2.21

2.79

EPS - basic reported (€)

 

 

4.42

4.68

4.65

2.56

3.32

2.21

2.79

Dividend per share (€)

7.50

7.50

6.50

2.00

2.50

1.70

2.20

Revenue growth (%)

14.0

4.8

(-1.4)

(-0.0)

(-11.4)

(-11.8)

10.0

Gross Margin (%)

81.4

81.0

80.3

82.0

79.2

80.2

80.4

EBITDA Margin (%)

23.8

24.4

25.3

24.5

24.4

18.9

21.3

Normalised Operating Margin

23.0

23.5

24.4

23.2

22.8

17.1

19.6

BALANCE SHEET

Fixed Assets

 

 

4.9

4.0

3.4

8.2

7.4

6.6

5.7

Intangible Assets

2.0

2.0

2.0

2.3

2.1

1.9

1.7

Tangible Assets

2.9

2.0

1.4

5.9

5.3

4.7

4.1

Investments & other

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Current Assets

 

 

140.5

120.6

99.9

87.0

88.2

96.7

102.4

Stocks

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Debtors

47.9

16.9

20.1

30.4

29.5

29.9

30.4

Cash & cash equivalents

91.8

101.8

78.3

48.0

50.9

59.0

64.2

Customer cash

0.0

0.0

0.0

6.7

5.9

5.9

5.9

Other

0.7

1.8

1.5

1.9

1.9

1.9

1.9

Current Liabilities

 

 

(35.1)

(35.3)

(34.0)

(50.9)

(42.5)

(41.7)

(42.5)

Creditors

(0.5)

(3.5)

(3.3)

(4.2)

(4.0)

(3.5)

(3.7)

Short term provisions/ tax liabilities

(21.4)

(18.9)

(19.2)

(33.7)

(28.7)

(28.7)

(28.7)

Short term borrowings

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other

(13.2)

(12.8)

(11.5)

(13.1)

(9.7)

(9.5)

(10.0)

Long Term Liabilities

 

 

(0.7)

(0.0)

(0.0)

(2.6)

(2.6)

(2.6)

(2.6)

Long term borrowings

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other long term liabilities

(0.7)

(0.0)

(0.0)

(2.6)

(2.6)

(2.6)

(2.6)

Net Assets

 

 

109.6

89.3

69.3

41.6

50.5

58.9

63.1

CASH FLOW

Op Cash Flow before WC and tax

32.5

37.0

36.3

35.0

30.6

20.9

25.8

Working capital

(1.6)

(3.0)

(7.5)

6.0

(0.7)

(0.1)

0.3

Exceptional & other

1.5

0.7

1.1

(1.0)

0.0

0.0

0.0

Tax

0.0

(3.4)

(5.0)

(10.2)

(5.5)

(3.5)

(4.4)

Operating cash flow

 

 

32.4

31.3

24.8

29.9

24.4

17.2

21.7

Capex

(1.3)

(0.5)

(0.7)

(2.5)

(1.0)

(1.0)

(1.0)

Acquisitions/disposals

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Net interest

26.0

29.0

0.0

0.0

0.0

0.0

0.0

Equity financing

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Dividends

(15.8)

(52.6)

(52.6)

(45.6)

(17.5)

(11.9)

(15.4)

Other

0.0

0.0

0.0

(0.8)

0.0

0.0

0.0

Net Cash Flow

41.3

7.2

(28.5)

(19.0)

5.8

4.3

5.2

Opening (cash)

 

 

(48.8)

(90.1)

(97.3)

(68.8)

(49.8)

(55.6)

(59.9)

FX

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other non-cash movements

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Closing (cash)

 

 

(90.1)

(97.3)

(68.8)

(49.8)

(55.6)

(59.9)

(65.1)

Closing net debt/(cash)

 

 

(91.8)

(101.8)

(78.3)

(48.0)

(54.7)

(59.0)

(64.2)

Source: Company accounts, Edison Investment Research

Contact details

Betting and gaming revenue by geography (FY19)

bet-at-home.com
Tersteegenstrasse

Düsseldorf-40474
Germany
+49 211 179 34 770

www.-bet-at-home.com

Contact details

bet-at-home.com
Tersteegenstrasse

Düsseldorf-40474
Germany
+49 211 179 34 770

www.-bet-at-home.com

Betting and gaming revenue by geography (FY19)

Management team

Founder and co-CEO: Franz Ömer

Co-CEO: Michael Quatember

Franz Ömer has founded several technology and gaming companies, including bet-at-home.com, and previously worked in international consulting for business process reengineering. He studied software engineering at the Software Park, Hagenberg, Germany.

Michael Quatember worked for 11 years at KPMG Austria focusing on auditing and business advisory. From February 2009 until October 2012 he was head of finance at bet-at-home.com and in November 2012 he was elected to the management board. He studied business management at the Johannes Kepler University in Linz, Austria.

President of supervisory board: Martin Arendts

Deputy chairman: Véronique Giraudon

Martin Arendts is the founder and owner of ARENDTS ANWÄLTE law firm. He specialises in capital investments as well as gaming and betting laws.

Véronique Giraudon is a senior finance and operations executive with proven leadership and track record of execution across start-ups and multinational companies. Since 2013, Véronique Giraudon has been Corporate Director and Group CFO of BetClic Everest Group covering the business areas of finance, operational performance, risk, fraud, compliance and legal.

Management team

Founder and co-CEO: Franz Ömer

Franz Ömer has founded several technology and gaming companies, including bet-at-home.com, and previously worked in international consulting for business process reengineering. He studied software engineering at the Software Park, Hagenberg, Germany.

Co-CEO: Michael Quatember

Michael Quatember worked for 11 years at KPMG Austria focusing on auditing and business advisory. From February 2009 until October 2012 he was head of finance at bet-at-home.com and in November 2012 he was elected to the management board. He studied business management at the Johannes Kepler University in Linz, Austria.

President of supervisory board: Martin Arendts

Martin Arendts is the founder and owner of ARENDTS ANWÄLTE law firm. He specialises in capital investments as well as gaming and betting laws.

Deputy chairman: Véronique Giraudon

Véronique Giraudon is a senior finance and operations executive with proven leadership and track record of execution across start-ups and multinational companies. Since 2013, Véronique Giraudon has been Corporate Director and Group CFO of BetClic Everest Group covering the business areas of finance, operational performance, risk, fraud, compliance and legal.

Principal shareholders

(%)

BetClic Everest

53.9

Union Investment Luxembourg

3.1

Franz Őmer

1.0

Allianz Global

0.7

JP Morgan Asset Management

0.7

Dimensional Fund Advisors

0.6


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Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by bet-at-home and prepared and issued by Edison, in consideration of a fee payable by bet-at-home. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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