Evolution: Continues to perform

Research Update

2023-04-28

07:37

Redeye updates on Evolution post Q1-results which came in somewhat above our expectations driven by strong profitability. We have slightly increased our topline and profitability forecasts resulting in EBITDA increases of 2-4% over 2023-25E.

HA

AH

Hjalmar Ahlberg

Anton Hoof

Strong Q1-results

Evolution reported strong Q1-results with revenue coming in slightly above our forecasts while solid cost control supported an EBITDA beat of 3%. The company reiterates its margin guidance of 68-71% for 2023E.

Solid growth in Asia and LatAm while RNG remains soft

Evolution saw total growth of c32% in Q1 driven by Asia and LatAm. Growth in Live Casino was slightly better than expected while RNG continued to see soft development with proforma organic growth around zero.

Slightly increased estimates and valuation range

We have slightly increased our revenue estimates on the back of the strong growth in Asia. With slower-than-expected cost growth we have also increased our EBITDA-margin forecasts supporting total EBITDA estimate increase of 2-4% for 2023-25E. On the back of the increased estimates our base case is increased to SEK1,650 (SEK1,600) which implies an EV/EBITDA of 25x 2023E and 20x 2024E.

Key financials

EURm202120222023e2024e2025e
Revenues1,068.81,456.71,858.92,258.92,652.4
Revenue Growth90.4%36.3%27.6%21.5%17.4%
EBITDA734.71,008.41,294.91,574.61,847.1
EBITDA Margin68.7%69.2%69.7%69.7%69.6%
EBIT654.1908.11,173.31,416.51,661.4
EBIT Margin61.2%62.3%63.1%62.7%62.6%
Net Income605.5843.41,080.81,289.01,495.3
EV/EBITDA36.021.919.815.813.0
EV/EBIT40.524.421.817.614.5
P/E44.526.924.820.817.9

Strong Q1-results

Evolution reported revenue of EUR430m (growth of 32%) for Q1 2023 which was c1% above our forecast of EUR427m where Live Casino segment performed stronger than expected while RNG was below our estimate.

On a regional basis, both Asia and Europe saw stronger revenue than expected while North America was somewhat lower than forecasted. The company has also separated LatAm into a new segment as it has seen strong growth (74% in the quarter) and has become a larger part of the group.

The company reported EBITDA of EUR300m which was c3% above our forecast of EUR292m. The EBITDA-margin was 70% while we had forecasted 68% where the main deviation was lower-than-expected personnel expenses.

Evolution Results outcome
EURmQ1 22Q2 22Q3 22Q4 22Q1 23EQ1 23ADiff, %
Revenue 327 344 379 407 427 430 1%
Live casino 265 278 310 335 354 360 2%
RNG 62 65 68 73 73 70 -4%
Europe 152 152 159 170 170 174 2%
Asia 103 111 128 136 145 154 6%
North America 37 46 50 56 61 57 -6%
LatAm 17 19 25 27 n.a. 30 n.a.
Other 17 16 17 18 n.a. 15 n.a.
Operating expenses-97-106-118-128-135-129-4%
Personnel expenses-63-68-76-82-88-83-6%
Other opex-34-37-41-46-47-460%
EBITDA 230 238 261 280 292 300 3%
EBITDA-margin70%69%69%69%68%70%
EBIT2072152362502602714%
EPS0.930.941.041.051.121.185%
Source: Redeye Research

Strong cost control supports increased margin forecast

Evolution saw lower than usual growth in the number of employees during the quarter while the cost per employee was also down compared to Q4 2022. Looking forward, we assume that employee growth will be back to the normal trend and that cost per employee will increase. However, this still supports a higher profitability and with our new costs assumptions the EBITDA-margin is forecasted to around 70% for 2023-25E while we had previously estimated 69%. The chart below illustrates the cost development per quarter from Q1 2021 to Q4 2023E.

Evolution: Personnel and other costs Q1 2021 to Q4 2023E

Overall outlook remains strong

Coming to our growth forecasts, the stronger-than-expected performance in Asia and LatAm supports increased growth forecasts although this is somewhat counteracted by the lower-than-expected growth in North America. Commenting on the performance per segment, Evolution states that although RNG only grew slightly organically it remains convinced that the segment can perform better while the path towards double-digit growth will not be linear. Overall, we expected continued growth albeit gradually lower as the company becomes larger while we expect profitability to remain on current levels over the next years.

Evolution revenue and EBITDA 2017-25E

EBITDA estimates increased by 2-4%

We have increased our revenue forecasts by 1-2% for 2023-25E while EBITDA estimates are up 2-4%. The tables below summarise our revenue forecasts per segment and region together with group key financials for 2020-25E.

