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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 [email protected] 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: [email protected]

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

21 Financial Estimates Minor estimate adjustments It is in our opinion that strong growth is still possible for Mr Green, however, due to the somewhat less intense turnover development, we lower our estimates for the year to SEK 801 million (earlier 824). This thereby also lowers the operating profit somewhat to 80 million for the year (earlier 87) excluding the effect of Austria from Q3 and onwards, given the lower turnover. The reported will however be entirely different with the precautionary measure taken along with impairment of Social Thrills at approximately SEK -42 million. A longer investment period will be required before the company achieves profitability in emerging markets; the potential is nevertheless significant at a greater maturity. Fundamentally, the investment case for Mr Green has not changed since the inception of this analysis it has gotten better in the sense of de-risking outgrowing an Austrian market (160 m) each annum with profitability. Other costs have increased due to expenses related to Austria, Italy and the United Kingdom license. The company has not shown indication of growth convulsion. Growth for the mobile segment has been decent, likely in both Scandinavia and the rest of Europe from a yearly perspective which further affirms our perspective regarding future growth. More importantly, the circumstances necessary for further growth are in large for a majority of its markets currently in Mr Green s favour. The estimates below now look worse than ever but are not even close to the truth as the items included for the current quarter is from now on of non-recurring nature. Including Austria, the actual earnings rate for the current revenue level is still north of SEK 25 million for the longer term. Estimates MSEK Q1'14 Q2'14 Q3'14 Q4' Q1'15 Q2'15E Q3'15E Q4'15E 2015E Game win 154,2 161,4 168,5 174,8 659,0 195,2 194,8 201,6 209,6 801,2 growth 42% 41% 36% 28% 37% 27% 21% 20% 20% 22% COGS 18% 18% 18% 20% 18% 21% 21% 30% 30% 25% Marketing expenses 40% 37% 35% 47% 40% 46% 35% 28% 38% 37% Other expenses 18% 22% 22% 23% 21% 20% 23% 22% 21% 22% EBIT 25,3 25,5 28,5-110,5-31,1 4,9 25,0-82,7 10,5-42,3 (%) 16,4% 15,8% 16,9% -63,2% -5% 2,5% 12,8% -41,0% 5,0% -5% Source: Redeye Research, Mr Green Costs of services sold were primarily affected by the Austrian Tax introduction, United Kingdom tax, as well as the VAT liability incurred in the EU, which resulted in gaming taxes of SEK 25.4 million (SEK 7.7 million in the previous quarter excluding Austria). Excluding Austria, the current quarters figure was increased to SEK 8.1 million which can indeed mean that it took further market share in the UK market during the quarter. 21

22 The earlier estimate of UK revenues stands at 90 to SEK 110 million (15 percent tax rate on GGR) in revenues for the year. This market alone may grow by SEK 75 million during 2016, but it will take time before the company can achieve decent profitability, which we do not see as a problem, in relation to the large long-term potential of this market. Thereafter, marketing costs will drop in relation to game win, when the market matures and higher ROI is achieved in the marketing efforts. The company has shown its capability in delivering just that, especially in a competitive market, which indicates that the company has an effective product mix, marketing mix and has good competence in performing crossborder investment projects. Margin Explanations Affecting the Valuation In comparison with our earlier analysis, two important matters need to be explained. Mr Green uses the NYX OGS system, which is certainly fine for game management. Though, we believe that the company can cut costs by developing and implementing its own systems. It is likely that such a move would decrease costs of services sold by 1-2 percent of turnover. Perhaps there are even more benefits in terms of a more responding casino important in this regard is that the NYX OGS system is standardized and not built on Mr Green s code (which was built from scratch) which can cause unnecessary interactions with the website slowing it down. Another interesting matter is that the related transactions which amount to 2-4 million per year has decreased from previous 6-8 millions reflecting the conversion of these into personel expenses and less costs. It is likely that these will actively deliver results, and growth is something we are not against in which case they deserve payment. However, this performance should be seen in context of actual numerical performance and in turn relative to the competition to the extent possible. At a more mature phase Mr Green s marketing expense relation is expected to converge to the norm The single largest factor which is driving the difference in the EBIT margin compared with the competition is the marketing costs. Mr Green is currently investing between percent in marketing, while Unibet has stagnated at 29 percent over the last five years. For Betsson, if one was only to account for B2C revenues which generate marketing costs, marketing costs then amount to around 30 percent of revenue during the last two years. In mature markets, marketing expenses can amount to 20 percent of turnover, depending on the level of competition. We therefore interpret Mr Green s marketing costs as a sign of strength, as their organic growth is also significantly greater than that of the competition. This suggests that Mr Green s marketing strategy is more effective as well as sustainable than its competitors. 22

