Better Collective: Continues to outperform our expectations

Research Update

2023-08-25

07:33

Redeye updates on Better Collective following its Q2-results which came in much stronger than expected. The company also saw a solid start to Q3 and while it leaves its 2023 guidance unchanged we have raised our estimates to the higher end of the range.

HA

AH

Hjalmar Ahlberg

Anton Hoof

Q2-results clearly above forecasts

Better Collective reported strong Q2-results with topline coming in 12% above our forecast while EBITDA was close to 50% better, illustrating the company's solid operating leverage. While the start to Q3 was positive as well, the company leaves its 2023 guidance unchanged which partly reflects tough comps in Q4 which was boosted by the FIFA WC last year.

Strong growth in all markets

Better Collective saw total growth of 39% in Q2, with organic growth of 29%. Performance was strong in all regions while South America was highlighted as a growth driver in Europe & RoW which was also partly boosted by a strong sportswin margin. North America saw strong growth driven by the transition towards increased income from revenue share contracts.

Increased estimates and valuation range

We have raised our estimates on the back of the strong Q2-results where 2023E EBITDA has increased by 5% while 2024-25E is up 2-3%. Our new 2023E estimates are at the top-end of Better Collective's guidance supported by the strong performance in H1 2023. We also increase our valuation range where the new base of SEK380 (SEK360) implies an EV/EBITDA of 17x 2024E while the share currently trades at c10x 2024E EBITDA.

Key financials

EURm202120222023e2024e2025e
Revenues177.1269.3327.7376.1424.3
Revenue Growth94.2%52.1%21.7%14.8%12.8%
EBITDA55.885.1113.0130.4150.1
EBIT45.570.488.4103.6122.9
EBIT Margin25.7%26.2%27.0%27.5%29.0%
Net Income17.348.154.674.792.2
EV/EBITDA20.511.512.510.18.1
EV/EBIT25.113.915.912.79.9
P/E30.816.722.216.813.6

Q2 results strong across the board

Better Collective reported revenue of EUR78.1m for Q2 2023 which is 12% above our forecast of EUR69.7m. Growth was 39% of which 29% organic while our forecasts were 24% and 18%, respectively. Revenue came in stronger in all segments with North America seeing strong performance in a seasonally slow quarter as it starts to benefit from the transition towards increased revenue-share contracts. Europe & RoW benefitted from a strong sportswin margin while the company also highlights strong growth in South America. NDC intake was also strong coming in at above 500k which was an increase of 32% YoY and slightly higher than in Q1 2023.

The company saw strong profitability with EBITDA coming at EUR28.7m representing a margin of 37% (our forecast was EUR19.3m and 28% respectively). This again illustrates the operating leverage in the business where a large part of topline growth trickles down to results. Opex was overall close to our forecast albeit with slightly higher staff costs but lower other external expenses. The Paid Media segment once again hit new record profitability with an EBITDA-margin of 31% and Better Collective comments that it seems to be a structurally higher margin following the transition to revenue-share income.

The table below summarize Q2-results outcome compared to our forecasts.

Better Collective: results outcome
EURmQ2 22Q3 22Q4 22Q1 23Q2 23EQ2 23ADiff, %
Revenue56.059.786.187.969.778.112.0%
OW North America14.217.835.137.118.422.924.5%
OW Europe & RoW41.941.951.050.851.355.27.6%
Direct costs-20.7-21.7-26.8-27.1-23.0-22.0
Gross profit35.438.059.460.846.756.120.0%
Staff costs-17.7-17.3-17.9-21.2-20.4-21.44.7%
Other costs-5.4-6.1-6.3-6.3-7.0-6.0-14.4%
EBITDA adj12.214.635.233.319.328.748.8%
EBIT9.69.632.428.114.820.740.3%
Net income7.17.020.320.99.68.3-13.3%
EPS reported0.120.120.350.360.170.15-9.8%
Source: Redeye Research

Solid growth in all markets

Better Collective saw solid performance in all markets during Q2 2023 where the Europe & RoW segment benefitted from a strong sportswin margin coupled with high growth in South America. The company highlights South America as a key growth region where the company earlier in the year launched investments to establish a local presence. As expected North America saw a typical seasonal decline in Q2, however, the YoY growth was strong with a revenue increase of 60% for the region as it benefitted from an increased mix of income from revenue-share contracts. Looking into Q3 2023 we expect revenue to remain at a similar level as Q2 2023 where we assume a normalized sportswin margin will mitigate a slighty stronger seasonality. Thereafter we expect the company to end the year strong, however, tough comps from Q4 last year which was boosted by the FIFA WC suggests YoY growth will be limited.

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

Source: Redeye Research

Strong NDC intake with a high revenue-share mix

Better Collective saw a strong NDC intake which came in at 500k for the quarter with a solid share of 87% being on revenue-share contracts. The company has been able to keep a strong NDC intake in the last two quarters following the record level of 581k achieved in Q4 2022 which was boosted by the FIFA WC (during which Better Collective delivered >300k NDCs). The strong NDC intake has been supported by Media Partnerships as well as growing traffic in its Publishing segment and strong performance in Paid Media.

Better Collective: NDC intake

Source: Redeye Research

Continued growth of recurring revenue

The company also saw strong growth of recurring revenue which increased 66% YoY and represented 59% of total revenue in Q2 2023. The mix of recurring revenue has trended upwards, supported by transiton towards increased revenue-share contracts in North America and Paid Media (the latter saw revenue-share mix increase to 45% in Q2 compared to 25% in Q1). While this level can fluctuate on a quarterly basis, we expect the mix of recurring revenue to continue to trend upwards supported by the high share of NDCs being delivered on revenue-share contracts.

