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Gaming Realms |
Refocusing to play to its strengths |
Asset disposal |
Travel & leisure |
19 February 2016 |
Share price performance
Business description
Next event
Analysts
Gaming Realms is a research client of Edison Investment Research Limited |
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Gaming Realms has announced that it has reached agreements to sell its third-party platform-driven bingo skins and associated websites (excluding bingoport.co.uk) for a total consideration of £2.9m. It will now focus its investments on higher-margin owned IP (such as its Slingo brand) delivered through its own platform. We have adjusted our forecasts to reflect the disposals and our revised view of the timing of additional Slingo game launches. As a result, we have reduced our 2016e EBITDA forecast from £5.8m to £1.4m, followed by a significant ramp up in 2017e to £12m.
Year end |
Revenue (£m) |
EBITDA* |
EPS* |
DPS |
P/E |
Yield |
12/14** |
11.2 |
(7.8) |
(5.0) |
0.0 |
N/A |
N/A |
12/15e |
21.5 |
(4.0) |
(2.2) |
0.0 |
N/A |
N/A |
12/16e |
42.5 |
1.4 |
0.1 |
0.0 |
N/A |
N/A |
12/17e |
65.0 |
12.0 |
4.0 |
0.0 |
4.7 |
N/A |
Note: *Normalised (and fully diluted EPS), excluding exceptional items, amortisation of acquired intangibles and share-based payments. **15mth period
Focus on owned IP delivered through own platform
With the completion of its own “Grizzly” mobile platform, the development of in-house brands such as Spin Genie, the July 2015 purchase of the Slingo brand and now the disposal of its third-party skins, Gaming Realms has shifted the balance of the company towards an increasing level of self-sufficiency with respect to control of its own technological and brand IP. We believe the greater KPIs achieved on its proprietary platform support the company’s view that it should be better placed to achieve a higher return on its investment as a result.
We still see EBITDA profitability in 2016e
The January trading update revealed 2015 revenues of £21.5m, slightly below our £22.5m forecast. We have left our forecast £4.0m EBITDA loss unchanged to reflect management cost flexibility, particularly regarding marketing. We have adjusted down our 2016e revenue (£49.5m to £42.5m) and EBITDA (£5.8m to £1.4m) forecasts to reflect the announced asset disposal, which we believe will reduce revenues by c £3m and EBITDA by c £1m. We also make an allowance for additional short-term losses resulting from the acquired Slingo business to reflect the slower than-anticipated launch of additional games. We continue to expect a strong ramp in profits in 2017e with EBITDA rising to £12.0m partly supported by Slingo brand licensing deals of the kind announced in its January trading update.
Valuation: The next 12 months are pivotal
Gaming Realms trades on a 2017e EV/EBITDA multiple of c 3.8x if it delivers on our revised profit forecasts, although we recognise the profitability profile of the reconfigured group is yet to be demonstrated. We believe that a period of business stability, together with confirmation that the Slingo business has swung to a profit, should be supportive of the shares.
Strategy evolution: End-to-end control is key
Successful exploitation of its real money gaming expertise optimised for the mobile channel has been at the core of Gaming Realms’ modus operandi since its inception. Previously management has been reasonably agnostic about the way in which its strategy has been delivered. As a result while always having the intention to develop its own platform, it also has run a number of bingo skins (including Iceland Bingo, Lucky Charm Bingo and Diva Bingo) on the third-party 888 Dragonfish platform. This had a number of benefits:
■
It enabled Gaming Realms to make the most of its marketing expertise while its own proprietary platform was still being developed.
■
The economics of operating on a third-party platform relative to a proprietary platform are attractive at lower NGR levels.
■
The additional skins came with existing customer lists to which it could cross-sell additional games.
Since the launch of its own Grizzly RMG platform Gaming Realms’ need to maintain a third-party skins model has progressively diminished. The ability to spread platform development costs over a larger player base offers a significantly better operational leverage profile at the level of revenues that the company is beginning to achieve. Furthermore, having full control of platform development and bonus structures has enabled it to deliver KPIs (lower customer acquisition costs, higher retention rates and resultant life time values) for the brands on own platform well ahead of what had been achieved under the third-party party structure.
Structure of the deals
Gaming Realms has effectively entered into two separate deals, the first of which will see it sell the Iceland Bingo IP and associated assets to Black Spark for an initial cash consideration of £1.2m, followed by an additional £500,000 payable under a transitional services agreement over the next five months.