23 Both of the competitors Betsson and Unibet utilized consultants extensively, and these expenses, in the case of Betsson, are accounted for as other external costs. Mr Green is now reporting personnel, activation of costs as well as consulting costs as separate expenses, compared to previously which saw them grouped as other costs. We believe that these expenses will drop over time, relative to turnover, as the need for personnel will gradually diminish as the company reaches a mature stage. For costs of services sold, where game distributor fees are included, Mr Green is in-line with Betsson, at 18 percent, calculated as a five-year average. This may be affected by new agreements between game distributors and taxes, which in Mr Green s case is possible, considering the high growth, as an example, Unibet has a lower costs of services sold on average. Write downs are also greater than the competition, for the moment, but it is justified as the company is also growing at quicker rate than the competition, and is therefore utilizing greater capital. Over time, write down levels should be between 5 to 6 percent, similar to the competition s historical figures. The company s distinct mobile investment makes CAPEX estimates somewhat higher than the write downs, which is positive, as the company must be able to differentiate and retain its position as one of the best online casinos. In the long term however, CAPEX is likely to mirror the write down levels. CAPEX remains high for the right reason, but is expected to be in-line with the write-downs in the long term. Company tax is estimated to decline gradually, to 5 percent in the maturity stage, which is relative to the Maltese tax of 5 percent. When the company reaches maturity, we assume that the company will take advantage of the taxation benefit, through profit distribution, which will occur as the holding company in Malta, which retains the earnings from its operations, distributes the money to the parent company. 23

24 Valuation A discounted cash flow model in combination with a relative valuation is the foundation for the valuation of the stock. Growth driven by expected high mobile growth DCF Valuation Growth is expected to gradually decline from approximately 25 percent in 2015, to about 10 percent from Our somewhat lowered short term assumptions are compensated by a somewhat increased long term estimate. This decision is due to the fact that we do not perceive a fundamental change in Mr Green s circumstances. The growth rate is to a greater extent possible, due to the strong growth experienced by the mobile segment for online games, which amounts to a CAGR of 32.4 percent, from 2013 to 2018 according to H2 Gaming Capital. Even bonuses, personnel and marketing expenses relative to incomes should decrease over time, and we assume an EBIT margin of 20 percent by the end of We even apply a surcharge to the operating expenses (likely attributable to costs of services sold) of 3 percent from 2016, due to expenses associated with changed regulations in new as well as existing markets. In concurrence, we also perceive that competition will increase, as more countries alter their regulations, which will decrease margins but induce greater growth over time. We have taken substantial margin of safety from long term margins, comparing Unibet and Betsson s percent operating margins. Mr Green is expected to grow somewhat quicker from 2018 onwards, at a rate of approximately 10 percent, as the company has taken part in the mobile expansion and can consolidate competitors, to keep a higher growth rate than the market. Operating capital is likely to become somewhat negative, considering the growth phase the company is in. The current expansion will likely drive development costs higher, to later mirror CAPEX in the maturity phase, or to become less than the write downs. WACC remains unchanged and amounts to 10.2 percent. Our intrinsic value therefore remains at SEK 61 per share. Mr Green is expected to continue to grow quicker than the market for a long time At a bear case, the stock is likely to be traded at around SEK 30 per share, and approximately SEK 118 per share in a bull case. 24

