Strong trading - nudging up EBITDA

Stride Gaming 19 September 2017 Update
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Stride Gaming

Strong trading - nudging up EBITDA

Pre-close trading update

Travel & leisure

19 September 2017

Price

223p

Market cap

£152m

Net cash* (£m) at 28 February 2017
*Excluding player balances of £1.8m.

9.5

Shares in issue

68.0m

Free float

34%

Code

STR

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

4.2

4.5

(9.9)

Rel (local)

5.0

6.9

(17.9)

52-week high/low

288p

208p

Business description

Stride Gaming is an online soft gaming operator in the bingo-led and social gaming markets. It uses its proprietary and purchased software to provide online bingo and slot gaming and a social gaming mobile app. It was formed in 2012 and only operates in regulated real money gaming markets.

Next events

FY17 results

21 November 2017

Analysts

Victoria Pease

+44 (0)20 3077 5700

Katherine Thompson

+44 (0)20 3077 5730

Stride Gaming is a research client of Edison Investment Research Limited

Stride is gaining market share with strong organic growth in real money gaming (RMG). In its FY17 pre-close trading update, the company expects to meet the upper end of consensus and we have increased our FY17 and FY18 EBITDA forecasts by c 2.5%. The 8Ball earnout is now complete, with the Tarco earnout period ending in December. Stride has invested heavily in technology and operational leverage should kick in as acquired customers migrate to the higher-margin proprietary platform. The stock trades at 7.0x CY18e EV/EBITDA, a meaningful discount to peers.

Year
end

Revenue (£m)

EBITDA*
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

08/15

27.8

7.3

7.2

14.0

0.0

15.9

N/A

08/16

47.8

12.3

11.3

20.3

2.5

11.0

1.1

08/17e

89.5

20.0

18.0

22.9

2.8

9.7

1.3

08/18e

100.7

19.0

16.7

19.0

3.0

11.7

1.3

08/19e

112.5

23.0

20.3

23.1

4.0

9.7

1.8

Note: *Normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. EPS is fully diluted.

Winning market share in real money gaming

On the back of robust organic growth and strong trading from acquired assets, Stride expects to meet the upper end of consensus for FY17, and we have nudged up our FY17 revenue forecast to £89.5m (from £88.8m) and our FY17 EBITDA goes from £19.5m to £20.0m. For FY18, our headline revenue remains unchanged, although we have altered the mix in favour of RMG (vs social gaming) and we have increased EBITDA by 2.7%. FY18 and FY19 EPS have been lowered by c 3.5% to reflect an increased share count. We anticipate further information on all verticals at the FY17 results on 21 November.

Acquisition update: 8Ball earnout complete

Stride Gaming acquired two bingo assets in August 2016 and the earnout payment for 8Ball has now been agreed at £13.1m (vs a total possible £18m), split between £4.0m cash and the issuance of 4.1m new shares. The Tarco earnout period ends in December, with a maximum payment of £22.0m. Post both earnouts, Stride believes it can achieve £2.5m of cost synergies and £3m of revenue synergies, as customers migrate to the higher-margin proprietary platform. In addition, the final $1.2m earnout consideration for the social gaming business InfiApps has been settled.

Valuation: 7.0x CY18e EV/EBITDA

Stride is fully regulated, successfully increasing market share, growing well ahead of the sector average and generating cash, with a progressive dividend policy. However, its 7.0x CY18e EV/EBITDA is below the peer group average. In our opinion, a demonstrable success in integrating the recent acquisitions, post all the earnouts, is key for a re-rating.

Forecast changes and acquisitions update

Acquisition update

The acquisitions last year (8Ball, Netboost Media and Tarco) doubled Stride’s market share in the UK online bingo market, from 5% to 10%.

Stride paid an initial £12.0m in cash to acquire 8Ball and the earnout period for 8Ball ended in August 2017. During the year, 8Ball achieved an adjusted EBITDA of £4.18m and the final consideration payable is £13.1m (compared to a maximum of £18m). The consideration will be split between £4.0m cash and the issuance of 4.1m shares. From 30 September, the total issued share capital will comprise 72.1m shares.

For Tarco, Stride paid an initial £16.0m and the earnout period ends in December. The maximum amount to be paid is £22.0m (51% cash and 49% shares) based on the EBITDA for the 12 months to December 2017.

