Becoming less grey

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.

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%.

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.

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.

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.

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.

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.

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.

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.

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 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.

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.

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.

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.

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.

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.

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.

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.

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:

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.

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.

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%.

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:

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: