Research note


Cherry – Preview Q2, marketing push

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We believe we saw a definite sign of the turn-around within Online Gaming during the previous quarter. Now the market can start to put focus on the growing gems Yggdrasil and Game Lounge. For Q2 we expect to see a growth of around 32% with healthy profitability. Just like most iGaming companies, the World Cup will most likely have led to a marketing push. Cherry’s report will be released on the 16th of August. We continue to view the share as attractively valued, and today it feels like a discount offering; Buy 3 for the price of 2.

We find that the turn-around in Online Gaming in combination with the rapid expansion of the highly profitable Yggdrasil and Game Lounge will lead to expanding margins during the year. Some of Cherry’s iGaming peers have already presented their Q2 reports; the outcomes have been somewhat mixed, we make no changes to our projections prior to the report release. For Q2, we expect net sales of SEK 709m with an EBIT margin of 23%. Some key events during the period have been the launch of, Guest play release, Polish Sportsbetting license and 888 deal with Yggdrasil. Below follows a brief discussion about Cherry’s largest segments and our projections for them.

Online Gaming

We believe that the turn-around within Online Gaming was confirmed during the previous quarter. In Q1 the deposits amounted to SEK 1.7bn and rose by 16% quarter over quarter, and yearly by almost 25%, we find this as a good indicator that we will see a continued firm revenue up-take in the coming quarter.

We expect to see a continued sales up-take and improving margins from marketing efficiency and thanks to improved supplier contracts.  We believe the marketing investment will rise to some degree during Q2 because of the World Cup, this will pay-off in the subsequent quarters. For Q2’18 we expect a net sales of SEK 559mm with an EBIT margin in the region of 20%.

Game Development

Yggdrasil continues to enter new markets,  sign clients and release new innovative products and games. We expect to see a larger effect during the next year from YGS, Bingo and table games,  for now, these growth endeavors will likely drive some additional costs. For the next quarter we expect a rise in income of 63%, and anticipate a  net sales level of SEK 56m with an EBIT of SEK 20m. After the quarter ended Cherry acquired additional shares from gaming specialist Highlight Games. The Group now owns 60.4%, and the company will be consolidated under the Game Development segment.

Online Marketing

As of Q1 Game Lounge is active in 13 markets, up from 12 in Q4’17 and 9 in Q1 last year. The New Depositing Players (NDPs) rose by 61% compared to the same period the previous year and amounted to a record level of 14 267. The NDPs grew by 15% when comparing to Q4’17. We view the NDP rise as a good indicator of a continued revenue up-take

We believe we should start to see some revenue take-up from the new product verticals and new regions, like Japan, from H2 and beyond. We expect to see a continued high profitability due to the inherent scalability of Game Lounge’s business model. For Q2’18 we project net sales in the area of SEK 56m with an EBIT of SEK 36m.

Cherry’s report will be released on the 16th of August. We continued to view the share as attractively valued, and today it feels like a discount offering; Buy 3 for the price of 2. Our Base-case currently amounts to 99 SEK per share.

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