Evolution: Finetuning growth assumptions

Research Update

2023-07-26

07:35

Redeye updates on Evolution following the company’s Q2-results which saw somewhat softer growth than forecasted. We trim our growth assumptions resulting in slightly lowered estimates for 2023-25E while our valuation range is left unchanged.

Hjalmar Ahlberg

Anton Hoof

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Somewhat soft topline in Q2

Evolution reported revenue of EUR441m in Q2 2023 which was slightly lower than our forecast of EUR447m where growth in both Live and RNG was softer than expected. On a regional basis, Europe and Asia were close to our expectations while North America and LatAm revenue was lower than estimated.

Trimmed growth assumptions

Looking into H2 2023, Evolution should see growth support from a strong release schedule for both Live and RNG. The company also highlights that it is currently underserving market demand supporting a positive growth outlook. Still, with RNG and North America growing slower than expected, we slightly trim our growth assumptions resulting in 2-3% lower revenue forecasts for 2023-25E.

Slightly lowered estimates, unchanged valuation range

On the back of the trimmed growth assumptions, we have lowered our EBITDA estimates by c1-3% for 2023-25E. We do not make any change to longer-term growth and profitability assumptions and our valuation range remains unchanged with a base case of SEK1,650. The share currently trades at 16x EBITDA 2024E while the average NTM EV/EBITDA is 22x and our base case implies 21x EBITDA 2024E.

Key financials

EURm	2021	2022	2023e	2024e	2025e
Revenues	1,068.8	1,456.7	1,824.7	2,205.7	2,585.8
Revenue Growth	90.4%	36.3%	25.3%	20.9%	17.2%
EBITDA	734.7	1,008.4	1,277.9	1,538.1	1,798.1
EBITDA Margin	68.7%	69.2%	70.0%	69.7%	69.5%
EBIT	654.1	908.1	1,152.3	1,383.7	1,617.1
Basic EPS	2.8	4.0	5.0	5.9	6.8
EV/EBITDA	36.0	21.9	19.8	16.0	13.2
EV/EBIT	40.5	24.4	21.9	17.8	14.7
P/E	44.5	26.9	24.9	21.0	18.2

Somewhat soft topline in Q2

Evolution reported revenue of EUR441m for Q2 2023 while we had forecasted EUR447m. Both Live and RNG was somewhat softer than expected with Live 1% below forecast and RNG 3% below our estimate. On a regional basis, Europe and Asia were close to our expectations while North America and LatAm revenue was lower than estimated. Although revenue was somewhat soft, the company saw lower cost growth than expected, resulting in EBITDA of EUR312m which was in line with our forecast.

Evolution Results outcome
EURm	Q2 22	Q3 22	Q4 22	Q1 23	Q2 23E	Q2 23A	Diff, %
Revenue	344	379	407	430	447	441	-1%
Live casino	278	310	335	360	376	372	-1%
RNG	65	68	73	69	72	70	-3%

Europe	152	159	170	174	175	175	0%
Asia	111	128	136	154	161	165	2%
North America	46	50	56	57	62	56	-11%
LatAm	19	25	27	30	34	31	-8%
Other	16	17	18	15	16	15	-7%

Operating expenses	-106	-118	-128	-129	-136	-129	-5%
Personnel expenses	-68	-76	-82	-83	-89	-87	-1%
Other opex	-37	-41	-46	-46	-47	-42	-11%

EBITDA	238	261	280	300	312	312	0%
EBITDA-margin	69%	69%	69%	70%	70%	71%

EBIT	215	236	250	271	282	282	0%

EPS	0.94	1.04	1.05	1.18	1.22	1.24	2%

Source: Redeye Research

Trimmed growth outlook

While Evolution continues to see solid overall growth, RNG continues to see a slower-than-expected path towards improved growth. Evolution comments that it is making progress in the RNG segment and reiterates its target to achieve double-digit growth although highlighting that it will take more time. Growth could potentially be supported by a strong release schedule for H2 2023 and the company commented during the conference call that the segment should see a positive direction in Q4.

