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1 E 2016E 2017E COMPANY ANALYSIS 11 November 2015 Summary Mr Green (MRG.ST) Growth Trajectory Intact Mr Green s financial performance for the quarter was somewhat below our expectations - revenue came in at SEK million (expected: SEK million). However, the EBIT reported of SEK 24.9 million was largely in-line with our expectations post-austria (24.8 million). Had the Austrian tax effect been excluded, it would have been a stellar quarter amounting to approximately SEK 40 million EBIT. The Nasdaq listing proposal makes the company poised for enhanced shareholder attention. We expect more decisions in this shareholder friendly manner to close the gap between price and value including in the future. This includes but not limited to stock buybacks and the subsequent rejection of an dividend payout for Fundamentally, the company is not burdened by a revenue ceiling within the existing markets which enables the future highgrowth trajectory. Mr Green appears to be an attractive takeover prospect within the next 1-3 years, in an industry likely to become consolidated, and the difference between price and underlying value remains substantial. The DCF model indicates a continued intrinsic value of SEK 61 per share. Redeye Rating (0 10 points) List: Market Cap: Industry: CEO: Chairman: Jul Aktietorget 1,341 MSEK Betting/Entertainment Per Norman Tommy Trollborg OMXS 30 Mr Green 13-Oct Management Ownership Profit outlook Profitability Financial strength 7.0 points 9.0 points 6.5 points 7.0 points 6.0 points Key Financials E 2016E 2017E Revenue, MSEK ,193 Growth 52% 36% 22% 21% 23% EBITDA EBITDA margin 21% 3% 6% 15% 19% EBIT EBIT margin 13% 10% 8% 8% 13% Pre-tax earnings Net earnings Net margin 12% -4% -5% 7% 12% Dividend/Share EPS adj P/E adj EV/S EV/EBITDA Share information Share price (SEK) 37.4 Number of shares (m) 35.8 Market Cap (MSEK) 1,341 Net debt (MSEK) -141 Free float (%) 60 % Daily turnover ( 000) 88 Analysts: Philip Skogby Philip.skogby@redeye.se Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report. Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, Stockholm. Tel E-post: info@redeye.se

2 Redeye Rating: Background and definitions The aim of a Redeye Rating is to help investors identify high-quality companies with attractive valuation. Company Qualities The aim of Company Qualities is to provide a well-structured and clear profile of a company s qualities (or operating risk) its chances of surviving and its potential for achieving long-term stable profit growth. We categorize a company s qualities on a ten-point scale based on five valuation keys; 1 Management, 2 Ownership, 3 Profit Outlook, 4 Profitability and 5 Financial Strength. Each valuation key is assessed based a number of quantitative and qualitative key factors that are weighted differently according to how important they are deemed to be. Each key factor is allocated a number of points based on its rating. The assessment of each valuation key is based on the total number of points for these individual factors. The rating scale ranges from 0 to +10 points. The overall rating for each valuation key is indicated by the size of the bar shown in the chart. The relative size of the bars therefore reflects the rating distribution between the different valuation keys. Management Our Management rating represents an assessment of the ability of the board of directors and management to manage the company in the best interests of the shareholders. A good board and management can make a mediocre business concept profitable, while a poor board and management can even lead a strong company into crisis. The factors used to assess a company s management are: 1 Execution, 2 Capital allocation, 3 Communication, 4 Experience, 5 Leadership and 6 Integrity. Ownership Our Ownership rating represents an assessment of the ownership exercised for longer-term value creation. Owner commitment and expertise are key to a company s stability and the board s ability to take action. Companies with a dispersed ownership structure without a clear controlling shareholder have historically performed worse than the market index over time. The factors used to assess Ownership are: 1 Ownership structure, 2 Owner commitment, 3 Institutional ownership, 4 Abuse of power, 5 Reputation, and 6 Financial sustainability. Profit Outlook Our Profit Outlook rating represents an assessment of a company s potential to achieve long-term stable profit growth. Over the long-term, the share price roughly mirrors the company s earnings trend. A company that does not grow may be a good short-term investment, but is usually unwise in the long term. The factors used to assess Profit Outlook are: 1 Business model, 2 Sale potential, 3 Market growth, 4 Market position, and 5 Competitiveness. Profitability Our Profitability rating represents an assessment of how effective a company has historically utilised its capital to generate profit. Companies cannot survive if they are not profitable. The assessment of how profitable a company has been is based on a number of key ratios and criteria over a period of up to the past five years: 1 Return on total assets (ROA), 2 Return on equity (ROE), 3 Net profit margin, 4 Free cash flow, and 5 Operating profit margin or EBIT. Financial Strength Our Financial Strength rating represents an assessment of a company s ability to pay in the short and long term. The core of a company s financial strength is its balance sheet and cash flow. Even the greatest potential is of no benefit unless the balance sheet can cope with funding growth. The assessment of a company s financial strength is based on a number of key ratios and criteria: 1 Times-interest-coverage ratio, 2 Debt-to-equity ratio, 3 Quick ratio, 4 Current ratio, 5 Sales turnover, 6 Capital needs, 7 Cyclicality, and 8 Forthcoming binary events. 2