25 Relative valuation The table below illustrates a comparison of comparable competitors: Peer Valuation Growth P/E EV/Sales EV/EBIT MSEK Revenues Companies Market value Net debt 2015E 2016E E 2016E E 2016E 2015E 2016E Unibet % 20% Betsson % 22% % 5% Bwin.Party % 1% Medel % 12% Mr Green % 21% * 2014/ Adjusted before Austria impairments but after earnings of Austria + after one-time costs *Redeye research, Bloomberg The above illustration loses significance as the company accelerates its high-growth trajectory pushing down profitability, we recommend viewing the adjusted table instead to recognize the underlying value of Mr Green. The growth numbers for its competitors includes acquisitions where as Mr Green is organic. During the quarter Betsson as well as Unibet continue its multiple expansion, both in terms of P/E and EV/EBIT which reflects the appreciation which has occurred for these companies, due to a perceived decline in risk. We are sceptical of the rationale behind this increasingly risky perception, and believe that Mr Green as well as Cherry to be more rational alternatives, at lower risk and greater organic growth, even when the risk aversion increases. The liquidity, awareness and the growth rate perceptions of the company is significantly lower than Betsson and Unibet, and in addition, these companies are perceived by the market as generally safe, diversified and high dividend yield. We believe that within a few years, even Mr Green s characteristics will be perceived as the competition is today (if they have not already been acquired). Shareholders therefore have a significant upside potential in a growing company such as Mr Green. The operating margin is now significantly lower than what they can achieve in the long term, and 2015E estimates are thus misleading compared with the long term income potential. Looking in to 2016E (on an adjusted basis), we believe that the upside potential is at least percent, together with the background that the company will likely continue to grow at a quicker rate than its competitors, which should be rewarded even at this stage. We believe that the difference in multiples compared to the competition will decline in time, as the company expands to a number of new markets, increases its regulated presence, and begins to show higher margins. But nevertheless, a sustainable long-term revenues growth is far more important as you gradually convert it to margins. 25

26 The table below illustrates the company s relative value to the competition, at the maturity stage. Peer Valuation Growth P/E EV/Sales EV/EBIT MSEK Revenues Companies Market value Net debt 2015E 2016E E 2016E E 2016E 2015E 2016E Unibet % 16% Betsson % 15% % 5% Bwin.Party % 2% Medel % 10% Mr Green % 21% * 2014/ Adjusted before Austria impairments but after earnings of Austria + after one-time costs *Redeye research, Bloomberg Mr Green appears attractive on an adjusted basis, on all multiple comparisons The maturity stage means the company matures in the majority of its existing markets increasing its overall margins and subsequently growths at a phase similar to market, in this example by the end of 2015 or This illustrates the company s attractiveness relative to its competitors which has entered a maturity phase. The valuation of the company in the current year should therefore be increased by 100 to 150 percent, based upon comparable companies EV/EBIT for the current year. For 2016, if growth occurs in accordance with our prognosis and legal circumstances do not develop against Mr Green, the stock has an upside potential of 200 to 225 percent. This is under the premise that the company growths at the rate which we have determined to be possible, to be able to justify a gradually increased valuation. The dividend payment potential for 2016 is closer to percent in a mature phase, which, in our minds, is totally unjustified, it should be traded at around 5 percent sustained earnings potential ( upside potential). It should be noted that the company will continue to absorb market share even at the end of 2016, which makes the actual long term income potential thereafter a decent safety margin pillar. The safety margin is significant compared to Unibet/Betsson s dividend rate of 3-4 percent, even by There are no reasons as to why the company could not achieve an operating margin of percent, only as an online casino, we choose however, due to safety margin reasons, to take a lower operating margin due to the possible negative consequences of a changed regulatory climate, as well as due to increased competition. In turn, had the income potential level become sustainable, the company s income potential could in that case been undervalued by up to 50 percent, which is in its' own another safety margin in this analysis. Underlying Earnings Power The earnings power or the cash flow which can be distributed to the shareholders with maintaining its current competitive standing is important to evaluate carefully. Previously the margins at a maturity phase have been discussed which are important in order to determine the longterm fundamental value. To use EV/EBIT is more relevant to us than the use of EV/EBITDA in this case. The reason is that continued growth will require greater levels of CAPEX than depreciation which therefore overestimates the underlying 26