Better Collective: Revenue mix Q1 2021 to Q4 2023E

Source: Redeye Research

Increased estimates

On the back of the strong Q2-results we have raised our 2023E EBITDA with 5% while 2024-25E EBITDA is increased by 2-3%. We now forecast revenue of EUR328m and EBITDA of EUR113m for 2023E which is in the top-end of Better Collective's guidance (revenue of EUR315m-325m and EBITDA of EUR105m-115m). While the company will meet tougher comps in Q4 which saw strong performance on the back of the FIFA WC last year, our forecast is supported by strong performance in H1 2023.

Better Collective: Revenue and EBITDA 2018-25E

Source: Redeye Research

Better Collective: Financial forecasts
EURm20212022Q1 23Q2 23Q3 23EQ4 23E2023E2024E2025E
Revenue17726987.978.176.485.2328376424
Growth Y/Y (%)94%52%30%39%28%-1%22%15%13%
North America479837.122.924.031.6116136155
Europe & RoW13017150.855.252.453.6212240270
North America Y/Y (%)370%109%19%60%35%-10%18%18%13%
Europe & RoW Y/Y (%)60%31%40%32%25%5%24%13%13%
Direct costs-65-92-27.1-22.0-25.2-27.7-102-119-135
Staff costs-41-69-21.2-21.4-21.8-22.4-87-96-108
Other costs-16-23-6.3-6.0-6.5-7.0-26-30-32
EBITDA adj568533.328.722.928.1113130150
EBITDA adj (%)32%32%38%37%30%33%34%35%35%
Non-recurring-170-0.6-1.20.00.0-200
EBITDA398532.727.522.928.1111130150
EBITDA (%)22%32%37%35%30%33%34%35%35%
EBIT297028.120.716.321.587104123
EBIT (%)16%26%32%27%21%25%26%28%29%
Net income adj.344821.59.510.714.6567592
Net income174820.98.310.714.6557592
EPS adj, EUR0.60.90.390.170.190.261.01.41.7
EPS, EUR0.30.90.380.150.190.261.01.41.7
Source: Redeye Research

Valuation

We increase our valuation range on the back of higher estimates where our new base case stands at SEK380 (SEK360) while the new bull case is SEK520 (SEK500) and the bear case SEK205 (SEK200). Our base case implies an EV/EBITDA of 17x 2024E while the share currently trades at c10x 2024E. See the table below for key assumptions for the valuation scenarios. Although the share has performed strongly during 2023, estimates have also been increased, and the share trades slightly below the historical average NTM EV/EBITDA as illustrated in the charts below.

Better Collective: Fair Value Range
SEKBear CaseBase CaseBull Case
Value per share205380520
Revenue CAGR 2024-20288%12%15%
Revenue CAGR 2029-20383%5%7%
Growth Terminal2%2%2%
EBITDA-margin 2024-203828%33%36%
EBITDA Terminal25%30%33%
Source: Redeye Research

Source: Factset

Source: Factset

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 SEK380 per share for Better Collective which is derived from a DCF-valuation using a discount rate of 8.0%. The base case implies an EV/EBITDA multiple of 19x on our 2023E and 17x 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
Revenues177.1269.3327.7376.1424.3
Cost of Revenue64.992.2102.1119.2134.5
Operating Expenses56.492.0112.6126.4139.7
EBITDA55.885.1113.0130.4150.1
Depreciation1.82.32.62.83.2
Amortizations8.512.321.924.024.0
EBIT45.570.488.4103.6122.9
Shares in Associates0.000.000.000.000.00
Interest Expenses5.99.617.04.00.00
Net Financial Items-2.5-5.4-13.6-4.00.00
EBT26.265.073.099.6122.9
Income Tax Expenses8.916.918.424.930.7
Net Income17.348.154.674.792.2
Balance sheet
Assets
Non-current assets
EURm202120222023e2024e2025e
Property, Plant and Equipment (Net)1.78.89.48.57.4
Goodwill178.2183.9183.9183.9183.9
Intangible Assets341.7487.5515.8499.4483.9
Right-of-Use Assets2.70.000.000.000.00
Other Non-Current Assets10.29.99.99.99.9
Total Non-Current Assets534.5690.2719.1701.7685.1
Current assets
EURm202120222023e2024e2025e
Inventories0.000.000.000.000.00
Accounts Receivable30.153.265.575.284.9
Other Current Assets4.210.332.837.642.4
Cash Equivalents28.631.550.0139.6246.0
Total Current Assets62.995.0148.3252.5373.3
Total Assets597.4785.2867.4954.21,058.4
Equity and Liabilities
Equity
EURm202120222023e2024e2025e
Non Controlling Interest0.000.000.000.000.00
Shareholder's Equity344.8412.9467.5542.2634.3
Non-current liabilities
EURm202120222023e2024e2025e
Long Term Debt121.1201.7201.7201.7201.7
Long Term Lease Liabilities1.55.05.05.05.0
Other Long Term 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 Payable18.422.332.837.642.4
Other Current Liabilities35.740.157.264.471.7
Total Current Liabilities55.565.192.6104.7116.8
Total Liabilities and Equity597.4785.2867.4954.21,058.4
Cash flow
EURm202120222023e2024e2025e
Operating Cash Flow31.648.271.999.1116.9
Investing Cash Flow-219.2-112.6-53.5-9.4-10.6
Financing Cash Flow188.865.70.000.000.00

Rating definitions

The team

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