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Bragg Gaming Group: Doubling Down On Oryx

ByEdison
Published 09/12/2019, 08:19 AM
Updated 07/09/2023, 06:31 AM

Bragg Gaming Group Inc (TSXV:BRAG) core asset is Oryx Gaming, a fast-growing online B2B gaming solution provider. We forecast C$38.4m revenues in FY19, with continued double-digit revenue growth until FY22. The underlying Oryx business is cash generative and we estimate that group EBITDA margin will expand from break-even at H119 to 7.6% next year. Investment risk is high, largely due to the need for financing, but Bragg is strategically well-positioned to make accretive M&A. Key milestones will be the development of positive cash flow, as well as the successful payment of the C$32.6m contingent cash consideration for Oryx. Bragg is still an early-stage business and trades at 15.3x EV/EBITDA and 11.2x P/E for FY20e.

Bragg Gaming Group

Buy and build strategy with an experienced team

Bragg Gaming is an online gaming technology holding company, formerly known as Breaking Data Corp. The business was fully rebranded with new management in December 2018, after the C$51m acquisition of Oryx, a high-growth, predominantly European online B2B gaming solution provider. Bragg’s strategy is to expand its B2B gaming business, both organically and through complementary acquisitions, as well as through strategic partnerships. At H119, management announced a strategic review of its online sports media outlet, the sale of which could provide meaningful upside to our cash forecast.

Strong pipeline to drive EBITDA expansion

Bragg’s continuing operations are now fully derived from Oryx, which grew at 240% in FY18 and 48% in H119. Oryx has an encouraging pipeline of new customers and, with c 80% of revenues derived from content aggregation, we forecast 31% revenue growth in FY19 and 23% in FY20. For FY19, we estimate 15.2% EBITDA for the Oryx business, leading to a group margin of 4.3%. Including the C$32.6m of contingent cash consideration (due in H120 and H121), net debt was C$32.7m at H119. Our estimates assume that the consideration will be satisfied equally via equity and debt and our adjusted net debt forecast declines to C$24.2m at FY20.

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Valuation: Early-stage business delivering growth

Bragg Gaming has a limited reporting history and has yet to generate net profit or positive net cash. The group trades at 15.3x EV/EBITDA and 11.2x P/E for FY20e, which compares to Oryx’s purchase price of 7.8x EBITDA for FY20e. Investment risk is high, due to the need for financing (both for the earnouts and for M&A), but the group’s structure is simplifying and Bragg is strategically well positioned to make accretive acquisitions. Our core DCF valuation is C$0.36/share.

Oryx delivering double-digit growth

Rebranded as Bragg Gaming in December 2018

Bragg Gaming is an online gaming technology holding company, formerly known as Breaking Data Corporation. The business was fully rebranded with new management in December 2018, after the C$51.6m acquisition of Oryx Gaming, a mainly European online B2B gaming solution provider.

Oryx Gaming was founded in 2012 in Slovenia. Its B2B offering includes a gaming platform, content aggregation (games from numerous supplier), as well as a full turnkey offering for purely marketing-led operators. Its customer list is very impressive (eg JPJ Group, Betsson, Mr Green) and Bragg’s strategy is to expand Oryx’s B2B business both organically and through the acquisition of complementary companies. Oryx’s main market is Germany (c 50% of revenues) and future growth markets include Spain (a top European regulated market), Colombia (newly regulated) and the US (newly regulated).

Following the decision to divest the legacy online sports media outlet, Oryx is now the only core asset within Bragg’s continuing portfolio. We discuss Breaking Data’s other legacy assets on page 8, which are EBITDA loss-making; these have been significantly restructured by new management and are now classified as for sale.

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Bragg is listed in Toronto (formerly Breaking Data) and it has c 170 employees, mainly in Toronto (HQ), London, Malta and Slovenia.

Investment considerations and sensitivities

  • Innovative with very high growth rates: Oryx has demonstrated impressive revenue growth (240% in FY18, 48% in H119) and has a very strong pipeline of industry leading customers, suggesting that the double-digit growth will continue. We forecast 31% revenue growth in FY19, with a 16% revenue CAGR from 2019–22. The fundamentals of the B2B business model (turnkey solutions, content aggregator and iGaming platform) are robust and Oryx benefits from a high percentage (over 90%) of recurring revenues.

  • Oryx EBITDA margin expanding to over 15%: We estimate that Oryx will deliver a 15.2% EBITDA margin this year and, combined with corporate costs, we forecast that Bragg’s EBITDA margin will expand from break-even at H119 to 4.3% in FY19 and 7.6% in FY20.

