Evolution: Potential for stronger H2

Research Update

2024-07-23

07:05

Analyst Q&A

Closed

Hjalmar Ahlberg answered 12 questions.

Redeye updates on Evolution following its Q2-results which saw somewhat softer topline and profitability than expected. The company reiterates its margin guidance for the full year, suggesting a potential for a stronger H2 2024.

Hjalmar Ahlberg

Anton Hoof

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Somewhat soft Q2 results

Evolution reported revenue of EUR508m and EBITDA of EUR346m for Q2 2024 which was somewhat lower than our forecasts of EUR520m and EUR360m. Revenue was weaker than expected in Europe, Asia and North America while LatAm and Other was stronger than expected. Opex was slightly higher which resulted in EBITDA-margin being lower than expected.

Reiterated guidance

While Q2-results were weaker than our forecast, the company reiterated its EBITDA-margin guidance of 69-71% for the full year. With the softer-than-expected Q2-results, we now expect the company to achieve an EBITDA-margin in the low-end of the range while we previously estimated EBITDA-margin to be in the mid-range.

Trimming estimates

We have lowered our EBITDA estimates for 2024-26E by 2-3% following Q2-results. We leave our long-term assumptions unchanged and our base case remains at SEK1,600. Our base case of SEK1,600 implies 20x 2024E EV/EBITDA and 17x 2025E EV/EBITDA while the 7-year average NTM EV/EBITDA is c21x. We believe the new capital allocation framework, which states that the company will distribute 100% of excess cash flow, could have a positive impact on Evolution’s valuation.

Key financials

EURm	2022	2023	2024e	2025e	2026e
Revenues	1,456.7	1,798.6	2,079.1	2,409.8	2,772.5
Revenue Growth	36.3%	23.5%	15.6%	15.9%	15.1%
EBITDA	1,008.4	1,267.4	1,429.8	1,689.8	1,938.3
EBIT	908.1	1,142.7	1,288.8	1,527.1	1,751.1
EBIT Margin	62.3%	63.5%	62.0%	63.4%	63.2%
Net Income	843.4	1,070.9	1,104.5	1,298.0	1,488.5
EV/Sales	15.2	10.5	9.3	7.8	6.5
EV/EBITDA	21.9	15.0	13.6	11.1	9.3
EV/EBIT	24.4	16.6	15.1	12.3	10.3

Somewhat soft Q2 results

Evolution reported revenue of EUR508m and EBITDA of EUR346m for Q2 2024 which was somewhat lower than our forecasts of EUR520m and EUR360m, respectively. The company saw softer than expected revenue from Europe, Asia and North America while the smaller regions in LatAm and Other saw stronger revenue than expected. The company states that it saw somewhat slower development in most regions during the quarter owing to natural variations while also adding that it had the largest pay-out ever in online casino. The EBITDA-margin of 68.0% was slightly lower than our forecast of 69.3% and comes both as a result of lower topline and higher opex as the company continued to add employees in a high pace. The table below summarizes our forecasts vs the Q2-results outcome.

Evolution Results outcome
EURm	Q2 23	Q3 23	Q4 23	Q1 24	Q2 24E	Q2 24A	Diff, %
Revenue	441	453	475	501	520	508	-2%
Live casino	372	386	406	431	447	438	-2%
RNG	69	67	70	70	73	70	-3%

Europe	175	175	186	191	194	191	-2%
Asia	165	172	182	198	207	201	-3%
North America	56	55	59	62	64	60	-6%
LatAm	31	34	32	33	36	37	2%
Other	15	16	17	18	18	20	7%

Operating expenses	-129	-134	-138	-156	-160	-163	2%
Personnel expenses	-87	-91	-94	-107	-110	-111	1%
Other opex	-42	-43	-44	-49	-49	-51	4%

EBITDA	312	319	337	346	360	346	-4%
EBITDA-margin	71%	70%	71%	69%	69.3%	68.0%

EBIT	282	287	303	312	325	311	-4%

EPS	1.24	1.28	1.33	1.27	1.31	1.28	-2%

Source: Redeye Research

Reiterated guidance suggests potential for stronger H2

While Q2-results were weaker than expected, Evolution reiterated its full year EBITDA-margin guidance of 69-71%. The company comments that focus during Q2 was on consolidation after two quarters of strong expansion which impacted margin negatively and it expects a more normalized staff expansion during H2 2024. Evolution continues to see strong underlying market drivers and vast growth potential in all its regions and there should be scope for margin improvement from operating leverage with a normalized expansion rate in the coming quarters. Still, we have slightly trimmed our growth forecasts for the coming quarters, and we now expect the company to reach the low-end of its guidance at 69% while we previously forecasted the mid-point at 70%.

