Better Collective: Solid Q1 results and positive outlook

Research Update

2023-05-25

07:38

Redeye updates on Better Collective following its Q1-results where the company reached record revenue and again beat our forecasts. The start to Q2 was strong as well and the company reiterates its financial targets for 2023. Overall, the growth outlook remains positive and we make limited changes to estimates while we slighlty increase our valuation range.

HA

AH

Hjalmar Ahlberg

Anton Hoof

Solid Q1 report with organic growth of 23%

Better Collective reported revenue of EUR88m in Q1 2023 (we expected EUR84m), representing total growth of 30% of which 23% was organic. The company reported EBITDA of EUR33m, which was 6% above our forecast.

Positive start to seasonally slower Q2

Going into Q2 which is a seasonally slower quarter for Better Collective, the company saw revenue of EUR27m in April, representing growth of 40%. We expect May and June to be slower months and we keep our Q2 2023 forecast of EUR66m revenue unchanged.

Limited changes to estimates

Better Collective reiterates its financial targets for 2023 and while the Q1-results was above our forecast we leave our estimates largely unchanged on the back of the report (2023-25E revenue and EBITDA up c1%). We slightly raise our valuation range where the new base case stands at SEK340 (SEK325) which implies an EV/EBITDA of 19x and 16x for 2023-24E while the share historically has traded at 8-20x NTM EV/EBITDA.

Key financials

EURm202120222023e2024e2025e
Revenues177.1269.3313.0354.4399.9
Revenue Growth94.2%52.1%16.2%13.2%12.8%
EBITDA55.885.1102.0119.8138.2
EBIT45.570.483.7101.1118.2
EBIT Margin25.7%26.2%26.8%28.5%29.6%
Net Income17.348.157.772.988.6
EV/EBIT25.113.914.911.59.0
EV/EBITDA20.511.512.29.77.7
P/E30.816.718.915.112.4

Solid Q1-results

Better Collective reported revenue of EUR87.9m for Q1 2023 which represents growth of 30% (of which 23% organic) and was c5% above our forecast. The company managed to achieve a new record quarterly revenue, beating the strong performance in Q4 2022 which was boosted by the FIFA WC. While overall opex was somewhat higher than forecasted (higher staff costs due to bonus payments), the strong topline and a strong gross profit resulted in EBITDA coming in 6% above our forecasts. The table below summarize the Q1 outcome compared to our forecasts.

Better Collective results outcome
EURmQ1 22Q2 22Q3 22Q4 22Q1 23EQ1 23ADiff, %
Revenue67.456.059.786.183.987.94.9%
OW US31.013.216.833.935.735.80.5%
OW RoW36.442.942.952.248.252.18.1%
Direct costs-23.1-20.7-21.7-26.8-26.8-27.11.2%
Gross profit44.335.438.059.457.060.86.6%
Staff costs-15.7-17.7-17.3-17.9-18.6-21.214.0%
Other costs-5.5-5.4-6.1-6.3-7.0-6.3-10.1%
EBITDA adj23.112.214.635.231.433.35.9%
EBIT18.79.69.632.427.128.13.7%
Net income13.77.17.020.318.820.911.3%
EPS reported0.240.120.120.350.330.369.3%
Source: Redeye Research

Strong quarter for North America

Better Collective has from Q1 2023 started to report North America as a new region which includes both US and Canada. This has had a limited impact compared to the earlier regional mix where Canada, which reported revenue of EUR1.3m for the quarter, is now moved from Europe & RoW to North America. In Q1 2023, the company achieved new record revenue in North America (both for US standalone and including Canada), supported by a successful launch of sports betting in Ohio and to some extent Massachusetts which launched late in March.

Looking into Q2, we expect a typical seasonal slowdown for North America as the NFL season ends while Europe & RoW should see a more limited drop sequentially. While revenue for April came in strong at EUR27m, we expect May and June to be softer and we forecast total revenue of EUR66m for Q2 2023. Thereafter we expect sequential growth in Q3 and Q4 2023 supported by the US where Kentucky could potentially launch sports betting before year-end. However, Europe & RoW will also face tough comps from the strong Q4 2022 and as such we expect limited total growth in Q4 2023.

Better Collective: Revenue per region Q1 2021 to Q4 2023E

Source: asd

Gradually increasing share of recurring revenue

Better Collective's recurring revenue for the quarter came in at EUR41m which was stable compared to Q4 2022 and up 75% YoY. The strong YoY growth is driven by the transition to revenue-share income contracts in the US which should also see continued progress going forward as NDCs from recent quarters starts to generate revenue. In Q1 2023, the company had an NDC intake of 488k representing a YoY growth of 35% while it was down from the very strong intake of 581k in Q4 2022 which was boosted by the FIFA WC. The overall mix of NDCs on revenue-share contracts was 71% in Q1 while the mix of NDCs on revenue-share contracts in the US is around 60-70% (up from close to zero in early 2022). Going forward, our impression is that the US is likely to remain in this range, supporting an overall level of around 70-80% of NDCs on revenue-share contracts, which should drive a gradually increasing mix of recurring revenue.