  • Structural growth in newly regulating online markets: According to H2 Gambling Capital (H2GC), the global online gaming market has grown at a c 10% CAGR over the past 10 years and amounted to c £40bn gross gaming revenues in 2018. Driven largely by the opening of the US market, H2GC estimates online growth of 7% CAGR to 2023. As Oryx continues to gain market share, we would expect the business to grow significantly faster than the sector, across all its major markets, particularly from newly regulating markets such as the US and Latin America.

  • Experienced management team: Bragg’s executive team and board has extensive experience in online gaming. Key members include CEO Dominic Mansour (formerly at GTECH, Full Tilt and NetPlay), as well as industry veterans Paul Pathak and Jim Ryan (board members).
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  • Highly competitive markets: The global online gaming market is highly competitive and many of Bragg’s B2B peers have a longer operating history, larger customer bases, greater scale and a significantly stronger balance sheet. It is possible that Bragg may not gain enough traction to remain relevant in the marketplace. In addition, Bragg’s online customers may also not be able to withstand competition themselves.

  • Regulation in many markets remains uncertain: The global gaming market is highly regulated, and the ongoing tightening of legislation globally could affect the prospects for Oryx’s customers, and hence impair Bragg’s revenues. In particular, Germany is a key market for Oryx and German gaming regulation remains uncertain. This had a clear impact on Q219 revenues, whereby many customers ceased marketing activities while the licensing regime was clarified. See page 10 for more details.

  • Still an early stage business: Bragg has a limited reporting history and is currently only EBITDA break-even at group level. Although the underlying Oryx business is cash generative (and with over 15% EBITDA margin forecast for FY19), Bragg has yet to make a profit or generate net cash, due to high corporate costs and supporting GiveMeSport. In order to achieve and maintain a higher revenue stream, Bragg may need to invest more than expected into its products and marketing, which could delay profitability.

  • Additional financing requirements for earnouts and M&A strategy: Bragg still has to pay C$32.6m of contingent consideration, related to the Oryx earnout, with C$15.4m due in H120 and C$17.3m due in H121. We expect Bragg will return to the capital markets in the next six months and, although management has a proven ability to raise capital, there can be no assurance that it will be successful. There is also a commensurate risk of equity dilution (with no clarity regarding maximum debt levels, our forecasts assume that the capital raising will be half equity, half debt). Bragg’s corporate structure (with high fixed costs and strong gaming expertise) would be appropriate for further M&A, but this would also require external capital.
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  • Customer concentration: Although Oryx has gained a number of new clients, it still has quite a concentrated customer base. Currently, approximately 50% of revenues are derived from the top five customers. In addition, Oryx's accounts receivable tend to be concentrated with a small group of customers and it expects this to continue.

  • Potential upside from sale of discontinued operations: Bragg has recently placed its online sports media outlet (GiveMeSport) under strategic review, which includes a possible sale. Given the early stage of the process, our forecasts do not include any cash inflow from a potential sale and therefore there is a meaningful upside possibility should a deal occur.

    • Valuation: C$0.36 DCF valuation for current business

    Bragg trades at 15.3x FY20e EV/EBITDA and 11.2x P/E, which is at the top end of the peer group for EV/EBITDA and in line for P/E. In terms of the sector, it is important to note that Bragg’s forecast growth rates are far higher than almost all the peers (which are generally displaying single-digit growth). We believe the closest peer is Kambi (online B2B sportsbook), which is also at the top end of the peer group, particularly for P/E (trading at 11.0x EV/EBITDA and 24.8x P/E for FY20). See page 13 for the peer group table.

    Given the growth prospects, a DCF valuation can be more instructive and our core DCF valuation of C$0.36 suggests a c 29% upside to the current share price. Please see the valuation section for our key assumptions, which includes a WACC of 9%.

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    It is important to note that our forecasts do not include any upside from accretive acquisitions, or from the sale of GiveMeSport, but we assume that Bragg is successful in raising finance for the key earnout obligations.

    In our view, key catalysts for share price performance will be continued high growth from the core Oryx business, combined with expanding EBITDA margin, as well as the successful payment of the remaining £32.6m contingent consideration for Oryx Gaming (due in H120 and H121).

    Financials: Double-digit growth; but high net debt

    Bragg’s continuing operations are now fully derived from Oryx, which grew at 240% in FY18 and 48% in H119. The business is gaining traction across its core markets, with a strong pipeline of new operators and c 80% of revenues from content aggregation. We forecast 31% revenue growth (pro forma from Oryx) in FY19 and 23% in FY20, with Oryx EBITDA margins of 15.2% in both FY19 and FY20. With high corporate costs (relative to the single continuing asset in the portfolio), group EBITDA was break-even at H119 and we forecast a margin of 4.3% in FY19 and 7.6% in FY20. This compares to the forecast Oryx standalone EBITDA margin of 15.2% for both years.