The second announced deal will see the company sell a number of other white-label bingo assets including Lucky Charm Bingo, Cupcake Bingo and Diva Bingo to Silverspin for a consideration of £1.2m. Silverspin is owned by the vendors of Blueburra Holdings, which Gaming Realms purchased in September 2014. As a result the £1.2m purchase price will be netted off against an expected contingent consideration payment of the same amount, resulting in no additional cash outflow. Gaming Realms will settle the remaining contingent consideration of £1.2m early by the issue of 4.8m new ordinary shares at a price of 25p on completion of the deal. Gaming Realms will also retain ownership of the profitable bingoport.co.uk bingo affiliate asset which was also purchased as part of the original Blueburra acquisition. The bingoport.co.uk website is one of the most popular bingo affiliate websites in the UK and will continue to provide important proprietary market intelligence in addition its profit contribution.
Licensing the Slingo brand IP
The success of Slingo related products since its July 2015 purchase has further demonstrated to management the value of branding and the ownership of the associated IP. Having previously witnessed the power of the Slingo brand first hand as a licensee, owning it now allows Gaming Realms to monetise the brand in non-competing product verticals through licensing deals of its own. It intends to actively pursue this avenue of additional revenue potential and the Zynga deal (announced as part of its January trading update) marks the first in what it believes will be a number of similar deals based on what management has described as a “healthy pipeline of opportunities”. Zynga will pay Gaming Realms a royalty on net revenue over a three-year term.
In addition to the Zynga deal Gaming Realms has also entered into partnerships with two media industry heavyweights in Freemantle Media (part of the RTL group), owners of the X Factor brand and Endemol, owners of the Deal or No Deal brand. Under the terms of these deals Gaming Realms will produce X Factor and Deal or No Deal games under the Slingo format. These games which both launch in H216 are expected to contribute strongly to the company’s player acquisition endeavours by introducing the Slingo format to new player pools.
Revised estimates reflect disposals and slower Slingo game launches
While the announced disposals free up management to focus on the areas where it sees the greatest return potential, the disposed assets did make positive revenue and profit contributions. As a result, we have revised down our forecasts to reflect this in addition to what we believe will be a greater than we had previously anticipated investment in Slingo in 2016 (accentuated by a negative $/£ currency move since the time of the acquisition) before it begins to fulfil its profit potential in 2017. Gaming Realms management have reported strong performance among its Slingo games launched to date, the challenge now is to put an increased amount of content behind the brand to maximise its commercial potential.
Exhibit 1: Changes to forecasts
Revenue (£m) |
EBITDA (£m) |
EPS (p) |
|||||||
Old |
New |
% chg. |
Old |
New |
% chg. |
Old |
New |
% chg. |
|
2015e |
22.5 |
21.5 |
(4.4) |
(4.0) |
(4.0) |
N/A |
(2.2) |
(2.2) |
N/A |
2016e |
49.5 |
42.5 |
(14.1) |
5.8 |
1.4 |
(75.8) |
1.8 |
0.1 |
(94.4) |
2017e |
65.0 |
65.0 |
N/A |
13.5 |
12.0 |
(11.1) |
4.6 |
4.0 |
(13) |
Source: Edison Investment Research, Gaming Realms
We had previous forecast £4.1m of deferred consideration cash outflows related to terms of the Blueburra acquisition payable over the course of 2016e and 2017e, this will no longer be payable under the terms of deal with Silverspin. Factoring in the cash received from Black Spark for the Iceland assets and £1.25m in deferred payment to BlueBurra in October 2015 we now forecast FY16e year-end net cash of £0.2m vs our previous forecast of £1.9m, rising to £9.2m in FY17e on the back of the improved cash flow generation.
Given the H2 weighted bias of our 2016e forecasts and the inherent uncertainty in cash-flow forecasting for strongly growing businesses, we believe that Gaming Realms may require some additional debt or equity funding during the year to take it through to a steady-state cash-flow positive position. A large part of this will be determined by management’s approach to the level of marketing investment, which is a variable cost that can be significantly flexed according to available funds.