Better Collective: Revenue mix Q1 2021 to Q4 2023E

Continued strong profitability in Paid Media

The Paid Media segment saw another impressive quarter with record profitability where the EBITDA-margin increased to 27% from 15% in Q1 2022 and 23% in Q4 2022. The company highlights that the strong performance was among other driven by a break-through in the North American market. The increased profitability is also driven by the transition towards an increased mix of revenue share income where the company reported that c25% of the segment's revenue in Q1 2023 was recurring. In the chart below we illustrate the positive profitability trend for Paid Media on a quarterly basis and on rolling twelve months. While the profitability in the segment is likely to remain volatile on a quarterly basis where lower margins will be seen in quarters where the company sees strong returns on investments, we believe the company has lifted the profitability level to a higher range.

Better Collective: Paid segment EBITDA Q1 2021 to Q4 2023E

Limited changes to estimates

While the Q1-results came in stronger than expected, the company reiterated its financial targets for 2023 and we have made limited changes to estimates (revenue and EBITDA up c1% for 2023-25E). We expect organic growth of c13% for 2023 which comes on the back of a very 2022 where the company saw 34% organic growth. We forecast similar growth of c13% for 2024-25E which excludes acquisitions while the company's growth target of 20% CAGR to 2027E includes acquisitions and offers upside potential to our estimates. Historically, the company has done around 1-3 acquisitions per year and we believe a similar pace is likely going forward.

Better Collective: Revenue and EBITDA 2018-25E

Better Collective: Financial forecasts
EURm20212022Q1 23Q2 23EQ3 23EQ4 23E2023E2024E2025E
Revenue17726987.966.270.987.9313354400
Growth Y/Y (%)94%52%30%18%19%2%16%13%13%
North America479837.118.122.736.9115130148
Europe & RoW13017150.848.248.251.0198224252
North America Growth Y/Y (%)370%109%19%28%28%5%17%13%13%
RoW Growth Y/Y (%)60%32%40%15%15%0%16%13%13%
Direct costs-65-92-27.1-21.5-23.0-27.2-99-112-127
Staff costs-41-69-21.2-20.2-20.8-21.5-84-92-103
Other costs-16-23-6.3-7.0-7.5-7.5-28-30-32
EBITDA adj568533.317.519.531.7102120138
EBITDA adj (%)32%32%38%26%28%36%33%34%35%
Non-recurring-170-0.60.00.00.0-100
EBITDA398532.717.519.531.7101120138
EBITDA (%)22%32%37%26%28%36%32%34%35%
EBIT297028.113.015.027.083101118
EBIT (%)16%26%32%20%21%31%27%29%30%
Net income adj.344821.58.39.818.8587389
Net income174820.98.39.818.8587389
EPS adj, EUR0.60.90.390.150.180.341.11.31.6
EPS, EUR0.30.90.380.150.180.341.01.31.6
Source: Redeye Research

Valuation

We have increased our valuation range on the back of the slightly higher estimates and the increase of the EUR/SEK impacts the valuation positively. Our new base case stands at SEK340 (SEK325) while the new bull case stands at SEK470 (SEK460) and the bear case at SEK195 (SEK190) (see assumptions for our scenarios here: https://www.redeye.se/company/better-collective/fair-value-range). The share currently trades at c10x 2024E EBITDA while our base case implies 16x 2024E EBITDA and the historical range has been between c8-20x. Looking at the estimate trend and share price development, the share has closed part of the gap while a positive outlook for the EPS should support a continued share price development going forward.

Investment thesis

Case

Profitable growth supported by booming US sports betting market

Better Collective is in a solid position to yield profitable growth over several years on the back of the structurally growing online gambling market coupled with an attractive business model generating strong margins. We expect the company to generate organic growth of 15-30% over 2022-24E as it benefits from regulation of the US sports betting market coupled with an emerging position in South America while the more mature European business continues to generate stable performance. The company should also see operating leverage as it reaps the benefit from its strong product portfolio of online educational and informational sports betting content.

Evidence

Solid track record by owner operated management team

Our positive view on Better Collective is supported by its strong track record. The company’s management team which are also founders and large shareholders of the company (CEO owns c. 20%) have grown the company substantially since it was listed in 2018 (revenue increase from EUR40m in 2018 to EUR269m in 2022). Better Collective has also built a strong position in the US through acquisitions that has this far delivered on expectations. Finally, the company has delivered on its financial targets which gives credit to believe in future growth targets.