3 Focus on Shareholder Value Turnover development still OK The company reported a result somewhat below our revenue expectations, SEK million against expected SEK million. Indeed, this, to some extent, represents the growth we wanted in the previous quarter. We asses, as earlier, that the company can accelerate growth if they so desire, within limits, given the need of a strong cash flow to properly support the expansion in growth markets. Expectation vs Actual MSEK Q2'15 Q3'15E Actual* Dif Gamewin 194,8 208,4 201,6-3% growth 21% 24% 20% -17% COGS 21% 17% 20% 3% Marketing expenses 35% 45% 28% -17% Other expenses 23% 18% 22% 4% EBIT 25,0 24,9 24,8 0% Strong sustainable EBIT Source: Redeye Research *Adjusted for Austria Tax & COGS The company reported an EBIT which was in-line with our expectations, taking into consideration the Austria effect on the quarter; SEK 24.9 million versus expected SEK 24.8 million, which was driven by, above all, lower than expected marketing expenses. Indeed, excluding Austria, the effect would have been approximately SEK 40 million, an EBIT record level we have however decided to act and not account for this level, as we from now on see it only as an upside if they manage to win or partially win this case. Investors must adjust the reported financial parameters to the figures above due to the non-recurring nature of the other items reported. The marketing costs represented 28% against the expected 45%, which was likely due to a lack of possibilities for sustainable marketing schemes, similarly to the corresponding quarter in the year prior (35 percent). The effectiveness of their marketing has increased substantially compared with the previous quarter, as it managed to grow its revenues with an increased revenue volume despite the decreased marketing ratio! In fact, as we will see in our review later, this is one of the strongest results in our data reaching back for at least two years. Nevertheless, while we see substantial opportunity potential, the company must have time to rationally perform defensible marketing activities just performing for a short term boost in revenues for the stock market does not matter. It needs to grow at a level it can handle and whether this requires 3

4 further personnel expansion should be clearly considered in order to amplify the growth rate. It is indeed important to debate the assertion of the profitability of the company at the current moment given the fact that, if one was to analyse the individual segments, some would be deemed unprofitable. These will generate significantly more money in the future which will provide a revenue boost. Higher other expenses, 22% (expected: 18%) is largely due to one-off costs in our opinion, such as the associated licensing costs in the UK, Italian consultancy costs and continued legal expenses in Austria. As the company matures, it will experience a significant margin expansion; however, Mr Green is still in the infancy of the growth phase. Indeed, we are more interested in the company obtaining greater market share in immature markets, and if a rights issue is required for such an endeavour, it should be implemented in the best interest of the shareholders. Mr Green Reveals Strong Shareholder Attention By far the most important factor this quarter was its proposed listing on the Nasdaq OMX Stockholm this will create conditions to converge the current price to its intrinsic value. Arguably, this should have been done earlier but the company is finally heading in the right direction in regards to this aspect. Subsequently, this will also open up M&A opportunities for the company, unleashing its full potential in a consolidating market. This is incredibly important in managing increased regulatory impacts and competitiveness the probability of merger or acquisition of and by Mr Green as a tier-1 dynamic operator increased substantially due to this decision. Skip the Dividends For 2015 Simultaneously to the listing of the company, we also expect that the company will announce a dividend decision which we asses should be eliminated in its entirety to give consideration for building up cash for a negative outcome in Austria, stock buybacks and as well to utilise these assets on continued market opportunities. The company will also have to take into account for the dividends SEK 100 million to Austria during We previously questioned last year s dividend decision, prompting the company to activate share buybacks in order to give the market a clear signal of its value. A clear argument for stock buybacks or basically investing them instead, is the following; what s the reason for investing in Mr Green if the dividend yield is only on par with its larger competitors? Indeed, for any rational investor the dividend yield should be higher for Mr Green in order to warrant a purchase in relation Betsson/Unibet s already considerably larger size and lower associated risk. In the end it is about realizing the full potential of Mr Green and this is where the money should be spent. Indeed, it does not even need to spend the amount that it paid out last year to make stock buyback noticeable it will change markets 4