Another soft spot in the quarter was growth in North America which has been lower than our forecast for two consecutive quarters. The company commented that growth in the region will be lumpy while it will be supported by the addition of new games which should increase Live casino penetration. The long-term growth potential for North America is also significant but dependent on regulation of online casino in additional US states.

Overall, we have trimmed our growth assumptions on the back of the weaker-than-expected performance in RNG coupled with slower-than-expected growth in North America, resulting in 2-3% lower revenue estimate for 2023-25E. We now forecast growth of 25% in 2023 (previous 28%) slowing down to 21% in 2024 (previous 22%) and 17% in 2025 (previous 17%). The chart below illustrates our revenue assumptions per market and segment revenue mix.

Evolution: Revenue per region and segment mix

Source: Redeye Research

Slightly lowered estimates

On the back of the trimmed growth assumptions, we have lowered our EBITDA estimates by c1-3% for 2023-25E. The tables below summarise our revenue forecasts per segment and region together with group key financials for 2020-25E.

Evolution: Segment revenue mix
Revenue, EURm	2020	2021	2022	Q1 23	Q2 23	Q3 23E	Q4 23E	2023E	2024E	2025E
Live Casino	544	839	1,188	360	372	392	418	1,542	1,903	2,259
RNG	18	230	268	69	69	71	74	283	303	326
Total	561	1,069	1,457	430	441	463	491	1,825	2,206	2,586

Growth, %	2020	2021	2022	Q1 23	Q2 23	Q3 23E	Q4 23E	2023E	2024E	2025E
Live Casino	49%	54%	42%	36%	34%	26%	25%	30%	23%	19%
RNG	n.m.	n.m.	17%	12%	6%	4%	2%	5%	7%	8%
Total growth, %	54%	90%	36%	31%	28%	22%	21%	25%	21%	17%

Source: Redeye Research


Evolution: Regional revenue mix
Revenue, EURm	2020	2021	2022	Q1 23	Q2 23	Q3 23E	Q4 23E	2023E	2024E	2025E
Europe	343	571	633	174	175	179	187	715	765	819
Asia	126	286	478	154	165	176	184	678	882	1,079
North America	37	115	189	57	56	58	62	232	293	366
LatAm	n.a.	n.a.	88	30	31	35	40	136	193	239
Other	56	96	68	15	15	16	18	63	73	83
Total revenue	561	1,069	1,457	430	441	463	491	1,825	2,206	2,586

Growth, %	2020	2021	2022	Q1 23	Q2 23	Q3 23E	Q4 23E	2023E	2024E	2025E
Europe	33%	67%	11%	14%	15%	13%	10%	13%	7%	7%
Asia	153%	128%	67%	49%	48%	38%	35%	42%	30%	22%
North America	70%	206%	65%	56%	20%	15%	10%	23%	26%	25%
LatAm	-	-	-	74%	61%	40%	50%	54%	42%	23%
Other	57%	73%	-30%	-15%	-7%	-5%	0%	-7%	15%	15%
Total growth, %	54%	90%	36%	31%	28%	22%	21%	25%	21%	17%

Evolution: Key Financials
EURm	2020	2021	2022	Q1 23	Q2 23	Q3 23E	Q4 23E	2023E	2024E	2025E
Revenue	561	1,069	1,457	430	441	463	491	1,825	2,206	2,586
Growth Y/Y (%)	54%	90%	36%	31%	28%	22%	21%	25%	21%	17%

Personnel costs	-134	-207	-290	-83	-87	-93	-100	-363	-447	-529
Other costs	-76	-127	-159	-46	-42	-46	-49	-184	-221	-259

EBITDA	352	735	1,008	300	312	323	343	1,278	1,538	1,798
EBITDA-margin	63%	69%	69%	70%	71%	70%	70%	70%	70%	70%

EBIT	319	654	908	271	282	291	308	1,152	1,384	1,617
EBIT-margin	57%	61%	62%	63%	64%	63%	63%	63%	63%	63%

Net income	285	605	843	251	259	268	284	1,061	1,259	1,455
EPS, EUR	1.7	2.8	4.0	1.2	1.2	1.3	1.3	5.0	5.9	6.8

