Fueled by the Online Shift
Redeye increases the fair value of GiG on the back of a stabile quarter, where the customer intake triumphed higher costs. The company signed six new agreements for Platform Services in the third quarter, and the positive development seems to continue in the fourth quarter. The OPEX came in higher than estimated, but we expect it to decrease in the coming quarters. Meanwhile, GiG saw a breakthrough for the Media Services in the US. As a result, we continue to see a considerable upside in the stock.
With the B2C divestment, GiG is now purely focusing on the B2B segment and has the long- term ambition of becoming a top-three company within the B2B iGaming space. We believe this new focus will help the company to improve its positions within both the Platform segment and the Media segment.
We view the growth prospects as strong for GiG ́s platform solution, and we especially find the omnichannel solution interesting. The boosted online shift due to COVID-19 has already resulted in several new deals for the omnichannel solution with land-based operators. GiG is also sending positive signals about the Media segment as the strong cash flow generating segment has reached a breakthrough in the massive US market.
Improved financial position
GiG ́s financial position has improved substantially due to the divestment of the B2C segment. As projected, the important NIBD/EBITDA ratio is now below the critical 3.0, which lowers the financial risk.
In the midst of the company"s transformation, we believe there are hidden values. The remaining B2B operations have an excellent position to deliver profitable growth, and earnings multiples are below its peers. We believe that the Media Service alone holds a value greater than the current enterprise value for the whole group. Accordingly, we regard the stock’s current level as unjustified and risk/reward as attractive, with a potential upside of around 50% to our base case valuation of SEK 12 (10).
In the third quarter, GiG ́s revenues were in line with our expectations, but the platform segment"s customer intake outperformed our expectations. Furthermore, the company also highlighted its making progress in the US market, with the Media segment being present in nine states. In the third quarter, the company saw a breakthrough in customer intake for the Media segment in the US market.
On a segment level, the Platform segment, adjusted for SkyCity, was the only segment that deviated from our estimates. The revenue for the Platform segment came in 7% above our estimates.
On the cost side, the company took several high one-off costs that lowered the earnings. EUR 250k relating to the Sports Betting segment"s cost optimization program and another EUR 500k for restructuring the group ́s overall business. However, even adjusted for these one- offs, the Other operating expenses were higher than expected. The main reason for this was the strong B2B customer intake that meant that GiG had to maintain a larger workforce than previously estimated to handle the strong pipeline of new customers.
As a result, for the more considerable expenses, the EBITDA came in well below our estimates. However, we view the large expenses as a result of increased revenue expectations going into 2021 with a strong pipeline of new B2B deals.
GiG ́s financial position has improved substantially with the divestment of the B2C segment. The important NIBD/EBITDA ratio is now, as projected, below the critical 3.0x mark. We expect the ratio to improve further as the company ́s EBITDA increase.
GiG is now a pure B2B company. The B2B operations offer higher scalability as the gross profit margin is much stronger, which is reflected in the table below. However, the company
is reorganizing the full SkyCity revenues, which is impacting the profit margin. Also, we expect the Other OPEX to decline much in Q4 due to minimal one-offs and generally lower expenses. The OPEX has, as mentioned, been substantially impacted by one-offs in the last few quarters.
• Underlying market: Underlying growth in existing markets and the main verticals is estimated at a CAGR of about 5% for 2018-23, according to H2GC.
• New partnerships: New land-based partners like Casino Win, Tipwin, Slotbox, and SkyCity will be a key long-term growth driver for GiG. On top of that, we expect new online partners to add additional growth. Increasing demand for the Media products should also increase the number of partners and revenue for the Media Services.
• New markets: Entering new markets will be important for growth as the European market mature. The deals in Hungary, Argentina, and Macedonia are evidence of this development. New states in the US are also opening up for online gambling for the Media segment, and the segment continues to expand to new states.
• Products improvements: With fewer new projects within additional verticals, we expect that the company will focus on improving the products within the core business and increase modular sales. This will be important to stay competitive.
• Acquisitions: The current financial position makes it difficult for GiG to take advantage of M&A opportunities. However, we do not rule out that smaller acquisitions will be added to the portfolio or a more significant merger.
• Cost of sales: With the new business structure with purely B2B operations, we will see a much lower cost of sales going forward, adjusted for the SkyCity revenues.
• Marketing: Minor marketing expenses will primarily be maintained within the Media segment and the cost related to SkyCity.
• Other operating expenses: We expect the company to slim the OPEX some more to improve the efficient use of resources. However, as the business grows, the operation needs to expand as well, but we expect the OPEX to decrease going forward in relation to revenues.
The Media Services continued to perform well during the third quarter. The growth driver was the Paid Media segment that reported a Y/Y growth of 50%. However, the Paid Media segment"s expansion is driven by increased marketing spending. Hence, lower profit margins for the Media Services. Furthermore, the overhead costs adjustment has resulted in higher overhead expenses for the Media Services and lower EBITDA margin as a result.
Nonetheless, the Media Services possibilities are substantially, especially in the massive US market, where the company saw a breakthrough in the third quarter. GiG is now up and running in nine states, which we find very impressive and should result in a good increase in the revenues over the coming year.
The Platform Services has shifted focus towards a fixed fee model and will increase its focus on large long-term partnerships. As a result, we expect that the company will phase out the white label deals. The Betsson deal has boosted the revenues from Q2’20 and will continue to do so in the coming two years.
Moreover, we believe that the increased focus on the B2B with major partnerships, such as Tipwin and Sky City, will drive underlying growth going forward. The strong customer pipeline should ensure strong growth in 2021. The segment is also highly scalable, which will drive increased margins, while the growth focus will mitigate some of the scalability effects in the short-run.
The Sports Betting Services is showing improved performance. However, we have low expectations for growth as the focus is on lowering costs in the short-term. Nonetheless, there is still long-term potential for the product, and we find the deal with Betgenius interesting.
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