5 A stock repurchase program can more clearly signal the company s perspective regarding the valuation perception of the company. Indeed, imagine the following quote from the company we believe that the company is significantly undervalued and thus we have decided to start an immediate stock buyback furthermore, we will cut the pay out by more than half in relation to last year as we see significant market opportunities. We deem that a halt of the dividend and the entrance of a stock buyback will more than mitigate the perception by the market of the dividend halt. Indeed, this makes sense even for the primary and larger owners they can realize values far above the current price if they would set some necessary further steps to turn it to a shareholder responsive company. Then, if they want, they can cash out more than they received in dividends. Punishing the company by issuing dividends is clearly unnecessary owner should sell shares (at a discount) instead if money is required for other adventures in order for it to not hurt the long-term fundamentals of the company such thinking would depreciate the intrinsic value over time as the business prospects taken advantage are reduced. We will guard these decisions with extreme care and any irrational decision will be dealt with swiftly in our valuation and rating evaluation. Cherry is a great example of shareholder friendliness: by the AGM in 2015 the dividend payment was dismissed why did the owners agree to no dividend even though the company had decent amount of cash? Because they can invest these assets continually in their existing business and increase its M&A presence. Why can t Mr Green do the same thing? They also know that the dividend yield that would be proposed would be insignificant to its competitors and would thus not increase investor attention. In the case of Cherry, we clearly conveyed the message to halt the dividend as well. 5

6 Significant potential in emerging markets Accelerate Growth for Shareholder Value Despite the weaker sales than expected, it should be noted that Mr Green is still a relatively small company in a number of the markets in which it operates in, which leads to volatility in revenue. Greater marketing endeavours must be seen in relation to its long term financial situation, and its long term sustainable undertakings. The need for capital exists for both immature markets as well as, and especially, in Austria, profitability must therefore be achieved in markets such as the Nordic countries; otherwise a rights issue will become inevitable to ensure an accelerated growth in immature markets; it may be the reason as to why Mr Green is seeing its profitability performance return to average, rather than, as we would have liked, to act extremely aggressive in absorbing market share. We want to be clear on this point; we expect nothing less from its Malta operations than to accelerate growth over profitability, but it must be done in a long-term manner. It should also be noted, that the stagnating growth is due to the fact that the company is not obtaining a desired yield from its efforts within the growth markets. In other words, as an example, what would happen if they achieved 1.5 GGR (Gross gaming revenue) more for the marketing expenses incurred in the United Kingdom, or even more in Italy (from probably a minus level)? It is likely that the company would have surpassed quarterly expectations in that case. This is exactly the reason why one has to dig deeper in these specific numbers before reaching any conclusion. Remember that in the last quarter it was the Nordics that underperformed, and now (again) performed well. Competitors such as Betsson are likely to have a GGR of 2 or more of the company s revenue for online casinos, and 4-5 GGR for the remaining products (net casino, sportsbook and poker). Mr Green is in a favourable position to obtain greater market share, including from that of its competitors. Marketing efficiency Source: Redeye research, Mr Green 6

7 Profitability per invested krona in marketing will likely increase over time Marketing effectiveness is defined as the ratio of net income over marketing expenses, which symbolizes the yield obtained from each krona invested in marketing efforts on average. The table above indicates a greater effect per each invested krona, from SEK 2.9 to 3.6 (excluding all other expenses); nevertheless, it also indicates that there are clear quarterly fluctuations, which must be carefully analysed before making any extrapolations. In next quarter for example, we expect a decrease as the company accelerates its marketing for the winter season and might not obtain full utilization of its investments until Q1. We asses that it will remain within the historic interval and will be closer to the lower interval of SEK 2-3, as the company will have the resources and the foresight to make long term investments. Investments in marketing also lead to new customers, which can also generate revenue during the upcoming quarter, which can increase the overall turnover. In addition, this key figure will affect the company s profitability in emerging markets. Mr Green s history suggests that it is most likely that each krona invested in these emerging markets will provide a low yield due to a lack of brand awareness amongst customers. Hence, these less established markets, as well as in combination where competition is fierce, such as Italy and the UK will not yield results in the near-term but rather in a long-term perspective. It is likely that Sweden, which is an established market, provides a greater yield per krona invested in marketing efforts, as the brand is well established. This will finance the expansion in the emerging markets. This is, to some extent, compensated by tougher competition. It is important to note that the focus should still be on growth, to ensure greater market share and scalability. This is required for long term shareholder value, and we note that this long term view should not be underestimated, as the market does, rather, it should be rewarded. Mr Green should not be valued based on current profitability, but based on its long term potential, when the company decides to take full advantage of general market growth (with a margin to account for an increased competitive climate and greater taxation as a result of altered regulations). New management and product development in line with shareholder thinking Operational Development We still believe that Per Norman s assignment last year is still the best choice for continued operational effectiveness during this growth phase. Per has a substantial share and option holding. In terms of product development, the company has a new site that provides a better mobile product experience for users using an app or no app it is more user convenient and responsive than its previous version along with the following technical details, better adaptation to improve its SEO, frequency of updates and integration between sites. As we see it, it s important that these product initiatives continue at a fast pace to ensure that the company exceeds the competition s offering. 7

