Picking winners
Only formed in August 2013, Gaming Realms PLC (LONDON:GMRG) aims to take a meaningful share of the UK online bingo and casino market, capitalising on management’s successful track record and the growth in mobile and entertainment-led gambling. The group is investing heavily in marketing, but we forecast a small positive EBITDA in 2015, with profits increasing very strongly thereafter. The 2016e EV/EBITDA is 5.5x, falling to only 2.4x for 2017e, suggesting very attractive potential share price upside.
All about marketing
Gaming Realms’ management is highly experienced and has already led a very successful gaming company (Cashcade, sold to bwin.party for £96m in 2009). While quoted UK operators have reported a mature and competitive internet bingo market, industry data reports positive growth, private operators have continued to perform well, mobile gaming is growing strongly and the c 10 million UK social gamers that do not currently gamble online represent a large market opportunity. Gaming Realms has identified an opportunity to expand rapidly with a mobile-led offering and brands that apply social games techniques to real money gambling.
‘J-curve’ of profits and cash
Gaming Realms is investing heavily in marketing, product and platform development. We expect it to achieve a small EBITDA profit in 2015, which should increase rapidly as revenue builds. Platform stability issues with Bingo Godz mean that our 2017e EBITDA estimate of £11.0m is a year later than market consensus envisaged last August, but the software supplier is working to address the issue and the impact has been partly mitigated by allocating marketing spend to other brands. The group will require debt or equity funding as it develops; once in profit, cash conversion should be high and we estimate £12m of cash by end 2017.
Valuation: Substantial upside potential
We believe there is plenty of room for an innovative new entrant to the online gaming market and that Gaming Realms has substantial upside potential, albeit that success within a competitive market is not yet assured. The peer group currently stands on a 2015e EV/EBITDA multiple of 7.5x; if we apply this to Gaming Realms’ 2017e earnings it points to a share price of 55p, over 2.5 times the current level, although a higher premium could be applied if this fully regulated business achieves our substantially above average EBITDA growth targets (75% in 2017e).
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