27 long-term earnings power. Concurrently, EBITDA is misleading for investors as it is benefited by the activated costs (which is an actual cost). In that case, the income potential would also have been overestimated, and the multiple expansion would thereby also have been overestimated on an EV/EBITDA basis. EBIT does indeed, for Mr Green, reflect more accurately the long-term earnings power, as of now, but comparing this to the all essential cash-flow components is important. Another important parameter in the forensic process is following the amount of capitalizations; if it is higher than depreciation, EBIT would be overestimated. The inverse of the former holds true as well, which is the state of the company today. Thus, we have somewhat of a security margin on a cash flow basis. Taxation of around 5 percent must always be taken into account in determining the long-term earnings power. Fundamentally speaking, in light of the earnings power, this correlated quite well on the EBIT level plus risk premium and taxation. Thus, the following rationale we presented at the beginning of this analysis can be presented: What would these main owners likely accept in such a case? It is likely that a couple of years growth would need to be capitalized to sell the operations, with one of the strongest brands in Scandinavia, in a fiercely competitive climate, with an all the more increasing presence in Europe. For example a revenue level of 1.2 billion, with a potential EBIT of SEK (EBIT margin of percent) million with a valuation based upon sustainable earnings power 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. 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 revenue is still not seen as an income ceiling for Mr Green, 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 of the largely untapped total market for European online casinos will reaching approximately SEK 30 billion in In practice, we expect high growth until the end of 2017, when the company s mobile and geographic expansion will become less certain. Then it is possible that the maturity phase is achieved to some extent. It is likely that the growth will not only be induced by the mobile implementation, but due to the transition from physical gaming stores to online games. Approximately 90 percent of the total global gambling market exist offline, and we believe that this will gradually decrease due to strong underlying 27

28 growth in the mobile sector, and due to the general growth in internet usage. The yield potential is significant at the maturity stage The single largest factor for multiple expansion is thereby due to margin alterations at the maturity stage, as well as the perceived risk when the company decides to distribute the majority of its cash flow. The company pay-out is 4-5 percentage points more than the competition in relation to the stock price already in Clearly, Mr Green s higher risk in relation to the competition today partly justifies a risk premium, but not to such an extreme extent. This difference in dividend payment will gradually decline, as Mr Green s dividend payment capacity reserves a strong attraction compared with the competition, and all in all, without any greater legal risk. The dividend policy is currently 50 percent of its net cash flow, and we expect that the company will pay-out a greater share of the profit. We believe that the share market will adjust the apparent yield differences between the competitors. This should lead to an increase in the stock price as the growth for a company such as Mr Green is appreciated; during all the while it is significantly higher than the competitions. In addition to this, the legal risk will gradually decrease as the company increases its presence in countries where Betsson/Unibet currently hold greater market share. If the legal climate worsens in the maturity phase, it would result in a higher risk premium for all companies, which will justify a lower valuation. This means that today s valuation multiples for gaming companies are less relevant. The changing regulations trend in Europe is leading to greater revenue but lower margins. This should result in lower political risks, which should lead to higher valuation multiples similar to the multiple analysis for the competitors which was reported above. Another ground for multiple expansion is the fact that the mix of countries is diverse. This is to prevent an extraordinary risk for higher taxation, which would eliminate the margins. This process will take time, but we believe that this multiple expansion will be reflected over time. It should be mentioned that a cannibalization scenario exists, as we explained earlier, which could eliminate current margins. Essentially, this would contribute to a prolonged multiple contraction. After the self-declaration in Austria, the company has been valued as if the company would lose a majority of its growth potential in the near future, which would be an irrational reaction, as it would then not reflect the growth that Mr Green has the potential to achieve in all of its current markets in the next two to three years. The importance for this valuation is not the short term growth, but rather the existing growth potential, competitiveness of Mr Green s brand and mobile solutions. The stock is valued as if a multiple contraction has occurred in practice, due a worse legal climate at concern level, which has apparently not occurred, and that growth would be significantly worse than in our scenario. When, not if according to us, the earnings starts gradually presenting itself 28