8 The company s personnel and consulting count was basically unchanged since last quarter. We cannot draw any conclusions from this; it may have reached a level within the personnel which fulfils the prerequisites to produce greater revenue in the future. As to which extent, is something we cannot yet ascertain, it will however, likely increase over time when it sees market opportunities. What about Social Thrills? Well, its book value was written down accordingly and subsequently the Spin Tower casino was shut down. The cost of this adventure is quite necessary from an innovation perspective but it is clear that they have missed acquiring and retaining top-talent for this project. It seems as if they were testing this arena, rather than going in with a strong determination and passion to see the hardship through and contribute to a new form of gaming experience. Similarweb continued to indicate a record breaking amount of site visits during the quarter, which explains the delayed income previously referred to. The visitor statistics from Similarweb does not necessarily represent reality accurately, as it is estimated figures only, and not the actual number of unique visitors. All in all, Mr Green continues to deliver and we believe that the company s growth orientated strategy will not require greater levels of investment than what the cash flow can support. Mr Green will likely come through to adapt its investments in accordance with liquidity needs, and, to what can be seen as long term sustainable investments. The acquisition of Mybet Italia and the license provision is expected to provide a positive contribution over time, even if it may take time to achieve profitability to reach critical mass in this highly competitive market. The advantage with this market is the open marketing channels, good general recognition of games by the consumers, and Mr Green s concept of gaming experience, as well as the unique and proved scalable brands. Continued positive development for the mobile segment Income from the mobile online casino increased as an independent figure, as well as in relation to the previous quarter, and we believe that this growth trend will continue. The mobile division currently represents 31% of total revenue (32% in the previous quarter). This is positive as we tend to see that ROI per mobile user is greater than for desktop users, as the convenience of such induce the increased probability of increased gaming in terms of frequency and volumes relative to desktop. Insiders have started buying shares, although, we deem that this is not a strong enough signal as of yet, we want key owners to also show confidence. Mikael Pawlo sold as previously noted in June. 8

9 Focus on Quality Delivers Results Active customers for the quarter amounted to compared to in the previous quarter of the current year this does not seem much of an increase, but we see it s a quite clear improvement for each active customer. The continued increase in deposit trend is also a likely reflection of the company s successful marketing efforts and continued appreciation for the platform. There are also quite substantial investments Investments by Mr Green in the gamer base improves quality It is important that the company retains its profitable customers, and makes further increases in its customer base, which Mr Green is using substantial resources to achieve, through the use of differing CRM/VIP programs. The results of their efforts can clearly be seen in the table below. Concurrently, competition remains fierce in all markets, which intensifies the difficulty in retaining active customers from the previous quarter. Especially if one does not continue the creation of (if not already in possession) unique experiences compared to other online casinos. Turnover per active customer Source: Redeye research, Mr Green Revenue per active customer continues to increase which suggest that the quality experienced by each active customer is improving and that Mr Green has a suitable platform to promote customer experience. As the relative revenue generated from active customers, who have used the platform more than once over the period of half a year, cannot be estimated, we use the total reported revenue where the traditional definition of active customers is applied (those who have played during the quarter and played with winning beyond their bonuses). There are a few factors that must be noted in verifying the integrity of the numbers: For one, it can be a misleading metric as it s about the general level of each active customer rather than a few percent of these which represents 20 % percent of revenues. This can cause serious fluctuations between quarters VIP/CRM programs are essential to retain the ultra-high activity and spending customers but as an operator you prefer not to have these in excess. Secondly, another thing in quality of this number is the ones who actually 9

10 played on the site for more than a quarter relative to a single quarter. This would indicate the resilience and user experience of the brand relative to competitors. Furthermore, lower utilization rates of temporary bonus customers can contribute to higher revenues per customer if done it in a proper manner, even if it will only reflect profitability optimization. Nonetheless, the aim is to increase the time played and as such the prolonged gaming experience is vital to produce yields over longer periods of time. Decreasing withdrawal times might have a negative effect in the short term but more and more operators are shifting to lower withdrawal times. Guts Casino is leading this development which is growing its active customers at a rate that exceeds any other operator organically. The company is in addition, working on lowering the affiliate customer component through collaboration negotiations, SEO-optimization as well as increased use of other direct marketing channels. The transformation of these affiliate customers, to profitable optimized direct customers could lead to a substantial increase in revenue. This is a step by step process and in a long term perspective, the affiliate customers will become an important factor in continued revenue optimization. Strong liquidity, but it cannot accelerate quickly without further capital Current Cash Situation Provides Stability Capital increased to SEK 139 million (SEK 113 million in the previous quarter), which was used to, amongst other things, to provide for the WC needs (approx. 16 million) which should be seen more as a timing issue according to the company. Approximately SEK 23 million in installments to Austria for 2015 (remaining payout portion of 7.5 million in 2015 and approximately 110 million in 2016). We do not see a disadvantage in the company in keeping capital to be used for investments, as we believe that the company can eventually employ these at a greater profitability of 20-25% EBIT-margins in the longer-term. 10