Post all the earnouts, Stride believes it can achieve £2.5m of cost synergies and £3m of revenue synergies. Revenue synergies include increasing LTV, yield and cash hold, and cross-selling lapsing Tarco/8Ball players onto its higher-margin proprietary platform.

In addition, the final $1.2m earnout consideration for InfiApps has now been paid.

Forecast changes

In its pre-close trading update, Stride Gaming announced that it is confident of meeting the upper end of consensus estimates for FY17. The company continues to deliver strong organic growth in RMG and we have nudged up our FY17 revenue forecast to £89.5m (from £88.8m) and our FY17 EBITDA goes from £19.5m to £20.0m.

Our headline revenue forecasts for FY18 and FY19 remain unchanged, although we have altered the mix to reflect strong growth in RMG and a lower contribution from social gaming. Our FY18 EBITDA goes from £18.5m to £19.0m and our FY19 EBITDA goes from £22.7m to £23.0m. We expect a full update on all verticals at the FY17 results on 21 November.

Exhibit 1: Summary divisional forecasts

£m

FY15

FY16

FY17e

FY18e

FY19e

Real money gaming (RMG)

26.7

35.0

81.5

93.2

104.1

Social gaming

1.1

12.8

8.0

7.5

8.4

Net gaming revenue (NGR)

27.8

47.8

89.5

100.7

112.5

COS (POC gaming tax)

(2.8)

(5.4)

(11.6)

(16.8)

(19.3)

% of RMG NGR

10.3%

15.4%

14.2%

18.0%

18.5%

Gross profit

25.1

42.4

77.9

83.9

93.3

Marketing cost

(7.0)

(10.9)

(22.0)

(24.8)

(27.7)

Marketing %

25.2%

22.8%

24.6%

24.6%

24.6%

Other distribution costs

(2.9)

(7.8)

(17.1)

(18.8)

(20.4)

Other distribution %

10.4%

16.2%

19.1%

18.7%

18.1%

Admin costs

(7.8)

(11.4)

(18.9)

(21.3)

(22.1)

Admin %

28.2%

23.9%

21.2%

21.2%

19.7%

Adjusted EBITDA

7.3

12.3

20.0

19.0

23.0

RMG EBITDA

7.0

8.2

19.4

18.4

21.9

Social gaming EBITDA

0.3

4.1

0.6

0.6

1.2

Adjusted EBITDA margin

26.3%

25.8%

22.3%

18.8%

20.5%

RMG EBITDA margin %

26.4%

23.5%

23.8%

19.7%

21.0%

Social gaming EBITDA margin %

24.3%

32.0%

7.0%

8.0%

14.0%

Source: Edison Investment Research

In addition, we have lowered our FY18 and FY19 fully diluted EPS forecasts by c 3.5%, largely due to the issue of new shares, as well as employee options.

Exhibit 2: Edison estimate changes

Revenue (£m)

EBITDA (£m)

EPS (p)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

08/17e

88.8

89.5

0.8

19.5

20.0

2.6

21.4

22.9

7.0

08/18e

100.7

100.7

0.0

18.5

19.0

2.7

19.7

19.0

(3.5)

08/19e

112.5

112.5

0.0

22.7

23.0

1.3

24.0

23.1

(3.8)

Source: Edison Investment Research

Exhibit 3: Financial summary

£m

2014

2015

2016

2017e

2018e

2019e

August

UK GAAP

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

8.5

27.8

47.8

89.5

100.7

112.5

Cost of Sales

0.0

(2.8)

(5.4)

(11.6)

(16.8)

(19.3)

Gross Profit

8.5

25.1

42.4

77.9

83.9

93.3

EBITDA

 

 

1.2

7.3

12.3

20.0

19.0

23.0

Operating Profit (norm)

 

 

1.2

7.3

12.0

18.5

17.2

20.8

Amortisation of acquired intangibles

(0.3)

(2.5)

(4.2)

(5.1)

(5.0)

(5.0)

Exceptionals

(0.1)

(3.3)

(5.1)

(19.6)

0.0

0.0

Share based payments

0.0

(1.0)

(1.9)

(1.3)

(1.3)

(1.3)

Operating Profit

0.8

0.4

0.8

(7.4)