29 until its maturity phase the company will incrementally gain more recognition and be more appreciated of its intrinsic value. Primary Investment Catalysts Investment catalysts are the factors which will drive the share value. Primary investment catalysts are the factors, in our opinion, the factors which are most likely, while the secondary catalysts are less likely. A multiple expansion in a mature phase, led by a margin increases in combination with a higher yield will close the price-value gap. This holds as growth occurs as predicted and the competitive climate does not intensify to an abnormal degree. Mr Green s ability to continuously innovate current and new products will be a key parameter to parry the oncoming competition and create longterm value. The implementation of its own or a third party sports book, as well as poker for its current customer base could be an important component to enhance the potential of market growth and valuation going forward. Stock repurchase is suitable when the company appears to be undervalued could possibly lead to diminishing gap between price and value In the short term, an activated aggressive stock repurchase program could close the difference between current price and the underlying value. The company needs to adopt an aggressive dividend policy in the maturity stage, if the market is to be able to reduce the multiple differences in relation to the competition; we believe that this is not entirely unlikely. A yield of 10 percent for 2016 is not impossible with the current low margins, which is the most significant in the industry, if the company wishes to distribute a portion of its capital. The legal climate will not change to the extent where the risk premium for the companies increases. Evidence suggests that the planned regulatory changes should decrease the perceived risk in the foreseeable future, which strengthens the long term base case scenario. Although, taxes will initially hit the margins. Mr Green will likely be listed at NASDAQ OMX Midcap during 2016 and the value will become more transparent when more investors and institutions begin to trade the company, multiple and dividend differences will diminish in comparison to the competition. This move is also an important part in improving shareholder communication. The company begins to acquire, for the purposes of consolidation to absorb market share quicker. It is important that this occurs within the right conditions for the stock holders, while creating new unique brands. 29

30 Secondary investment catalysts Advantageous conditions for altered regulations in Spain, and standalone markets in Asia could create significant possibilities for the company s margins and growth. Management succeeds, especially with Garbo.com and other new brands that work to gain market share for niche and non-niche markets. Changed regulations could lead to a different competitive climate One of the greater risks concerning the altered regulations that are expected to occur and has occurred in Europe is that competition becomes so fierce that in a future scenario, growth due to new players will not compensate for the increased competition. This transition could lead to cannibalization between the market operators, as new operators see potential in margins and growth. This would suggest that it would become more difficult for existing operators to retain the same yield provided by investments in marketing and personnel in today s market. It is therefore beneficial that the company already has a strong position in a reregulated market, and will thereby not need to compensate to such an extent an increased competitive climate. It will also be able to be act as a consolidator in this scenario. 30