11 Mr Green transforms to an all the more attractive acquisition candidate Substantial premium offer is required for a successful acquisition Mr Green an Attractive Acquisition Target We cannot disregard the possibility of an increasing acquisition interest of Mr Green in the future, especially with new regulations to be gazetted and an all the more intensive transaction climate, in combination with a prolonged low pricing of Mr Green. It is worth to note that Mr Green is one of the few online casinos in Europe that has grown entirely organically thus far with top-tier rankings, with an especially strong Nordic presence, making it an interesting natural acquisition target for larger operators. As Mr Green is experiencing significant growth, in combination with profitability, the interest of competitors will increase as the pricing of the company remains low. This is to both consolidate the market and increase its revenue base, to be able to grow at quicker pace than the market. Consider the significant future prospects that Mr Green represents as a well-established and pure-play organically growing brand. Betsson and Unibet are both possible hypothetical buyers as their ambitions relate to a strengthened position in the European and Nordic markets, and desire to obtain access to a company achieving quick organic growth. The price of these two operators have increased, which means that the dilution effect does not have be any greater than 20% for an offer which would hypothetically be accepted by Mr Green s main owners in the future. Still the dividend increase potential is substantial according to our calculation, up to 1 percent increase for Betsson shareholders for the current year. This accounts for the effect of cutting personnel, volume in marketing and royalties, as well as platform optimization. Because Betsson is traded at around 20 in EV/EBIT it is clear that Betsson and Unibet alike would do a decent short and long-term investment for shareholders by acquiring Mr Green for an adjusted multiple of EV/EBIT 5 (quickly realizing the synergies above). Thus, acquiring Mr Green at around SEK 2.4 billion, equivalent to an EV/EBIT of around 10 does indeed makes sense. However, we believe that the company can create substantially more value for all shareholders as a stand-alone entity. Indeed, the reality is that Betsson and Unibet can quickly integrate its own platform, cutting personnel expenses and consultants. Moreover, royalty rates due tier-agreements and scale in marketing pushes the actual underlying acquisition multiple down significantly, post-synergies. Moreover, British operators interest is likely to be noticeable as they desire to increase their presence in the profitable Nordic market, while strengthening their overall European position. William Hill recently desired to purchase 888 Holdings (half of its revenue is generated by its online casino division, and it has grown from a revenue of SEK 700 million to approximately SEK 1.2 billion in the last three years, which is similar to our expectations of Mr Green, but somewhat quicker), the purchase was not accepted however, as one of the main owners, likely the Shaked brothers, were of the opinion that the premium was too low to be accepted (the offer was approximately SEK 9 billion). GVC finally acquired Bwin creating a new powerhouse while 888 lost. 11

12 With many operators looking for complements in its strategy, a whollyorganic online casino operator would likely be to tier-1 operators such as 888. A potential offer would have to compensate the high growth potential in the future, which is likely to be rejected by the founding members as they chose to keep their positions. It is also not impossible that American operators will desire to enter the market, as Intertain did through the acquisition of Vera&John. As for the price, a substantial premium should be required as the ownership duo is unlikely to sell their positions, who were involved in the actual founding of Betsson (2B USD+ MCAP today). Berquist and Sidfalk together, own approximately 30% of the company. What would these main owners likely accept in such a case? It is likely that a couple of years of growth would need to be capitalized to sell the operations, as it is one of the strongest brands in Scandinavia, in a fiercely competitive climate, with an all the more increasing presence in Europe. Indeed, we see further potential to accelerate growth in the Nordics if the company so desires. A revenue level of 1.2 billion, with a potential EBIT of SEK (EBIT margin of percent) million with a valuation based upon a sustainable income potential of 10% (significantly higher risk premium than the competitors), should imply a value of at least SEK per share, which owners could hypothetically agree to. Indeed, the higher risk premium acts as a margin of safety in this valuation. The perception of the company in this case could lead to the estimated sustained income potential to be perceived as sustainable in the long term, which, if it decreased from 10 percent to 7.5 percent will indicate a price of SEK per share instead. The previous relates to the lower intervals for our base case in relation to the bull case. The SEK 1.2 billion game win is still not seen as an income ceiling for Mr Green, as the company is likely to grow to SEK 2 billion through organic growth. This should be considered in relation to the transition occurring in physical casinos as more customers migrate to online casinos, as well as the fact that the total market for European online casinos will reach approximately SEK 30 billion in In addition, management s options program (approximately 4 percent of remaining shares) has an exercisable price of SEK 68 per share in 2017, as such; a price above this should act as a reasonable indicator. 12