EBITDA estimates trimmed by 2-3%

In summary, we lower our EBITDA estimates by 2-3% for 2024-26E on the back of the lower growth assumptions. We have adopted a slightly steeper growth deceleration in Asia for the next quarters while we also expect lower growth in North America. We have added the acquisition of Galaxy Gaming to our forecasts assuming closing in mid 2025, although with limited positive impact based on the guidance for Galaxy for 2024E (revenue of USD29m-30m and EBITDA of USD12m-13m). The tables below summarizes group key financials and revenue per region and product category for 2021-26E.

Evolution: Regional revenue mix
Revenue, EURm	2021	2022	2023	Q1 24	Q2 24	Q3 24E	Q4 24E	2024E	2025E	2026E
Europe	571	633	710	191	191	193	200	775	829	887
Asia	286	478	672	198	201	207	214	819	963	1,107
North America	115	189	227	62	60	63	65	250	310	388
LatAm	n.a.	88	128	33	37	40	45	154	211	274
Other	96	68	62	18	20	21	22	81	97	117
Total revenue	1,069	1,457	1,799	502	508	523	547	2,079	2,410	2,772

Growth, %	2021	2022	2023	Q1 24	Q2 24	Q3 24E	Q4 24E	2024E	2025E	2026E
Europe	67%	11%	12%	10%	9%	10%	8%	9%	7%	7%
Asia	128%	67%	41%	28%	22%	20%	18%	22%	18%	15%
North America	206%	65%	20%	8%	8%	15%	10%	10%	24%	25%
LatAm	-	-	45%	10%	17%	15%	40%	21%	37%	30%
Other	73%	-30%	-8%	22%	34%	30%	35%	30%	20%	20%
Total growth, %	90%	36%	23%	17%	15%	16%	15%	16%	16%	15%

Source: Redeye Research

Evolution: Key Financials
EURm	2021	2022	2023	Q1 24	Q2 24	Q3 24E	Q4 24E	2024E	2025E	2026E
Revenue	1,069	1,457	1,799	501	508	523	547	2,079	2,410	2,772
Growth Y/Y (%)	90%	36%	23%	17%	15%	15%	15%	16%	16%	15%

Personnel costs	-207	-290	-355	-107	-111	-114	-116	-448	-503	-585
Other costs	-127	-159	-176	-49	-51	-51	-51	-201	-217	-250

EBITDA	735	1,008	1,267	346	346	358	380	1,430	1,690	1,938
EBITDA-margin	69%	69%	70%	69%	68%	69%	70%	69%	70%	70%

EBIT	654	908	1,143	312	311	323	343	1,289	1,527	1,751
EBIT-margin	61%	62%	64%	62%	61%	62%	63%	62%	63%	63%

Net income	605	843	1,071	269	269	275	292	1,104	1,298	1,488
EPS, EUR	2.8	4.0	5.0	1.3	1.3	1.3	1.4	5.2	6.2	7.1

Source: Redeye Research

Valuation

While we trim our estimates for 2024-26E, this has a limited impact on our DCF-valuation as we leave our longer-term assumptions unchanged (see table below for assumptions). Our base case of SEK1,600 implies 20x 2024E EV/EBITDA and 17x 2025E EV/EBITDA. The share currently trades at 14x 2024E EV/EBITDA and 11x 2025E EV/EBITDA while the 7-year average is around 21x. We believe the new capital allocation framework, which states that the company will distribute 100% of excess cash flow, could have a positive impact on Evolution’s valuation. The company have announced a share buyback program of EUR400m, and based on our cash flow assumptions for 2024-26E, we estimate that around EUR2bn additionally can be deployed during 2025-26E for share buybacks or extra dividends.