    Including the C$32.6m of contingent cash consideration, adjusted net debt was C$32.7m at H119. In our forecasts, this figure declines considerably going forward, as we estimate that the consideration will be satisfied equally via equity and debt. Our adjusted net debt goes to C$24.2m at FY20 and C$14.1m at FY21; at the same time, interest payments would increase significantly due to the debt financing (see Exhibit 1 below).

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    At the current share price, we are assuming that a further 60m shares will be issued in total, which equates to a 77% dilution by 2021 (although management would like to avoid this level of dilution). Clearly, any cash inflow from the sale of GiveMeSport would reduce the level of capital raising required.

    Exhibit 1: Continuing operations (C$000s)

    Focusing on online B2B gaming

    Portfolio overview

    Bragg Gaming is an online gaming technology holding company, previously known as Breaking Data Corporation. The business was fully rebranded in December 2018, after the acquisition of Oryx Gaming, a mainly European gaming solution provider.

    Following the decision to divest the legacy online sports media outlet, Oryx is now the core asset within Bragg’s continuing portfolio:

  • Oryx Gaming: Oryx is a fast growing B2B online gaming provider, founded in 2012 in Slovenia. It offers a turnkey solution, including an omni-channel retail, online and mobile iGaming platform, as well as an advanced content aggregator, sportsbook, lottery, marketing and operational services. It has an impressive roster of industry leading customers (eg JPJ Group, Betsson, Mr Green).

  • GiveMeSport (discontinued operations): GiveMeSport is a top sports media outlet with over 26 million Facebook (NASDAQ:FB) fans and is the number one Facebook sport publisher. This formed a key part of the Breaking Data portfolio. The UK sportsbook, GiveMeBet, has direct access to GiveMeSport’s fans and is also classified as a discontinued asset.

    • Strategy: Organic growth and selective M&A

    Bragg’s strategy is to expand both organically and through the acquisition of businesses that are complementary to Oryx’s B2B online gaming platform This could include the acquisition of competitors with a different geographic spread and/or another aggregator, to boost volumes and increase the number of suppliers.

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    Oryx’s customer base operates throughout Europe and approximately half of Oryx’s revenues are derived from German-facing operators. Revenue growth outside Germany was 87% in H119 and management has stated that key new markets include Spain (large regulated market) and Colombia (nascent but high growth potential). Looking ahead, the most important market for future expansion is the US, which has recently been regulating gaming across many states.

    Oryx Gaming

    History and development

    Oryx is a B2B gaming solution provider, founded in 2012 by Matevz Mazij (currently MD of Oryx within Bragg). It is incorporated in the state of Delaware and its headquarters are in Las Vegas. Its primary operations are provided through its wholly owned subsidiaries in Malta and Slovenia.

    The company signed its first major customer in 2013 and launched OnlineCasino.de. In 2015 Oryx obtained a Class 4 Malta Gaming Authority licence, which allowed the business to host and manage remote gaming operators. It also began to diversify its product portfolio offerings with Crown City and the Jockey Club launches in Paraguay.

    In 2016 Oryx launched a real money gaming (RMG) and free play solution in New Jersey for Rush Street Interactive, and launched an online and mobile sportsbook for BigBetWorld.com. By 2018, the recurring customer base had grown to more than 60 operators, including Cherry Group, Mr Green, and JPJ Group. In H119, Oryx launched a record number of new operators, signing 22 agreements and building a strong pipeline of 24 additional operators to be onboarded in H219. Agreements have also been signed with operators such as StakeLogic, Red Tiger, Casumo and Betsson. Once signed, customers are typically on rolling contracts, hence a high recurring revenue stream.

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    Since inception, Oryx has focused on diversifying its customer base, with the top five customers comprising c 50% of revenues currently, which compares to 75% of revenues from just two customers at the beginning of 2018.

    Products and revenues

    With its industry-leading technology, Oryx offers a turnkey solution, including an omni-channel retail, online and mobile gaming platform, as well as an advanced content aggregator, sportsbook, lottery, marketing and operational services.

    Oryx’s revenue grew 240% in FY18 to C$29.2m vs C$8.6m in the prior year. The company has continued its high growth into H119, with revenues increasing 48.4% to C$18.0m vs the prior period. Within this figure, revenues from German facing operators increased by 29.6%, with other revenues increasing by 86.5%. The slower growth in Germany (particularly in Q219) was largely due to the uncertain regulatory environment, whereby operators temporarily cut back on marketing spend until their licences were renewed in July 2019.