Source: Redeye Research

Unchanged valuation range

We do not make any change to longer term growth and profitability assumptions and our valuation range remains unchanged with a base case of SEK1,650 and a bull case of SEK2,650 while the bear case case is SEK1,250. The share currently trades at 16x EBITDA 2024E while the average NTM EV/EBITDA is 22x and our base case implies 21x EBITDA 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
EURm	2021	2022	2023e	2024e	2025e
Revenues	1,068.8	1,456.7	1,824.7	2,205.7	2,585.8
Cost of Revenue	0.00	0.00	0.00	0.00	0.00
Operating Expenses	334.1	448.3	546.8	667.5	787.7
EBITDA	734.7	1,008.4	1,277.9	1,538.1	1,798.1
Depreciation	0.00	0.00	0.00	0.00	0.00
Amortizations	80.6	100.4	125.6	154.4	181.0
EBIT	654.1	908.1	1,152.3	1,383.7	1,617.1
Shares in Associates	0.00	0.00	0.00	0.00	0.00
Interest Expenses	6.5	0.00	0.00	0.00	0.00
Net Financial Items	-6.5	-1.5	-1.4	0.00	0.00
EBT	647.5	906.6	1,150.8	1,383.7	1,617.1
Income Tax Expenses	42.1	63.2	89.4	124.5	161.7
Net Income	605.5	843.4	1,061.5	1,259.2	1,455.4
Balance sheet
Assets
Non-current assets
EURm	2021	2022	2023e	2024e	2025e
Property, Plant and Equipment (Net)	80.2	111.0	176.0	264.3	367.7
Goodwill	2,188.5	2,315.3	2,315.3	2,315.3	2,315.3
Intangible Assets	757.3	742.9	664.0	564.7	448.3
Right-of-Use Assets	54.3	67.9	67.9	67.9	67.9
Other Non-Current Assets	13.5	22.8	22.8	22.8	22.8
Total Non-Current Assets	3,093.7	3,260.0	3,246.1	3,235.0	3,222.1
Current assets
EURm	2021	2022	2023e	2024e	2025e
Inventories	0.00	0.00	0.00	0.00	0.00
Accounts Receivable	200.7	277.0	364.9	441.1	517.2
Other Current Assets	187.3	299.8	364.9	441.1	517.2
Cash Equivalents	421.4	532.6	1,154.8	1,844.7	2,634.0
Total Current Assets	809.4	1,109.4	1,884.6	2,727.0	3,668.4
Total Assets	3,903.1	4,369.4	5,130.7	5,962.0	6,890.5
Equity and Liabilities
Equity
EURm	2021	2022	2023e	2024e	2025e
Non Controlling Interest	0.00	0.00	0.00	0.00	0.00
Shareholder's Equity	3,191.0	3,460.3	4,095.3	4,823.8	5,649.6
Non-current liabilities
EURm	2021	2022	2023e	2024e	2025e
Long Term Debt	0.00	0.00	0.00	0.00	0.00
Long Term Lease Liabilities	53.2	65.2	65.2	65.2	65.2
Other Long Term Liabilities	288.8	418.0	418.0	418.0	418.0
Total Non-Current Liabilities	342.0	483.2	483.2	483.2	483.2
Current liabilities
EURm	2021	2022	2023e	2024e	2025e
Short Term Debt	0.00	0.00	0.00	0.00	0.00
Short Term Lease Liabilities	14.6	14.4	14.4	14.4	14.4
Accounts Payable	8.6	10.1	36.5	44.1	51.7
Other Current Liabilities	346.9	401.4	501.3	596.5	691.6
Total Current Liabilities	370.1	425.9	552.2	655.0	757.7
Total Liabilities and Equity	3,903.1	4,369.4	5,130.7	5,962.0	6,890.5
Cash flow
EURm	2021	2022	2023e	2024e	2025e
Operating Cash Flow	598.9	877.5	1,160.3	1,364.1	1,587.0
Investing Cash Flow	-155.7	-371.6	-111.7	-143.4	-168.1
Financing Cash Flow	-248.5	-394.2	-426.4	-530.7	-629.6

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