Evolution: Segment revenue mix
Revenue, EURm202020212022Q1 23Q2 23EQ3 23EQ4 23E2023E2024E2025E
Live Casino5448391,1883603764004351,5711,9492,318
RNG1823026869727275288310335
Total5611,0691,4574304474725101,8592,2592,652
Growth, %202020212022Q1 23Q2 23EQ3 23EQ4 23E2023E2024E2025E
Live Casino49%54%42%36%35%29%30%32%24%19%
RNGn.m.n.m.17%12%9%6%4%7%8%8%
Total growth, %54%90%36%31%30%25%25%28%22%17%
Source: Redeye Research
Evolution: Regional revenue mix
Revenue, EURm202020212022Q1 23Q2 23EQ3 23EQ4 23E2023E2024E2025E
Europe343571633174175175187710760813
Asia1262864781541611731846718731,068
North America3711518957626876263341426
LatAmn.a.n.a.8830344043147208256
Other56966815161720687889
Total revenue5611,0691,4574304474725101,8592,2592,652
Growth, %202020212022Q1 23Q2 23EQ3 23EQ4 23E2023E2024E2025E
Europe33%67%11%14%15%10%10%12%7%7%
Asia153%128%67%49%45%35%35%40%30%22%
North America70%206%65%56%35%35%35%39%29%25%
LatAm---74%75%60%60%66%42%23%
Other57%73%-30%-15%0%5%10%0%15%15%
Total growth, %54%90%36%31%30%25%25%28%22%17%
Source: Redeye Research
Evolution: Key Financials
EURm202020212022Q1 23Q2 23EQ3 23EQ4 23E2023E2024E2025E
Revenue5611,0691,4574304474725101,8592,2592,652
Growth Y/Y (%)54%90%36%31%30%25%25%28%22%17%
Personnel costs-134-207-290-83-89-95-101-367-453-537
Other costs-76-127-159-46-47-50-54-197-232-269
EBITDA3527351,0083003123283551,2951,5751,847
EBITDA-margin63%69%69%70%70%69%70%70%70%70%
EBIT3196549082712822973221,1731,4161,661
EBIT-margin57%61%62%63%63%63%63%63%63%63%
Net income2856058432512602742961,0811,2891,495
EPS, EUR1.72.84.01.21.21.31.45.16.07.0
Source: Redeye Research

Valuation

On the back of the increased estimates, we have also raised our valuation range where the new base case stands at SEK1,650 (SEK1,600) with a bull case of SEK2,650 (SEK2,600) and a bear case of SEK1,250 (SEK1,200). Looking at the current valuation compared to the historical range, Evolution trades at c19x EBITDA NTM which is slightly below its average of 22x. Our base case of SEK1,650 implies an EV/EBITDA of 25x 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 SEK1,650 per share for Evolution which is derived from a DCF-valuation. The base case implies an EV/EBITDA multiple of 25x on our 2023E EBITDA and 20x our 2024E 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.

Quality Rating

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.

Financials

Income statement
EURm202120222023e2024e2025e
Revenues1,068.81,456.71,858.92,258.92,652.4
Cost of Revenue0.000.000.000.000.00
Operating Expenses334.1448.3564.0684.2805.3
EBITDA734.71,008.41,294.91,574.61,847.1
Depreciation0.000.009.311.313.3
Amortizations80.6100.4112.3146.8172.4
EBIT654.1908.11,173.31,416.51,661.4
Shares in Associates0.000.000.000.000.00
Interest Expenses6.50.000.000.000.00
Net Financial Items-6.5-1.5-1.40.000.00
EBT647.5906.61,171.91,416.51,661.4
Income Tax Expenses42.163.291.1127.5166.1
Net Income605.5843.41,080.81,289.01,495.3
Balance sheet
Assets
Non-current assets
EURm202120222023e2024e2025e
Property, Plant and Equipment (Net)80.2111.0176.1255.1348.0
Goodwill2,188.52,315.32,315.32,315.32,315.3
Intangible Assets757.3742.9677.1586.8480.7
Right-of-Use Assets54.367.967.967.967.9
Other Non-Current Assets13.522.822.822.822.8
Total Non-Current Assets3,093.73,260.03,259.23,247.93,234.7
Current assets
EURm202120222023e2024e2025e
Inventories0.000.000.000.000.00
Accounts Receivable200.7277.0371.8451.8530.5
Other Current Assets187.3299.8371.8451.8530.5
Cash Equivalents421.4532.61,156.51,864.42,677.2
Total Current Assets809.41,109.41,900.12,767.93,738.2
Total Assets3,903.14,369.45,159.36,015.96,972.9
Equity and Liabilities
Equity
EURm202120222023e2024e2025e
Non Controlling Interest0.000.000.000.000.00
Shareholder's Equity3,191.03,460.34,114.74,863.35,714.1
Non-current liabilities
EURm202120222023e2024e2025e
Long Term Debt0.000.000.000.000.00
Long Term Lease Liabilities53.265.265.265.265.2
Other Non-Current Lease Liabilities288.8418.0418.0418.0418.0
Total Non-Current Liabilities342.0483.2483.2483.2483.2
Current liabilities
EURm202120222023e2024e2025e
Short Term Debt0.000.000.000.000.00
Short Term Lease Liabilities14.614.414.414.414.4
Accounts Payable8.610.137.245.253.0
Other Current Liabilities346.9401.4509.8609.8708.2
Total Current Liabilities370.1425.9561.4669.4775.6
Total Liabilities and Equity3,903.14,369.45,159.36,015.96,972.9
Cash flow
EURm202120222023e2024e2025e
Operating Cash Flow598.9877.51,171.21,395.11,629.8
Investing Cash Flow-155.7-371.6-120.8-146.8-172.4
Financing Cash Flow-248.5-394.2-426.4-540.4-644.5

Rating definitions

The team

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