    Exhibit 2 And Exhibit 3

    Oryx’s revenues are derived from:

  • Third-party content and content aggregation (c 80% of revenues). The content aggregator technology enables customers to connect with various leading game studios and content providers using a single point of integration, simplifying the ability to deliver over 8,000 games and content. Oryx’s content partners include Gamomat, Kalamba Games, Golden Hero, Givme Games, Quickfire, Greentube, NetEnt, Play’n GO, NYX, EGT, Evolution, Realistic, Kiron, Amatic and iSoftbet. For this service, Oryx takes a one-off integration fee as well as ongoing aggregation fees and it currently has 63 aggregator clients.

  • Software platform licensing and content fees (c 7% of revenues): The gaming platform enables operators to manage their entire product suite using one shared account and one wallet for casino, lottery, sportsbook, bingo, poker and other operations. Benefits include maximising cross-sell opportunities and increasing player value through better integration, customisation, reporting and analytics. The platform features Oryx games, as well as games and content developed by third parties and it also offers full payment solution integration. Oryx charges a platform licensing fee on a monthly basis, which is linked to the revenues a customer earns from utilising the platform in that period. Oryx currently has six platform customers.
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  • Turnkey and management services (c 13% of revenues): The turnkey solution offers a one-stop, complete managed solution for operators. It includes the management of the operators’ customers’ experience and marketing in addition to hosting, security, gaming know-how, know your customer (KYC), payment solutions, transaction management, customer support and risk and fraud management. Additional benefits include analytics, business intelligence services, campaign management services for customer retention, VIP management, and a personalised approach to players, based on player data and correspondence history. For the turnkey service, Oryx charges a fixed monthly management fee for services and the company currently has three turnkey clients.

    • Discontinued operations: GiveMeSport and GiveMeBet

    In order to focus on the B2B gaming opportunity, Bragg Gaming has announced that its sport media and UK sportsbook businesses are under strategic review, for a possible sale. Management has stated that it has received expressions of interest from a number of groups regarding potential transactions with GiveMeSport and GiveMeBet and, as a result, these divisions have been classified as discontinued. Of the two assets, GiveMeSport is by far the most significant.

    GiveMeSport is a sports media outlet sharing exclusive player and manager interviews, and it provides fans with up-to-date features, match previews and match reviews. The outlet shares breaking UK and European sports news, results, fixtures and statistics, as well as photos and videos on trending sports topics. It is currently the number one Facebook (NASDAQ:FB) sport publisher, with 26.1 million Facebook fans, compared to 19.4 million at ESPN and 11.7 million at Sky Sports.

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    GiveMeSport was a core part of the Breaking Data portfolio, but since 2018, Bragg’s new management has adopted a content first strategy, resulting in a significant reduction in output (from 100 articles a day to 25) but an increase in quality, engagement and average views per article. The web platform has recently been relaunched and engagement increased significantly in H119, with a reach of 232 million unique Facebook (NASDAQ:FB) users.

    GiveMeSport’s video output has increased to 10 videos per day and it has diversified from 100% dependence on Facebook (NASDAQ:FB) and opened up revenue streams from Twitter, Apple (NASDAQ:AAPL) News, AMP and other social platforms. It has also launched ‘GMSW’, a female sport vertical that aims to be the world’s leading women’s sport content provider.

    As part of the discontinued assets, GiveMeBet is a UK-focused sportsbook with direct access to GiveMeSport’s 26 million fans.

    Key financials

    H119 revenues from discontinued operations was C$2.2m (vs C$6.8m in H118), with an EBITDA loss of C$1.4m. To give a historical perspective, FY18 and FY17 revenues were C$12.2m and C$10.7m, with corresponding adjusted EBITDA losses of C$3.3m and C$4.4m. On the balance sheet, these assets have a negative book value of C$0.7m.

    Bragg has appointed Sequence Advisers for the strategic review, but given the early stage of the process, our forecasts do not include any cash inflow from a potential sale and therefore there is a meaningful cash upside possibility should a deal occur.

    Bragg Gaming and Breaking Data history

    As discussed above, Bragg Gaming was formerly known as Breaking Data Corporation. The business was fully rebranded in December 2018, after the acquisition of Oryx Gaming. In this section, we review the history of Breaking Data, as well as the acquisition terms of Oryx Gaming, which is now at the core of Bragg Gaming.

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    Breaking Data Corporation history

    In April 2017, Breaking Data Corporation was formed after a C$27.5m equity financed reverse takeover of Sports New Media Holdings Limited. The resulting business was a technology provider of a range of artificial intelligence (AI) services including semantic search, machine learning and natural language processing. Breaking Data’s main application was GiveMeSport, which utilised AI, semantic machine learning and NLP to track social media in a fully automated, real-time manner for significant sports information and events and distribute summarised information through real-time push notifications to consumers.