Evolution: Fair Value Range
SEK	Bear Case	Base Case	Bull Case

Value per share	1,200	1,600	2,400

Revenue CAGR 2025-2029	10%	14%	18%
Revenue CAGR 2030-2039	5%	6%	8%
Growth Terminal	2%	2%	2%

EBITDA-margin 2025-2039	59%	64%	68%
EBITDA Terminal	55%	60%	65%

Source: Redeye Research

Evolution: Historical NTM EV/EBITDA

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. 15% over the next five years and around 12% on 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 SEK1,600 per share for Evolution which is derived from a DCF-valuation. The base case implies an EV/EBITDA multiple of 20x on our 2024E EBITDA and 17x our 2025E 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 15% 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	2022	2023	2024e	2025e	2026e
Revenues	1,456.7	1,798.6	2,079.1	2,409.8	2,772.5
Cost of Revenue	0.00	0.00	0.00	0.00	0.00
Operating Expenses	448.3	531.2	649.3	720.0	834.2
EBITDA	1,008.4	1,267.4	1,429.8	1,689.8	1,938.3
Depreciation	0.00	0.00	0.00	0.00	0.00
Amortizations	100.4	124.7	141.0	162.7	187.1
EBIT	908.1	1,142.7	1,288.8	1,527.1	1,751.1
Shares in Associates	0.00	0.00	0.00	0.00	0.00
Interest Expenses	0.00	0.00	0.00	0.00	0.00
Net Financial Items	-1.5	5.9	12.7	0.00	0.00
EBT	906.6	1,148.6	1,301.5	1,527.1	1,751.1
Income Tax Expenses	63.2	77.7	197.0	229.1	262.7
Net Income	843.4	1,070.9	1,104.5	1,298.0	1,488.5
Balance sheet
Assets
Non-current assets
EURm	2022	2023	2024e	2025e	2026e
Property, Plant and Equipment (Net)	111.0	121.1	178.0	262.3	359.4
Goodwill	2,315.3	2,324.0	2,324.0	2,324.0	2,324.0
Intangible Assets	742.9	714.5	643.4	655.1	537.2
Right-of-Use Assets	67.9	70.4	70.4	70.4	70.4
Other Non-Current Assets	22.8	21.2	21.2	21.2	21.2
Total Non-Current Assets	3,260.0	3,251.2	3,237.0	3,333.0	3,312.2
Current assets
EURm	2022	2023	2024e	2025e	2026e
Inventories	0.00	0.00	0.00	0.00	0.00
Accounts Receivable	277.0	348.4	415.8	482.0	554.5
Other Current Assets	299.8	388.1	415.8	482.0	554.5
Cash Equivalents	532.6	985.8	1,217.7	1,821.2	2,630.7
Total Current Assets	1,109.4	1,722.3	2,049.4	2,785.1	3,739.7
Total Assets	4,369.4	4,973.5	5,286.4	6,118.1	7,051.9
Equity and Liabilities
Equity
EURm	2022	2023	2024e	2025e	2026e
Non Controlling Interest	0.00	0.00	0.00	0.00	0.00
Shareholder's Equity	3,460.3	4,006.2	4,280.4	5,026.2	5,865.6
Non-current liabilities
EURm	2022	2023	2024e	2025e	2026e
Long Term Debt	0.00	0.00	0.00	0.00	0.00
Long Term Lease Liabilities	65.2	65.5	65.5	65.5	65.5
Other Non-Current Lease Liabilities	418.0	340.4	340.4	340.4	340.4
Total Non-Current Liabilities	483.2	405.9	405.9	405.9	405.9
Current liabilities
EURm	2022	2023	2024e	2025e	2026e
Short Term Debt	0.00	0.00	0.00	0.00	0.00
Short Term Lease Liabilities	14.4	13.9	6.1	6.1	6.1
Accounts Payable	10.1	13.1	20.8	24.1	27.7
Other Current Liabilities	401.4	534.3	573.1	655.8	746.5
Total Current Liabilities	425.9	561.3	600.0	686.0	780.3
Total Liabilities and Equity	4,369.4	4,973.5	5,286.4	6,118.1	7,051.9
Cash flow
EURm	2022	2023	2024e	2025e	2026e
Operating Cash Flow	877.5	1,168.4	1,196.8	1,414.4	1,624.8
Investing Cash Flow	-371.6	-139.4	-126.8	-258.7	-166.3
Financing Cash Flow	-394.2	-574.5	-838.1	-552.2	-649.0

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