13 Continued European Expansion Mr Green Plenty of opportunities across emerging markets The company continued to expand in the remaining European market during the quarter. The company means to enter reregulated markets and we have in large seen recent development continue in such a manner, such as in the United Kingdom and Italy. It is in our opinion that the company will follow suit and join its competitors in new prospective markets. We believe that, amongst others, that the following markets may become of interest to Mr Green, now or in the future, based on our analysis of the competitive climate; Greece, Iceland, USA, Spain as well as a select Asian nations. The company also has language support for Canada, which is a large and interesting market. We noticed that the company significantly increased its revenues outside Europe once again, which is the Canadian market (in our opinion) for the moment. In the coming chapter, we describe the legal circumstances and changes for online casinos and its potential effect, as well as the opportunities for Mr Green. Italy Large Market with Potential The company has now acquired a license and has opened an online casino during the 2 nd half of the year. The market for Italy can total SEK 2-4 billion in GGR, with a high growth rate for online casinos. According to Betsson, their presence in the Italian market was not significant, but argued that they grew at a quick pace. Paddypower tried to achieve momentum in this market during two years prior to breaking even, if it occurred earlier for their online casino division than for their sport betting solution remains unclear. Paddypower retained a market share of 3 % in As customers migrate from physical casinos to online casinos, the market will continue to expand. The Italian gaming market is characterized by open marketing channels and an aware gaming crowd, and is therefore a suitable market for a strong brand such as Mr Green. Canada High-market Potential to Relatively Low Risk There are no demands placed upon international operators on this market. At this time, there is no legal framework in Canada to close sites which (potentially) operate without a license, as long as the parent company is registered outside of Canada. International operators are thereby totally legal in Canada. Furthermore, there are no restrictions placed upon consumers of these gaming sites, and there are no current motions in place to alter the framework concerning how these operators are allowed to cater to Canadian customers. The market in Canada is likely large, and we believe that Mr Green can establish a strong presence in this market over time. 13

14 Austria Situation Every Security Measure Taken Mr Green earlier decided to execute a provision upon the self-declared taxation burden in Austria which Mr Green has appealed. The company has registered a claim with both the European Commission as well as the Austrian courts and is scheduled to pay taxes during 2015/2016 (noninterest bearing liabilities). The precautionary principle in conjunction with IFRS has led to a self-declaration from Mr Green of SEK 134 million. Subsequently, this quarter the company reports all liabilities in the income statement. We expect that another payout in Q4 of SEK 7.5 million will be due during 2015 (total payout during 2015 approximately SEK 23 million) and approximately SEK 110 million during The reservations which will occur after September 2014 will however only be taxed if the courts judge against Mr Green. If the decision is in their favour the paid expenses will be reimbursed plus interest. It is important to note that if they succeed in the upcoming court cases, the provisions and payments will be revoked. Furthermore, if it has to pay, it will not be a direct payment of all its taxes but rather during a schedule which supports the thinking that Mr Green will not be seriously affected financially. We believe that the company will not give up this case as it is not taxed on a legal basis in reference to European regulations, nor by the Austrian constitution. This is especially true given that European laws stipulate that commerce between nations is to remain free, and that Austrian laws can in theory be understood to be included in the European-commissions redline priority given a monopolized market scenario. This is against the commissions rules and Austria should therefore, like other countries, not be able to revoke the operator s operations which are based overseas. Mr Green will have its case examined correctly and fairly regardless. The company continues to operate in the market and we estimate that revenue is around SEK 150 million for Mr Green, extrapolated on an annual basis (with 40 percent taxation on game win). It is likely that the company can grow by 15-30% in this market in the near future, but will likely act cautiously to avoid growing too quickly in this market, as there is risk for a potential negative outcome. We believe that the legal process will drag on a couple of years, and Mr Green can continue to grow in other markets in the meantime, which in that case, given the estimated revenue will be a marginal cost. Concurrently, the company has approximately 139 million in liquid assets (expected to grow) to cover unexpected costs related to a negative outcome. The investment case for Mr Green will not even remotely collapse due to the Austrian situation, but we believe that the market will likely overreact in the case of a negative outcome with all else being equal providing a decent opportunity for the agile investor. 14