    In December 2018, a new management team was appointed (including current CEO Dominic Mansour), who subsequently implemented a change in strategic focus for Breaking Data. Alongside the transaction to acquire Oryx (announced in August 2018), the new team refocused its strategic plans away from Al, towards the Oryx gaming platform. Changes to the Breaking Data assets included a C$8.2m impairment of goodwill (August 2018) and a C$2.4m impairment in the value of Breaking Data’s intellectual property (December 2018).

    As discussed above, after the decision to place the legacy sports businesses under strategic review, both GiveMeSport and GiveMeBet are now classified as held for sale.

    Acquisition of Oryx: 7.8x EV/EBITDA for FY20e

    The Oryx acquisition was completed on 20 December 2018. At the time of the acquisition, the total estimated purchase price was C$51.6m, including C$15.1m in shares and C$6.4m in cash, C$3.0m in deferred consideration and C$27.1m in contingent consideration. The deal included C$31.9m of goodwill. As detailed in Exhibit 4 below, at H119 results, management revised the original purchase price down by C$0.722m due to changes in working capital.

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    Subsequently (ie not included in Exhibit 4) the deferred consideration has been lowered by C$0.65m, as a result of a lower share price, which affects the value of 2m shares to be issued. However, contingent consideration has been raised by C$5.53m, since there is now greater certainty regarding the FY19 Oryx EBITDA. The total revised purchase price equates to C$55.7m or 7.8x EV/EBITDA for FY20e, which is in line with other recent deals (see Gamesys/JPJ and Rank/Stride Gaming).

    Earnout provision

    The C$32.6m contingent consideration (revised upwards from the original C$27m) relates to the earnout provision to the vendor of Oryx. This will be mostly satisfied in cash, but also includes C$5m of Bragg equity. Management confirms that the entire Oryx acquisition payment was capped at €50m: €7.5m has been paid already and therefore the cap on the earnout is €42.5m. We note that the vendor has no lock up post the earnout payment. We summarise the terms of this contingent consideration here:

  • FY19 earnout (payable in H120): The first earnout relates to FY19 (the first year following the closing date) and Bragg is required to pay eight times 33% of the EBITDA of Oryx for that first year, subject to Oryx having achieved EBITDA of at least €2m. At H119 Bragg had C$15.4m on its balance sheet for short-term contingent consideration, which implies an FY19 C$5.8m EBITDA for Oryx. As part of this first earnout payment, the vendor will receive up to 2m shares.

  • FY20 earnout (payable in H121): The final earnout relates to FY20 (the second year following the closing date) whereby Bragg is required to pay eight times 33% of the EBITDA of Oryx for that second year, subject to Oryx having achieved EBITDA of at least €3m. Bragg has C$17.3m on its balance sheet for long-term contingent consideration, which implies an FY20 EBITDA of C$6.5m for Oryx (our forecast C$7.2m takes into account one year of discounted cash flow). As part of this last tranche, the vendor will receive up to 2.5m shares.
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    Exhibit 4: Oryx acquisition (C$000s)

    Online gaming markets

    Online gaming overview

    According to H2GC, the global online gaming market has grown at a c 10% CAGR over the past 10 years and amounted to c £40bn gross gaming revenues (GGR) in 2018. Driven largely by the opening of the US market, H2GC estimates online growth of 7% CAGR to 2023.

    Exhibit 5: Global Online Market Growth (£bn)

    The shift towards online gaming over the past decade has been driven by a number of different factors. In addition to rising mobile penetration and product innovations, the most important contributor has been the introduction of local regulation across a growing number of countries.

    Regulation varies significantly across the world: from markets where gambling is explicitly prohibited, to government-owned monopolies, to licensed industries that are fully open to commercial operators. There are also many countries where governments are yet to legislate for online products and the regulatory picture in these markets remains grey.

    Oryx Gaming currently has licences to operate across all its markets, although regulation in some markets remains unclear. This is particularly the case in Germany, which we estimate comprises approximately half of Oryx’s revenues.

    Germany: Uncertainty led to temporary slowdown in Q219

    At the moment, Germany is a grey market, where online gaming companies generally operate in Schleswig-Holstein (with a local licence) or through another European licence (typically Maltese) and pay VAT on casino revenues and a turnover tax on betting. To date, legislation has been very confusing and there has been a high level of disagreement among Germany’s member states.

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    Sports: regulation in sight

    In March 2019, German state ministers approved an interim sports-betting licensing regime from January 2020 (not directly relevant to Oryx, which focuses on online casino). The amendments also lifted the cap on licences in preparation for a future agreement on a more permanent regime from June 2021.