10.9

14.5

Net Interest

0.0

(0.1)

(0.7)

(0.6)

(0.5)

(0.5)

Profit Before Tax (norm)

 

 

1.2

7.2

11.3

18.0

16.7

20.3

Profit Before Tax (FRS 3)

 

 

0.8

0.4

0.1

(8.0)

10.4

14.0

Tax (reported)

0.0

0.1

(0.5)

0.0

(1.3)

(1.6)

Profit After Tax (norm)

1.2

6.2

10.9

16.7

15.4

18.7

Profit After Tax (FRS 3)

0.8

0.4

(0.4)

(7.9)

9.1

12.4

Average Number of Shares Outstanding (m)

31.2

43.8

51.5

68.0

75.5

78.0

EPS - normalised (p)

 

 

0.0

14.2

21.2

24.6

20.4

23.9

EPS - normalised fully diluted (p)

 

 

4.0

14.0

20.3

22.9

19.0

23.1

EPS - (IFRS) (p)

 

 

0.0

0.9

(0.8)

(11.7)

12.1

15.9

Dividend per share (p)

0.00

0.00

2.50

2.80

3.00

4.00

Gross Margin (%)

100.0

90.1

88.7

87.1

83.3

82.9

EBITDA Margin (%)

14.6

26.3

25.8

22.3

18.8

20.5

Operating Margin (before GW and except.) (%)

14.6

26.1

25.0

20.7

17.1

18.5

BALANCE SHEET

Fixed Assets

 

 

0.1

37.1

78.7

64.0

59.7

54.7

Intangible Assets

0.0

36.4

73.6

58.6

53.9

48.6

Tangible Assets

0.0

0.2

0.7

0.9

1.3

1.6

Investments

0.1

0.5

4.4

4.4

4.5

4.5

Current Assets

 

 

5.7

11.7

27.1

29.5

33.7

49.6

Stocks

0.0

0.0

0.0

0.0

0.0

0.0

Debtors

5.7

4.2

5.8

6.4

7.0

7.0

Cash

0.0

7.4

21.1

23.1

26.7

42.6

Other

0.0

0.0

0.2

0.0

0.0

0.0

Current Liabilities

 

 

(1.2)

(7.7)

(26.1)

(20.6)

(19.7)

(19.7)

Creditors

(0.8)

(5.2)

(16.3)

(18.6)

(17.5)

(17.5)

Player balances

(0.4)

(1.4)

(1.8)

(2.0)

(2.2)

(2.2)

Short term borrowings

0.0

(1.1)

(8.0)

0.0

0.0

0.0

Long Term Liabilities

 

 

0.0

(10.2)

(10.5)

(14.0)

(10.5)

(10.5)

Long term borrowings

0.0

(8.0)

0.0

(8.0)

(8.0)

(8.0)

Other long term liabilities

0.0

(2.2)

(10.5)

(6.0)

(2.5)

(2.5)

Net Assets

 

 

4.6

30.8

69.2

58.8

63.2

74.1

CASH FLOW

Operating Cash Flow

 

 

0.0

4.6

14.4

12.0

18.1

22.1

Net Interest

0.0

0.0

(0.6)

(0.3)

(0.3)

(0.3)

Tax

0.0

(0.1)

(0.7)

(0.5)

(1.3)

(1.6)

Capex

0.0

(0.6)

(1.9)

(2.1)

(2.3)

(2.3)

Acquisitions/disposals

0.0

(18.1)

(22.2)

(5.0)

(18.4)

0.0

Financing

0.0

10.4

25.9

0.0

10.0

(0.0)

Dividends

0.0

(3.0)

(0.6)

(1.8)

(2.0)

(2.1)

Net Cash Flow

0.0

(6.6)

14.4

2.3

3.8

15.7

Opening net debt/(cash)

 

 

0.0

0.0

3.1

(11.3)

(13.6)

(17.3)

Moving in player balances

0.0

1.0

0.0

0.0

0.0

0.0

Other adjustments

0.0

2.5

0.0

0.0

(0.0)

(0.0)

Closing net debt/(cash)

 

 

0.0

3.1

(11.3)

(13.6)

(17.3)

(33.0)

Source: Stride Gaming Accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Stride Gaming and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Stride Gaming and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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