Exhibit 2: Financial summary
£'m |
2013* |
2014* |
2015e |
2016e |
2017e |
||
September/December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||
Revenue |
|
|
0.88 |
11.23 |
21.50 |
42.50 |
65.00 |
EBITDA |
|
|
(2.32) |
(7.82) |
(4.02) |
1.42 |
12.04 |
Operating Profit (before amort. and except.) |
|
(2.44) |
(8.33) |
(4.82) |
0.52 |
11.14 |
|
Amortisation of acquired intangibles* |
(0.05) |
(0.80) |
(1.00) |
(0.90) |
(0.80) |
||
Exceptional items |
(0.87) |
(0.23) |
0.39 |
(0.40) |
0.00 |
||
Share based payments |
(0.04) |
(0.44) |
(0.50) |
0.00 |
0.00 |
||
Operating Profit |
(3.40) |
(9.80) |
(5.93) |
(0.78) |
10.34 |
||
Net Interest |
(0.00) |
(0.04) |
(0.13) |
0.00 |
0.00 |
||
Profit Before Tax (norm) |
|
|
(2.44) |
(8.38) |
(4.95) |
0.52 |
11.14 |
Profit Before Tax (FRS 3) |
|
|
(3.40) |
(9.85) |
(6.06) |
(0.78) |
10.34 |
Tax |
0.00 |
0.09 |
0.03 |
(0.20) |
(0.52) |
||
Profit After Tax (norm) |
(2.44) |
(8.28) |
(4.92) |
0.32 |
10.62 |
||
Profit After Tax (FRS 3) |
(3.40) |
(9.75) |
(6.03) |
(0.98) |
9.82 |
||
Average Number of Shares Outstanding (m) |
36.4 |
165.2 |
220.0 |
253.9 |
255.9 |
||
EPS - normalised (p) |
|
|
(6.7) |
(5.0) |
(2.2) |
0.1 |
4.2 |
EPS - normalised diluted (p) |
|
|
(6.7) |
(5.0) |
(2.2) |
0.1 |
4.0 |
EPS - (IFRS) (p) |
|
|
(9.3) |
(5.9) |
(2.7) |
(0.4) |
3.8 |
Dividend per share (p) |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
EBITDA Margin (%) |
-264.1 |
-69.6 |
-18.7 |
3.3 |
18.5 |
||
Operating Margin (before GW and except.) (%) |
-277.7 |
-74.2 |
-22.4 |
1.2 |
17.1 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
6.03 |
17.06 |
30.20 |
26.90 |
28.00 |
Intangible Assets |
5.92 |
16.76 |
28.00 |
24.60 |
24.60 |
||
Tangible Assets |
0.12 |
0.30 |
2.20 |
2.30 |
3.40 |
||
Investments |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
||
Current Assets |
|
|
6.53 |
6.24 |
4.20 |
3.86 |
14.90 |
Stocks |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
||
Debtors |
1.34 |
2.22 |
2.60 |
3.50 |
5.50 |
||
Cash |
5.06 |
3.99 |
1.40 |
0.16 |
9.20 |
||
Other |
0.12 |
0.02 |
0.20 |
0.20 |
0.20 |
||
Current Liabilities |
|
|
(1.80) |
(5.26) |
(9.30) |
(6.10) |
(7.00) |
Creditors |
(1.78) |
(5.25) |
(9.10) |
(6.10) |
(7.00) |
||
Short term borrowings |
(0.02) |
(0.01) |
(0.20) |
0.00 |
0.00 |
||
Long Term Liabilities |
|
|
(0.02) |
(2.43) |
(2.39) |
0.00 |
0.00 |
Long term borrowings |
(0.02) |
0.00 |
0.00 |
0.00 |
0.00 |
||
Other long term liabilities |
0.00 |
(2.43) |
(2.39) |
0.00 |
0.00 |
||
Net Assets |
|
|
10.74 |
15.61 |
22.71 |
24.66 |
35.90 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
(3.90) |
(8.02) |
(7.22) |
0.02 |
11.04 |
Net Interest |
0.00 |
(0.04) |
(0.10) |
0.00 |
0.00 |
||
Tax |
0.00 |
0.05 |
0.00 |
0.00 |
0.00 |
||
Capex |
(0.44) |
(0.69) |
(0.50) |
(1.00) |
(2.00) |
||
Acquisitions/disposals |
3.42 |
(4.12) |
(7.30) |
0.45 |
0.00 |
||
Financing |
5.91 |
11.81 |
11.90 |
0.00 |
0.00 |
||
Dividends |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
||
Net Cash Flow |
4.99 |
(1.01) |
(3.22) |
(0.53) |
9.04 |
||
Opening net debt/(cash) |
|
|
0.00 |
(5.02) |
(3.98) |
(0.68) |
(0.16) |
HP finance leases initiated |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
||
Other |
0.03 |
(0.03) |
(0.08) |
0.01 |
0.00 |
||
Closing net debt/(cash) |
|
|
(5.02) |
(3.98) |
(0.68) |
(0.16) |
(9.20) |
Source: Edison Investment Research, Gaming Realms
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