    E-gaming: Federal ban except in Schleswig-Holstein

    The biggest area of confusion surrounds the issue of online gaming (which is Oryx’s key focus), with online casino and poker technically illegal under the current reading of the Interstate Treaty. In March 2019, the draft amendments maintained a federal ban on online casino set in 2012, with the exception of Schleswig-Holstein, where online casino licences already granted continue for the interim period. Oryx Gaming holds one of these Schleswig-Holstein licences, which were recently renewed (July 2019). Oryx’s iGaming platform is compliant with the Schleswig-Holstein technical regulations and Oryx’s content portfolio has been approved by the regulator. Oryx’s key customers all hold compliant casino licences.

    Within Schleswig-Holstein, there is an important distinction between the casino-only operators (like Oryx) and the sports-led operators (who cross-sell into casino from their sports brands). The operators with both online sports betting licences and online casino licences issued by Schleswig-Holstein are particularly exposed, with regulators requiring sports betting licensees to stop offering casino games alongside sports betting. Oryx’s key Germany-facing customers have Schleswig-Holstein casino licences only and are therefore less exposed to this likely change in regulation. Bragg’s management has stated that its customers are perceiving this as a significant opportunity to gain market share.

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    Germany summary

    To summarise, the most likely scenario for German regulation is that there will be full online sports regulation from mid-2021 and partial e-gaming regulation (on a state-by-state basis).

    At present, the regulatory framework for online gaming outside Schleswig-Holstein remains uncertain. In terms of Bragg’s exposure, Bragg's Germany-facing customers are primarily operating online e-gaming under Schleswig-Holstein casino licences.

    US: The most important growth market for online gaming

    The US is a promising potential market for Bragg, as a B2B online player. After the repealing of the Professional and Amateur Sports Protection Act (PASPA) in 2018, the US is now positioned as the most important regulating market, in terms of future growth prospects. Industry estimates are that the US online market could generate c US$6bn in the medium term, from a base of c US$600m at FY18.

    The US regulatory environment is changing rapidly, with many new states having recently announced regulatory packages. In addition to online sports, many of the states are also incorporating e-gaming (casino) into the regulation. In the near term we would expect that Bragg could partner with other sportsbook operators, with its complementary casino platform and/or its player account management tools for the sportsbook. At present, we have not included significant upside from the US into our forecasts, as Bragg has yet to partner with any US facing operators.

    Management

    Bragg’s current executive team and board were appointed in 2018, to restructure the legacy Breaking Data assets, as well as to lead the integration of the Oryx business. All members have extensive experience in the online gaming sector, including CEO Dominic Mansour, whose background includes 20 years working in the industry. We detail the biographies of the key members in Exhibit 6 below.

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    Exhibit 6: Board And Management Team

    Bragg has a fixed stock option plan, as well as a deferred share unit plan in place. At H119, there were 9.6m outstanding stock options, and the vast majority have exercise prices well above the current share price. Additionally, there are 27.1m special warrants in place; please see the financials section for more details.

    Sensitivities

  • Limited operating history: Bragg is in the early commercialisation stage of its business and has yet to generate a net profit or positive net cash flow. There is a meaningful risk that the company will not achieve its target growth projections and therefore may not generate the anticipated cash flow. In this case, Bragg would likely not be able to fund its operations from internally generated cash.

  • Additional funding requirements: Our forecasts indicate that Bragg will need to raise a meaningful sum of money to satisfy the upcoming contingent liabilities. We would expect that the company will return to the capital markets in H120 and there can be no assurance that it will be successful in the capital raising. However, we note that management has a proven track record of raising capital. There is also a commensurate risk of equity dilution (we assume that half the financing will be via equity). In addition, in order to pursue its M&A strategy, we believe Bragg will need to raise external capital.

  • Competition: The global online gaming market is highly competitive and many of Bragg’s online B2B peers have a longer operating history, larger customer bases, greater scale and a significantly stronger balance sheet. It is possible that Bragg may not gain enough traction to remain relevant in the marketplace. In addition, Bragg’s online customers may also not be able to withstand competition.
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  • Gaming industry is highly regulated: The global gaming market is highly regulated, and the ongoing tightening of legislation may affect Bragg’s business prospects. Bragg seeks to only conduct business in regulated markets but there is no assurance that its customers do not offer gaming in unregulated markets. It is possible therefore that some customers (and hence Bragg’s revenues) could be impaired by negative legislative clampdowns.

  • FX risk: Bragg faces a degree of FX risk, predominately due to the fact that its main trading currency (the euro) is different to its reporting currency (the Canadian dollar). There is additional currency risk in newer markets, such as Colombia.

