As mentioned in our premium article, we have received information from our industry contacts that the sports betting margin was very low in November and during the start of December. Potentially, the lowest quarterly margin since 2016/2017. The margin was low mainly due to many favorite wins in the Champions League, Europa League, qualifying matches for Euro 2020 football, as well as the major European football leagues. This is supported by the performance of the sports betting focus licensed holders in the Swedish market, as illustrated in the graph below. The sports betting focused license holders decline with -16.3% M/M in November.
However, several of these license holders also have a large share of casino-related revenue. Spooniker Ltd (Subsidiary to Kindred), for example, has, apart from the flagship brand Unibet, several casino focused brands in the Swedish market. As a result, we expect that most of the revenues for Spooniker Ltd are casino-related in Sweden. The license holder Hillside (Sports) ENC (Subsidiary to Bet365), on the other hand, only includes the sports betting related revenues and has large betting volumes. Therefore, we believe that this license holder best illustrates the impact of the lower betting margins.
Hillside (Sports) ENC reported an NGR of SEK 42.3m, which was a drop of -29% compared to October and a drop of -38% compared to September. The monthly average by quarter indicates and drop of -18%, as illustrated in the graph below. The number for Q4 is based on the average for October and November. The information that we have received from our contacts indicates that the margins were low during the first weeks of December as well. As a result, we expect the decline to remain within 15-20% interval for Q4 compared to Q3.
Moreover, there were few major sports events during the summer, which had a negative effect on the Q3 numbers. Therefore, we expected Q4 to be a stronger quarter with Q/Q growth. This is also in line with the overall consensus estimates (Bloomberg) for the public iGaming companies in the fourth quarter, with overall Q/Q growth estimates of ~10%. Obviously, a potential decline of >10% instead of an estimated growth of ~10% will have major implications for the earnings as most of these iGaming companies have a gross profit margin of >75%. As a result, we believe that there is a large risk of profit warnings for the fourth quarter from European sports betting focused companies.
We have listed some public companies and their exposure to sports betting in the table below. We believe that there is a high risk that several of the companies with a high sports betting exposure (>40%) will need to issue profit warnings due to the unusually low sports betting margin. Note that for the affiliates, the low margin only affects the Rev Share related revenues.
It should, however, be highlighted that the lower sports betting margin only has short-term consequences. We expect that the increased return-to-player (RTP) will trigger higher player activity going forward. So, there is a good chance that the last two weeks December will be better and dampen the negative margin effect in the fourth quarter to some degree.
We will follow the development for December closely and publish an update later in January. Stay updated and receive all our premium articles by signing up for our premium membership here.
(View data for all license holders, segmented for the listed companies in our Premium article found here.
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