15 A marginal expense in relation to the market potential that Mr Green has over time United Kingdom Growth Phase Begins GBGA is once again aggressive towards POC taxation and has now won a case in the courts. It concerns questions regarding the legality of the British taxation law and in principle the free trade agreement within Europe. This will continue in the British courts, but we believe that nothing of significance will be concluded in the near future. Many countries are regulated since many years now, and a decision in the European court will likely result in changed regulations. We see this is an unlikely outcome. It should be reminded that GBGA already in September before the POC enactment failed with a similar process. Earlier in the 2nd quarter, Mr Green was awarded with a license, as we had previously estimated. It should also be noted that in the case of taxation, Mr Green s margins may not necessarily be reduced, as it may share the taxation burden with the game distributors, affiliate publishers and decrease the bonus levels. However, we believe that to obtain higher revenue levels, the company will need to invest substantially in marketing ventures, which initially results in unprofitability. This is compensated by lower marketing investment requirements in other markets. Mr Green follows a strategy of operating in regulated markets which will lower the political risks, which, when Mr Green reaches critical mass in terms of revenue, may allow for multiple expansion over time. Changes in regulations are expected to come into force in 2018 Swedish Regulatory Update In line with our earlier predictions, 2018 will be the year new regulations may come into force according to the government. We believe that Mr Green is advantageously positioned for the upcoming regulatory changes and it will likely lead to greater turnover but lower margins. The proposed regulations suggest that the number of operators will be limited, and that is why Mr Green is likely to take this position when considering its history, size and beneficial reputation in the industry. The state must take responsibility and enact a low taxation rate, which is economical and sustainable for the gaming operators and its customers, to be able to support the growth of the operators, maximize collected tax and to ensure maximum market competition, providing benefits for the end-user. Svenska Spel has increased its contributions to the investigations into gambling addiction, which may later be used to defend the monopoly. The Swedish Gambling Authority previously took the decision to strengthen its stance against marketing by illegal overseas operators. This may come to have a certain effect, as marketing investments made in the Swedish channels will be passed on to fewer legal or untouchable overseas marketing operators. The investments will thereby be passed on to TV and affiliates which will increase competition within these mediums, and thereby decrease margins to 15

16 some degree. Concurrently, the exposure is relatively insignificant, which would not affect the investment case to a greater degree. Practically speaking, the proposal will come into force at the beginning of 2016, it is however likely that relevant cases will not be tried in court until the middle of the year nor will definite decisions have been taken in relation to general promotion ban until such time. Changed regulations in the Netherlands at the beginning of 2016 is expected to provide strong growth in the long-term The Netherlands Re-regulation For 2016 The Netherlands market, which Mr Green s platform has language support for, is expected to experience strong growth during 2016, as it is expected that the Netherlands will be re-regulated during Q As the law proposal stands today, we expected a tax rate of 20 percent. It is possible that Mr Green could to take advantage of the changed regulations, as it is likely that the company would desire to acquire a larger market share, of a market amounting to approximately 800 million euros on unregulated sites. New German Licenses Are Unlikely In Germany, which Mr Green also has language support for; there is still strong opposition against the Schleswig-Holstein-licenses. The European court ruled that Schleswig Holsteins opening of online casino does not damage remaining German states stricter policies, according to GamingIntelligence. We do of course see this as a negative development, but do not disregard the possibility that individual states cannot follow Schleswig Holsteins steps in the future. Fundamentally, nothing has changed during the quarter for gaming operators, as strong growth is still expected in the grey market, as gamers will migrate to internationally recognized operators such as Mr Green. Spanish taxes in today s environment requires auditing if smaller/midsized operators are to become interesting Spanish Tax Rate Still Disadvantageous The Spanish government has recently accepted the creation of online casinos and consequently licenses have been awarded. The thought behind the decision lies within the fact the online casino market is small and there is potential for significant tax incomes in the case of changed market regulations, which is much needed in the current Spanish economic situation. The taxation rate will amount to 25 percent of GGR, which makes the market less attractive for Mr Green to enter presently. Concurrently, the market potential is significant. We believe that the operators will suggest that the industry is re-regulated to support a more advantageous tax rate, as the operators will use significant resources to establish themselves in the market. Companies which neglect the taxation consequences in the short term may however become one of the first of the operators to establish itself and develop a strong brand in this large market. 16

17 Norwegian Re-Regulation, Imminent? A regulation of Norway s gaming industry is not expected to occur during the foreseeable future, even if the Norwegian election in September 2013 suggested that a majority was for changed gaming regulations. Norway has however taken actions to mitigate the amount of advertising in its country urging other member states to take consideration of its proposal. The proposal involves for example blocking TV3 which broadcast from UK but is marketed in Norway in accordance with European laws (although it has no membership in EU it has strong connections). Now, the proposal involves that if the receiving state (Norway) deems it unlawful behaviour of the sending party (UK) to broadcast gambling content, or any other for that matter, as we understand it, they should cooperate. Now, this seems to break several basic rights like that of Freedom of Speech and freedom of trade between countries. It is still uncertain as to how long this process of permitting online casinos will take, but we expect to uncover more regarding this matter with the release of the 2015 budget. Establishment in the US could be an interesting long term alternative for Mr Green North America An Opening for Online Casinos North America, which is expected to gain greater growth rates than the European market for online casinos has shown signs of changed regulations. The market has to a large degree remained closed since 2006, but has since then opened step by step. States such as New Jersey, Nevada and Delaware have now allowed the operation of online casinos, together with acceptable taxation conditions; however, there is still a significant problem of payment systems, as the largest banks are yet to provide support for transactions. Furthermore, the perspective of legalized games is still negative amongst the population, 888 conducted an investigation which indicated this in New Jersey and will now address this fact in its marketing strategy. 888 has once again established itself well in the region, and will likely strengthen its presence as they possess vast experience of the market, both in online casino and online poker. We believe that there is a significant possibility that the company can establish itself here; the circumstances must however change if the operations are to function properly. Negotiations are currently underway to provide support through the banks payment systems. It is too early to suggest that New Jersey, Nevada and Delaware will contribute to the possibility that other states too will allow online casinos. We therefore do not account for this market in our estimates, and may be required to revise our prognosis if sales increases in the region. It may be a good idea for Mr Green to thoroughly explore the potential of this market, and it may be a very profitable adventure in the existing states, being one of the first and even in other states in the longer term. 17