  • Customer concentration: Although Oryx has gained a number of new clients, it still has quite a concentrated customer base. Currently, approximately 50% of revenues are derived from the top five customers. In addition, Oryx's accounts receivable tend to be concentrated with a small group of customers and it expects this to continue.

    • Valuation

    Peer group valuation: Top end of peers, but with higher growth prospects

    The most straightforward way to value Bragg Gaming is via a peer group comparison, based on future profits, although it is important to note that Bragg’s growth rates are far higher than almost all the peers (which are generally displaying single-digit growth).

    Given the debt profile, we believe that EV/EBITDA is the more appropriate benchmark and using an adjusted net debt of C$32.7m, Bragg trades at 15.3x and 10.7x EV/EBITDA for FY20 and FY21, which is 71% and 34% above the peer average. For P/E, it trades at 11.2x and 11.8x for FY20 and FY21, which is more in line with the peers. For our EPS calculation, we have assumed that C$16.3m worth of shares are issued to satisfy the contingent consideration, which leads to a total equity dilution of 77% (including 2m shares from the deferred consideration).

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    In terms of operations and growth prospects, we believe Kambi is the closest peer (B2B online sportsbook) and Kambi also trades at a significant premium to the sector average.

    Peer group analysis

    Exhibit 7: Peer Group Table

    DCF: C$0.36/share valuation

    Given the growth prospects, a DCF valuation can be more instructive and our core DCF valuation of C$0.36/share suggests 29% upside to the current share price. Our DCF uses a terminal growth rate of 2.0% and a terminal EBITDA margin of 11%, in line with our forecast FY22e EBITDA margin. This is at the lower end of the peer group, but includes the higher than average corporate costs. Using a WACC of 9.0% produces a value per share of C$0.36/share; flexing the WACC between 8.0% and 10.0% gives a range of C$0.24–0.53/share. Our core DCF valuation equates to 17.0x EV/EBITDA and 14.5x P/E for FY20e.

    It is important to note that our forecasts do not include any upside from accretive acquisitions, or from the sale of GiveMeSport, but we assume that Bragg is successful in raising finance for the key earnout obligations.

    Catalysts

    In our view, key catalysts for share price performance will be continued high growth from the core Oryx business, combined with expanding EBITDA margins, as well as the successful payment of the remaining £32.6m contingent consideration for Oryx Gaming (due in H120 and H121).

    Exhibit 8: DCF Sensitivity Table (C$/share)

    Financials

    Bragg Gaming has a limited reporting history, having reported its first half year at H119. In our financial summary, we have included financials for FY18, although this comprises the legacy Breaking Data operation and only includes 10 days of Oryx’s trading (it was acquired on 20 December 2018).

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    Income statement: High revenue growth, EBITDA break-even

    Bragg’s continuing operations are now fully derived from Oryx and the company reported Q219 continuing revenues of C$8.8m, an EBITDA loss of C$0.3m. For the first half, this amounted to 48% revenue growth to C$18.0m vs the prior year and positive EBITDA of C$0.4m.

  • Revenues: Double-digit growth expected to continue: Underpinned by recurring revenues and a pipeline of new customers, Oryx’s revenues grew 240% in FY18 to C$29.2m vs C$8.6m in the prior year. The company has continued its high growth into H119, with 48.4% growth (C$18.0m) vs the prior period. Within this figure, revenues from German facing operators increased by 29.6%, with other revenues increasing by 86.5%. The slower growth in Germany (particularly in Q219) was largely due to the uncertain regulatory environment, whereby operators temporarily cut back on marketing spend until their licences were renewed in July 2019. Now that the licences have been renewed, we expect German growth to continue and forecast FY19 total revenue growth of 31.2% (pro forma based on Oryx). We forecast 23.2% and 15.2% growth for FY20 and FY21. We expect aggregator revenues to remain at c 80% of revenues and for Oryx to continue expanding into new markets (particularly Spain and Colombia in the near term).

  • EBITDA: Oryx growth to offset HQ costs: We forecast Oryx EBITDA of C$5.8m for FY19 and C$7.2m for FY20, which correlates to the contingent consideration on the balance sheet. We have forecast a 15.2% EBITDA margin for both years, expanding slightly thereafter as revenues grow. Due to the holding company structure, we have estimated a relatively high level of corporate costs for FY19 (C$4.2m), decreasing to C$3.6m per year thereafter (once the GMS asset has been divested and the structure is simplified). Altogether, this equates to an EBITDA of C$1.7m for FY19 (4.3% margin) and C$3.6m for FY20 (7.6% margin). Our model does not incorporate future possible M&A.
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  • Tax rates: Given the tax losses within the corporate structure, Bragg is currently undergoing a full review of its tax position. For our model, we are using an 8% effective tax rate, which is comparable to other online gaming companies that have substantial subsidiaries in Malta. We expect the company to provide further clarity on its tax position in due course.