31 Investment Case Mr Green and Co is in a growth phase, and is growing quicker than the competition. This has resulted in higher than normal costs, as the company is investing considerable resources in marketing to attract customers, especially in emerging markets. Adjusted for high marketing expenses which are incurred due to less established markets requiring greater marketing efforts, and taking into account the growth in the mobile segment and in the industry overall, Mr Green s stock appears to have an attractive value proposition. The company is already profitable, and revenue is growing at a greater pace than expenses. It is important that the regulatory climate is beneficial and its innovation DNA is maintained, if the company is to retain its growth potential. The company is likely to increase its international sales in the coming years, which could lead to further legal issues, but a decreased total risk in relation to the turnover. A possible change in gaming allowance or a sentiment in one of the markets could be a significant factor in the company s expansion and the coming year s results. The implementation of national licenses can, in the short term, negatively affect the company due to lower margins, this would however be compensated by greater turnover. When the company enters the maturity phase, we assume a lower operating margin than that of the competition, of about 20 percent, to account for the effects of the changed regulatory environment and increased levels of competition, which appears attractive today due to the high potential yield in relation to its competitors. It is likely that the company will achieve EBIT margins of percent when it enters the maturity phase, which is not expected by the market. It is important that percent growth is achieved in the coming years, if the share value is to be reflected accordingly. We believe that the company has significant possibilities to expand in already established as well as new markets, as Mr Green still has a smaller share in all the markets. Markets which are more restrictive in relation to the operation of online casinos, such as USA, Spain and Asia, could counteract growth in the maturity stage. The high growth in the online casino market, combined with high margins makes the online casino industry an attractive one, which leads to greater levels of competition and possibly lower margins. Mr Green s future growth is likely to be dependent upon the company s continued brand establishment, which differs to the competition, as well as its investment in the mobile segment. The company is therefore heavily invested in the mobile market, to be able to capitalize on its growth. Mr Green s investment case still lies in a continued good growth as well as dividend pay-out potential in the maturity phase, in relation to the competition, which should lead to multiple expansion. Even a possible listing on Nasdaq OMX main lists should drive the share price towards the intrinsic value, as more funds would be able to trade. 31

32 Bear Case Scenario SEK 30 per share In a worse scenario than expected, Mr Green does not achieve the desired effect from its marketing expenses, and growth slows over time due to greater competition, and the profitability falls due to new gaming taxes. The company later changes its listing to NASDAQ OMX Mid CAP at the end of 2017, which impels the company to be priced more in line with the competition. In this scenario, the company succeeds in absorbing 4 percent of the expected online casino market in Europe, by 2018, due to the earlier substantial investments made in the mobile segment. Mr Green is met with tough competition amongst mobile platforms internationally and has difficulties in establishing momentum in a myriad of user-friendly and bonus focused competitors. Failed overseas expansions contribute to increasing marketing expenses, as well as lower margins. We assume that the dividend level will gradually increase by the maturity stage in 2018, and the company tax will gradually diminish to 5-6 percent, similarly to that of the competition. The scenario results in an average growth of 17 percent per year, between 2014 and During the period of 2014 to 2017 the company will grow at an average of 28 percent per year, as the company can capitalize upon the growth in the mobile segment. The operating margin will be 12.2 percent during the period of 2014 to During the period of 2014 to 2017 the operating margin will initially be 11 percent, to later amount to 14 percent in 2018 as the company enters the maturity stage. A weighted value of SEK 30 is obtained. The discount rate for the scenario is 10.2 percent. The likelihood of the case is 15 percent. Base Case Scenario SEK 61 per share Marketing expenses decline in the established countries and the bonus programs are adjusted, which gradually makes the EBIT margin closer to 25 percent by The company changes its listing to NASDAQ OMX Mid Cap by end 2016, which results in a pricing more in-line with the competitors. The scenario assumes a successful and sustainable growth in sales in future overseas ventures. With a viable brand, the company can also maintain higher margins as well as growth during the period of 2014 to Mr Green will grow quicker than the market with a distinct mobile niche focus in the foreseeable future, and the company s margins will gradually begin to match the competitors long term margins. In this scenario, the company can achieve a market penetration of 6.4 percent in Europe by 2018, which will lead to a sales level of about 2.1 billion in In 2018, it is expected that even the mobile penetration in Europe will weaken, which will lead to slower growth, as it will then exceed 78 percent, which can be compared with 52 percent in Garbo is well established in its niche market, which will contribute to greater growth after Social Thrills is still not accounted for in the growth or hypothetical take over. 32