Challenge

High growth in US will drive increased competition

The strong growth in US will likely drive increased competition in the online sports betting and casino marketing segment. However, Better Collective focus on building quality products which should put it ahead of competition in our view. Additionally, it has also been able to strike partnerships with traditional media outlets which further strengthens its competitive position.

Valuation

Base case DCF driven by US growth – implies valuation in higher end of historic EV/EBITDA range

We find a base case valuation of SEK340 per share for Better Collective which is derived from a DCF-valuation using a discount rate of 8.0%. The base case implies a EV/EBITDA multiple of 19x on our 2023E and 16x 2024E EBITDA while the share has historically traded in a range of 8x to 20x twelve months forward EBITDA. Our base case assumes growth of 12% between 2024-28E and 5% between 2029-38E supported by the structural growth in the US market. We assume a slight margin expansion as the company enjoys operating leverage.

Quality Rating

People: 4

We regard management as capable, with notable industry experience. Impressively, Jesper Søgaard and Christian Kirk Rasmussen have taken Better Collective from a single site to the world’s leading sports betting affiliate. However, board members average a relatively short history with the company. The founders, who are also part of top management, hold the majority of the shares. We consider this positive as this creates long-term alignment with shareholders. Chairman of the board Jens Bager holds over 2%, while several other board members and the CFO also have significant shareholdings. This strengthens the ownership structure further. Moreover, Better Collective has several institutional investors among its largest owners, which we view as a further stamp of quality.

Business: 4

The bulk of sales are generated from regulated markets, which mitigates regulatory risk. The US market and several large South American markets offers a large potential for Better Collective, as they are being regulated. The operations are also highly scalable, and the gross margin is above 60%, including Paid Media. Better Collective’s community sites create network effects and barriers against new competitors. Moreover, much of the sites’ traffic is direct, leading to low dependence on Google and expensive paid media compared to peers. On the negative side, Better Collective is still exposed to regulatory risks and potential margin pressure. Furthermore, despite its rapid growth pace Better Collective still has strong EBITDA margin of above 30% with strong cash flow.

Financials: 4

Better Collective is a very active and successful industry consolidator with several acquisitions carried through in the last years. While this can increase leverage in the short term the company’s strong cash generation means this quickly improves and opens for further growth by acquisitions.

Financials

Income statement
EURm202120222023e2024e2025e
Revenues177.1269.3313.0354.4399.9
Cost of Revenue64.992.299.0112.2126.6
Operating Expenses56.492.0112.0122.4135.1
EBITDA55.885.1102.0119.8138.2
Depreciation1.82.32.42.73.0
Amortizations8.512.315.916.017.0
EBIT45.570.483.7101.1118.2
Shares in Associates0.000.000.000.000.00
Interest Expenses5.99.69.44.00.00
Net Financial Items-2.5-5.4-6.7-4.00.00
EBT26.265.076.497.1118.2
Income Tax Expenses8.916.918.724.329.5
Net Income17.348.157.772.988.6
Balance sheet
Assets
Non-current assets
EURm202120222023e2024e2025e
Property, Plant and Equipment (Net)1.78.87.66.75.7
Goodwill178.2183.9183.9183.9183.9
Intangible Assets341.7487.5509.4500.4491.4
Right-of-Use Assets2.70.000.000.000.00
Other Non-Current Assets10.29.99.99.99.9
Total Non-Current Assets534.5690.2710.8701.0691.0
Current assets
EURm202120222023e2024e2025e
Inventories0.000.000.000.000.00
Accounts Receivable30.153.262.670.980.0
Other Current Assets4.210.331.335.440.0
Cash Equivalents28.631.562.2142.7239.1
Total Current Assets62.995.0156.0249.1359.1
Total Assets597.4785.2866.9950.11,050.1
Equity and Liabilities
Equity
EURm202120222023e2024e2025e
Non Controlling Interest0.000.000.000.000.00
Shareholder's Equity344.8412.9470.6543.5632.1
Non-current liabilities
EURm202120222023e2024e2025e
Long Term Debt121.1201.7201.7201.7201.7
Long Term Lease Liabilities1.55.05.05.05.0
Other Non-Current Lease Liabilities74.5100.6100.6100.6100.6
Total Non-Current Liabilities197.1307.2307.2307.2307.2
Current liabilities
EURm202120222023e2024e2025e
Short Term Debt0.001.11.11.11.1
Short Term Lease Liabilities1.31.71.71.71.7
Accounts Payable18.422.331.335.440.0
Other Current Liabilities35.740.155.061.268.0
Total Current Liabilities55.565.189.099.3110.7
Total Liabilities and Equity597.4785.2866.9950.11,050.1
Cash flow
EURm202120222023e2024e2025e
Operating Cash Flow31.648.269.589.5106.4
Investing Cash Flow-219.2-112.6-38.9-8.9-10.0
Financing Cash Flow188.865.70.000.000.00

Rating definitions

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