  • Interest costs: Debt financing for 50% contingent consideration: Our model assumes that Bragg will finance about half of its earnout obligations through debt (at an 11% interest charge) and hence our net finance cost forecasts increase from C$0.05m in FY19 to C$0.5m in FY20 and C$1.4m in FY20.

  • Amortisation of acquired intangibles: Approximately 97% of the amortisation charge relates to the Oryx intangibles and therefore is excluded from our normalised earnings. We forecast C$2.7m amortisation of acquired intangibles in FY19.

  • Exceptional items/fair value movement: As discussed above, Bragg currently has c C$32.6m of contingent liabilities related to the Oryx earnout, which in turn is dependent on EBITDA performance. It is likely, therefore, that the fair value of the contingent consideration will fluctuate over the course of the next 18 months. For FY19, we have used the fair value movements reported at the half year results, which included a C$0.65m gain on deferred consideration and a C$5.5m loss on contingent consideration.

  • Potential upside from discontinued operations: Given the lack of clarity regarding the strategic review, our model assumes that the discontinued operations are disposed for no cash gain during FY20 and therefore there is a meaningful potential upside to our cash estimates.
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    Exhibit 9: Income Statement

    Future potential equity dilution

    Bragg currently has 78m shares in issue. This includes an issuance of 27.1m shares in March 2019 (see below). In addition, there are a further 9.6m outstanding share options, 27.1m warrants and 1.6m compensation options. Furthermore, within current liabilities, C$0.8m of deferred consideration is to be satisfied by shares (equivalent to 2m shares); this is included in our adjusted net debt for FY19 but within our EPS calculation from FY20 onwards.

    As is common with start-up businesses, many of the executives are rewarded with stock options and equity has also been used as part payment for the Oryx acquisition. While most of the options and warrants have exercise prices that are significantly above the current stock price, it is important to note the potential for future equity dilution. We summarise the options and warrants here:

  • 9.6m outstanding stock options: At H119, there were 9.6m outstanding stock options in place (mostly for Bragg executives and employees), the majority of which are currently significantly under water. There are 1.55m options with no exercise price and are therefore immediately dilutive (once a profit has been reached).

  • 27.1m special warrants: In March 2019, the 27.1m special warrants that were issued as part of the Oryx acquisition were converted to a unit, consisting of one common share and one warrant. The 27.1m warrants are exercisable into common shares until November 2020, at an exercise price of C$0.76 per share.

  • 1.6m compensation options: In addition, Bragg has issued 1.6m compensation options. Each compensation option entitles the holder (Bragg’s broker) to acquire one unit, at the exercise price of C$0.51 per compensation option unit. Each compensation option unit comprises one common share and one warrant.
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  • Further equity dilution relating to the Oryx acquisition: As discussed above, the current liabilities include C$800,000 of deferred consideration to be settled to the vendor of Oryx (2m shares to be issued). In addition, we assume that half of the C$32.6m contingent consideration will be satisfied in shares. In total, we forecast that there will be 138m shares in issue by FY21, which equates to a 77% dilution (although management would like to avoid this level of dilution). In addition, we note that any cash from the sale of GiveMeSport would reduce the amount of capital raising required.

    • Balance sheet and cash flow statement

    With high growth at Oryx, we forecast positive operating cash flow in FY20. However, this will still be insufficient to meet earnout obligations. Oryx ended H119 with net cash of C$0.8m, excluding earnout obligations, but including leases payable (IFRS 16 changes). Including the deferred consideration and contingent consideration, adjusted net debt was C$32.7m.

  • Deferred consideration: After the working capital adjustment, the total amount of deferred consideration payable for the Oryx acquisition amounted to C$2.3m and there is still currently C$0.8m on the balance sheet, which will be satisfied in shares.

  • Contingent consideration: At H119, total cash contingent consideration amounted to C$32.6m (increased by C$5.5m during H119 due to more certainty regarding FY19 EBITDA), of which C$15.4m is due in H120 and C$17.3m is due in H121. As discussed above, we assume that Oryx will finance its contingent consideration through a combination of equity and debt. This will lead to higher interest costs, and equity dilution, although clearly our adjusted net debt figure would decline considerably.
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  • Net debt/EBITDA: As discussed above, we assume that half the earnout payment (C$16.3m) will be satisfied through debt financing and we forecast adjusted net debt of C$32.8m at FY19, C$24.2m at FY20 and C$14.1m in FY21. This equates to a net debt/EBITDA of 19.8x in FY19, falling rapidly to 6.8x in FY20 and 2.8x in FY21.
    • Exhibit 10: Financial Summary

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