Mobile-first gaming opportunity
Nektan (LONDON:NKTN) offers investors an interesting way to play the rapidly growing mobile gaming market with a new B2B platform, a promising pipeline of B2B partners and an experienced management team. Add to this US opportunities – both land-based casinos and freemium – and we see potential for Nektan’s market value to double over the next two years. Nektan is currently early stage and loss making and the key catalyst is the addition of major new B2B partners and US casino customers over the next nine months, which should establish a strong growth momentum.
Gathering momentum
Nektan has already gone live with a number of casino real money gaming (RMG) partners in the UK, including City AM, and we believe it is in talks with a large new media partner, which would add both scale and credibility. Its new mobile platform offers rapid speed to market, innovation and flexibility. In the US its ReSpin JV has already installed a small number of XtraSpin units in California, and Nektan has two large freemium white label partners lined up. There are relatively few pure B2B mobile gaming providers and Nektan’s experienced management and proprietary platform put it in a strong position to address both the RMG and freemium markets.
Upswing in profits from FY16
Nektan is early stage and investing heavily for the future; we expect maiden interim results to show only modest revenues and ongoing losses. It should reach breakeven early in CY16 on our estimates but much depends on the rate of signing new partners and the aggressiveness of their marketing. We have been fairly cautious about the rate of uptake by US casinos, who tend to be fairly conservative, and this may be an area of upside. We are targeting EBITDA of £12.5m in FY17e. The November 2014 IPO raised £4.1m (gross) and Nektan had a small amount of net cash at December 2014, but it will need debt or further equity finance to fund its development (including the funding of the ReSpin JV) on our estimates.
Valuation: Early stage investment opportunity
Our sum of the parts valuation incorporates the non-consolidated ReSpin JV and is based on a range of peer group EV/EBITDA multiples from 8.3x to 11.9x. This produces an EV of £81-107m, 96 -159% above the current level. Nektan is well positioned in the high-growth B2B market and if it demonstrates the growth momentum we are projecting it could trade at a significant premium to this.
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