Evolution: Solid year-end

Research Update

2023-02-03

07:32

Redeye updates its view on Evolution post Q4-results which came in just above our expectations and we have slightly raised our estimates and valuation range.

Hjalmar Ahlberg

Anton Hoof

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Q4-results slightly above expectations

Evolution reported solid Q4-results with revenue and EBITDA coming in just above our expectations. Growth was overall good in all markets although slightly lower than expected in Asia while we were pleased to see better-than-expected growth in Europe and North America.

Strong margin guidance, albeit with wider range

Looking into 2023, the company guides for a EBITDA-margin in the range of 68-71% which is strong in our view considering the general global inflationary pressure. We forecasted a margin of around 68% for 2023E ahead of the report which we have now raised slightly to around 69%.

Slightly increased estimates and valuation range

With a slightly stronger-than-expected Q4 and a positive outlook for 2023 we have increased our EBITDA estimates with c2% for 2023-24E. Coupled with slightly higher growth expectations, we also raise the valuation range where the new base case stands at SEK1,600 (SEK1,500) with a bull case of SEK2,600 (SEK2,400) and a bear case of SEK1,200 (SEK1,100).

EURm	2020	2021	2022	2023e	2024e
Revenues	561.4	1,068.8	1,456.7	1,845.0	2,210.6
Revenue Growth	53.6%	90.4%	36.3%	26.7%	19.8%
EBITDA	351.9	734.7	1,008.4	1,269.1	1,522.3
EBIT	319.4	654.1	908.1	1,130.8	1,356.5
EBIT Margin	56.9%	61.2%	62.3%	61.3%	61.4%
Net Income	284.9	605.5	843.4	1,040.3	1,234.4
EV/EBITDA	41.6	36.0	21.9	20.2	16.4
EV/EBIT	45.8	40.5	24.4	22.7	18.4

Q4-results slightly above expectations

Evolution reported Q4 revenue of EUR408m compared to our estimate of EUR402m. Both Live and RNG revenue was somewhat higher than our expectations. Coming to the regional revenue mix, we are encouraged to see that Europe and North America came in above our expectations. Revenue from regulated markets stood at 40% compared to 41% in Q3 2022 and Q4 2021. EBITDA came in at EUR280m compared to our estimate of EYR278m. The EBITDA-margin was 69.2% while our estimate was 68.6%.

Strong margin guidance, albeit with wider range

Commenting on the profitability outlook for 2023, the company’s guidance is 68-71% which is wider range than earlier due to increased global uncertainty. However, this was strong compared to our expectation which was for a margin of around 68% for 2023E and we have slightly increased our margin assumption to around 69% for 2023E. We expect the margin to improve gradually over the year with a stronger margin in H2 2023E compared to H1 2023E.

Slightly increased estimates

Overall, we have increased our revenue forecasts with c3% and EBITDA-estimates with c2 % for 2023-24E. We expect a gradual slowdown of growth in 2023-24E with topline growth of 27% and 20% for 2023-24E (slightly higher than our previous forecast of 24% and 20% respectively). The table below summarises key financials and regional revenue for 2019-2024E.

Valuation

On the back of the increased estimates, we have also raised our valuation range where the new base case stands at SEK1,600 (SEK1,500) with a bull case of SEK2,600 (SEK2,400) and a bear case of SEK1,200 (SEK1,100). Looking at the current valuation compared to the historical range, Evolution trades at around its average at 18-19x EV/EBITDA 2023E which looks attractive considering the continued positive earnings growth outlook. Our base case of SEK1,600 implies an EV/EBITDA of 24x 2023E and 20x 2024E.

Investment thesis

Case

Market leading platform company with long runway for growth

As the market leader in the online live casino supplier segment Evolution is well positioned for continued growth as the global casino market transitions from offline to online. The company has built a strong position by providing high-quality and innovative products which helps it to stay ahead of the competition. We expect Evolution to continue its growth journey driven by immature markets such as North America, Latin America and Asia while the more mature European market will see slower growth. Overall, we forecast average revenue growth of c. 20% over the next five years and around 15% in average over the next ten years. We expect profitability to remain stable yielding solid profit growth as well.

Evidence

Strong track record and large market opportunity

Evolution has a strong track record of growth and profitability. The company has increased revenue from EUR75m in 2015 when it was listed to around EUR1.4bn in 2022 which has largely been from organic growth. It has also increased profitability from an EBITDA-margin of 36% in 2015 to around 70% in 2022. The strong track record supports our view that the company should continue to capture growth from the ongoing transition from offline to online casino. The overall online gambling penetration is around 25% in 2022 with mature markets like Sweden and UK at around 50-60% implying a significant remaining growth potential for the total market.

Challenge

Emerging competition and regulatory risks

While Evolution remains the clear market leader in online live casino the competitors are gradually catching up. This could result in price pressure impacting growth negatively, however, Evolution has a strong brand among players which ensures that operators need to offer Evolution games or it might risk losing players to other operators. Another challenge is that Evolution also has a high share of revenue from non-regulated markets which creates a negative perception and could be a risk when they are regulated. However, we expect the share of regulated revenue to increase which should ease investor uncertainty and historically regulations have also typically been positive for Evolution.