18 Strong European Growth Ahead Mr Green Betsson s market share serves as an indication for Mr Green s growth potential We believe that Mr Green s focus and investments in effective marketing, unique brand, innovation and the mobile orientated product makes it possible for the company to grow quicker than the market, which is characterized by fierce competition. We believe that Mr Green has good potential to reach similar turnover levels to that of Betsson in the future. If we analyse Betsson's annual report for 2014 and the online casinos gross result, while adjusting for cost of services sold of approximately 17 percent, we obtain a gross result of approximately 2 billion in net gaming wins, which corresponds to a European market share of about 7-10 percent, which geographically represents the largest share of income. The turnover level (game win) for the online casino market in 2013 amounted to SEK 22.5 billion according to H2 Gaming Capital and will reach SEK 30 billion in 2018, which represents an annual growth of 5.4 percent. The image below shows the potential Mr Green has in absorbing greater market share in the future. The driving force behind this strong development is the transition from physical casinos to online casinos in combination with the growth of smartphone use. Gamewin Growth Online Casino *H2 Gaming Capital 18

19 Mr Green s sales in Scandinavia increased on a QoQ basis, although its growth has not been satisfactory during the last year. Although we believe that the company can accelerate this growth further in the future. The company has significant potential to increase in actual size as well as absorb greater market share in Scandinavia in the long-term despite the ferocious competition. It s a matter of planning these strategic investments in a sustainable manner for the right audience and the right procedures. They could accept lower yield per customer in order to gain market share for example. Increasing its affiliate presence in the Nordic markets is one way opening sportsbetting is another way. The company will in addition, take market share from Svenska Spel as the transition from physical to online gaming continues. Betsson has a net income within B2C (online casino + sportsbook and poker) in Scandinavia of about SEK 1.6 billion in relation to Mr Green s approximate SEK 400 million. Lotterinspektionen (the Swedish lottery commission) indicated that online casinos itself achieved a game win of approximately SEK 1.5 billion in 2014, in Sweden alone. The Scandinavian market may therefore be worth SEK 4-5 billion as of 2014, we thereby asses that the company has continued strong potential to absorb market share. We also asses that the company will invest more in remaining European and non-european markets; this will represent the larger share of future growth. As we outlined above, there are several dynamics that has affected the stagnancy of growth in its European markets. We expect this to yield significant results over years to come. Market Growth Per Geographical Area (MSEK) - Mr Green Source: Redeye Research, Mr Green 19

20 Mobile game utilization on the right path Continued Positive Development within Mobile Games Given Mr Green s distinct mobile strategy, the mobile casino sales become an increasingly important measurement, which indicates how well the mobile solutions are experienced by the customers. In other words, it means how well Mr Green s product development and marketing is interpreted by its customers. The company decreased its sales in relative percentages but increased in absolute figures in comparison to the previous quarter. As earlier indicated, there are further signs suggesting that the mobile sales will continue to grow significantly as a relative share during the coming years. The market for mobile games is expected to grow significantly in the coming years, with a turnover growth rate of 32.4 percent between 2013 and 2018 according to H2 Gaming Capital. This growth does not need to be net of the possible cannibalization likely to occur in the transition between desktop and mobile customers. The market is expected to grow considerably due to the transition of the physical to the online casino trend; it is therefore likely that the cannibalization will not necessarily be significant. In our opinion, the company has the platform, resources and management circumstances to be able to take part in this growth. Game distributors are also likely to increase their mobile games availability, which will become apparent for Mr Green in the long term. Mobile Growth Development Source: Redeye research, Mr Green The assertion that the company is decreasing its mobile presence is not relevant as revenue growth was realized in relation to an absolute increase in mobile revenues. Our previous estimates suggested that the company will obtain 50 percent of its revenue from the mobile segment by the end of 2016, and we retain this estimate. Especially since the company is now scaling its effort to become leading within the mobile scene. This development is of essential interest, as we believe that the mobile customers play more than the traditional desktop users, which will become apparent in game win in the foreseeable future. 20