Valuation

Base case DCF supported by strong growth and profitability

We find a base case valuation of SEK1,600 per share for Evolution which is derived from a DCF-valuation. The base case implies an EV/EBITDA multiple of 24x on our 2023E EBITDA while the share has historically traded in a range of 15x to 45x twelve months forward EBITDA. Our base case assumes average growth of around 20% over the next five years and a gradual decline over 2028-38E to a terminal growth of 2% by 2038E. We estimate a stable EBITDA-margin until 2028E whereafter we assume a gradual decline towards a terminal EBITDA-margin of 60% by 2038E.

Summary Redeye Ratings

The rating consists of three valuation keys, each consituting an overall assesment of several factors that are rated on a scale of 0 to 1 points. The maximum score for a valuation key is 5 points.

People: 4

We judge management and the board as very capable. They bring solid experience and impressive track records in the industry, where several of them have extensive experience. We view the company's communication as transparent and honest. The company has a strong ownership structure with the board, management and founders having significant ownership, creating strong alignment with minority owners and supporting long-term shareholder value. Furthermore, the company has several institutional owners which we view as positive.

Business: 4

Evolution Gaming has an impressive track record with a market-leading position and a wide revenue base with rapid growth in all markets. It has defensive moats in both technology and organization supporting pricing power and an impressive return on capital.

Financials: 5

Evolution Gaming has a strong cash position and very solid cash flow, which supports it taking M&A opportunities. The company has an impressive return on both equity and invested capital. We expect that it will maintain strong profit margins and EPS growth in the years to come. The company has increased its dividend rapidly without jeopardising its financial position or growth possibilities.

Income statement
EURm	2020	2021	2022	2023e	2024e
Revenues	561.4	1,068.8	1,456.7	1,845.0	2,210.6
Cost of Revenue	0.00	0.00	0.00	0.00	0.00
Operating Expenses	209.5	334.1	448.3	575.9	688.3
EBITDA	351.9	734.7	1,008.4	1,269.1	1,522.3
Depreciation	0.00	0.00	0.00	9.2	11.1
Amortizations	32.5	80.6	100.4	129.2	154.7
EBIT	319.4	654.1	908.1	1,130.8	1,356.5
Shares in Associates	0.00	0.00	0.00	0.00	0.00
Interest Expenses	0.99	6.5	0.00	0.00	0.00
Net Financial Items	-0.99	-6.5	-1.5	0.00	0.00
EBT	299.0	647.5	906.6	1,130.8	1,356.5
Income Tax Expenses	14.1	42.1	63.2	90.5	122.1
Net Income	284.9	605.5	843.4	1,040.3	1,234.4
Balance sheet
Assets
Non-current assets
EURm	2020	2021	2022	2023e	2024e
Property, Plant and Equipment (Net)	62.3	80.2	111.0	175.6	252.9
Goodwill	1,834.3	2,188.5	2,315.3	2,315.3	2,315.3
Intangible Assets	727.6	757.3	742.9	659.9	560.4
Right-of-Use Assets	39.7	54.3	67.9	67.9	67.9
Other Non-Current Assets	6.0	13.5	22.8	22.8	22.8
Total Non-Current Assets	2,669.9	3,093.7	3,260.0	3,241.5	3,219.4
Current assets
EURm	2020	2021	2022	2023e	2024e
Inventories	0.00	0.00	0.00	0.00	0.00
Accounts Receivable	120.5	200.7	277.0	369.0	442.1
Other Current Assets	157.1	187.3	299.8	369.0	442.1
Cash Equivalents	221.7	421.4	532.6	1,135.5	1,824.3
Total Current Assets	499.2	809.4	1,109.4	1,873.5	2,708.5
Total Assets	3,169.1	3,903.1	4,369.4	5,115.0	5,928.0
Equity and Liabilities
Equity
EURm	2020	2021	2022	2023e	2024e
Non Controlling Interest	0.00	0.00	0.00	0.00	0.00
Shareholder's Equity	2,726.2	3,191.0	3,460.3	4,074.2	4,788.4
Non-current liabilities
EURm	2020	2021	2022	2023e	2024e
Long Term Debt	0.00	0.00	0.00	0.00	0.00
Long Term Lease Liabilities	38.1	53.2	65.2	65.2	65.2
Other Non-Current Lease Liabilities	36.7	288.8	418.0	418.0	418.0
Total Non-Current Liabilities	74.8	342.0	483.2	483.2	483.2
Current liabilities
EURm	2020	2021	2022	2023e	2024e
Short Term Debt	0.00	0.00	0.00	0.00	0.00
Short Term Lease Liabilities	11.9	14.6	14.4	14.4	14.4
Accounts Payable	15.3	8.6	10.1	36.9	44.2
Other Current Liabilities	341.0	346.9	401.4	506.3	597.7
Total Current Liabilities	368.2	370.1	425.9	557.6	656.4
Total Liabilities and Equity	3,169.1	3,903.1	4,369.4	5,115.0	5,928.0
Cash flow
EURm	2020	2021	2022	2023e	2024e
Operating Cash Flow	316.1	598.9	877.5	1,149.2	1,352.7
Investing Cash Flow	-36.9	-155.7	-371.6	-119.9	-143.7
Financing Cash Flow	0.00	-248.5	-394.2	-426.4	-520.1

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