33 The company is expected to reach maturity in 2018, as the competition will then increase and the growth in the mobile segment will diminish. Furthermore, the ongoing re-regulations lower the margins over time, as well as growth in the short term. We therefore provide for a greater scope for negative margin alterations, but concurrently raise them in the long term perspective. We assume that the dividend pay-out level will gradually increase as the company enters the maturity stage in 2018, and that taxation will gradually diminish to 5-6 percent, similar to that of the competition. An average revenue growth rate of 21 percent per annum for the period of 2014 to 2022 is assumed. During the period of 2014 to 2017, a higher growth rate of 31 percent is assumed. The operating margin amounts to an average of 15 percent during the period of 2014 to 2022, and 19 percent for the period 2018 to The discount rate is 10.2 percent, which results in a share price of SEK 61 per share. The likelihood of the scenario is 60 percent in our opinion. Bull Case Scenario SEK 118 per share In a successful scenario, Mr Green will grow quicker than the market through their well-placed mobile solutions and effective marketing strategy. Niche projects will help in attracting new customers without further substantial investment requirements in the coming years and will create synergies in the operations. The company switches to the NASDAQ OMX Mid Cap listing already by the mid-2016, which will allow the company to be priced more in line with the competition. Mobile solutions complement the PC market and concurrently continue the transition from the physical game stores to online casino. The company is also successful in maintaining the same marginal benefit for the expenses incurred in securing new customers as well as emerging markets. In this scenario, the company absorbs 8 percent of the European market by Social Thrills, Garbo as well as hypothetical new projects are expected to increase growth during the period , which is to some extent compensated by negative regulatory outcomes. The company retains its level of marketing costs at a high level until 2017, when the company gradually increases these costs to 30 percent. Growth will average at 28 percent per year, between 2014 and 2022, and 44 percent for the period 2014 to We assume a higher averaged operating margin of 20 percent during the period 2014 to We also assume that the dividend pay-out level is gradually increased at maturity phase in 2018, and taxation is gradually reduced to 5-6 percent, similar to that of the competitors. The discount rate is 10.2 percent, and likelihood of the scenario is calculated to be 25 percent. It provides a weighted value of SEK 118 per share. 33

34 Summary Redeye Rating The rating consists of five valuation keys, each constituting an overall assessment of several factors that are rated on a scale of 0 to 2 points. The maximum score for a valuation key is 10 points. Rating changes in the report Management 7.0p We are able to place confidence upon the management team, given their value-adding contribution for the operations in the company. Despite the fact that the company delivers good growth as well as profitability, we would like to see more shareholder friendly initiatives and transparency. Ownership 9.0p We perceive the significant ownership held by highly and relevantly experienced shareholders as positive. Retention of Fredrik Sidfalk and Henrik Berquist ownership in our thesis is important in going forward. We do however believe that the company could benefit from an institutional owner which would complement the ownership structure. Profit outlook 6.5p The sales model is scalable and profitable. We also perceive that the underlying market will continue to grow, and the unique brand as well as mobile strategy will provide a degree of competitiveness in comparison to the competition. We are, however, uncertain of to what extent Mr Green and other dynamic operators will be able to retain profitability margins and future growth as the market becomes more saturated. Profitability 7.0p The cash flow is very strong and we do not see any signs that company is utilizing a greater amount of capital than required. This criterion is hurt by the significant amount of goodwill. We do however not perceive it to pose a risk today. Financial strength 6.0p The company is debt free and has a strong capital base which is expected to grow in line with the profitable growth. The reasoning for the relatively low score is due to the size of Mr Green and the politically unstable gaming market that the company operates in. 34

35 Income statement E 2016E 2017E Net sales ,193 Total operating costs EBITDA Depreciation Amortization Impairment charges EBIT Share in profits Net financial items Exchange rate dif Pre-tax profit Tax Net earnings Balance E 2016E 2017E Assets Current assets Cash in banks Receivables Inventories Other current assets Current assets Fixed assets Tangible assets Associated comp Investments Goodwill Cap. exp. for dev O intangible rights O non-current assets Total fixed assets Deferred tax assets Total (assets) 947 1, ,135 Liabilities Current liabilities Short-term debt Accounts payable O current liabilities Current liabilities Long-term debt O long-term liabilities Convertibles Total Liabilities Deferred tax liab Provisions Shareholders' equity Minority interest (BS) Minority & equity Total liab & SE 947 1, ,135 Free cash flow E 2016E 2017E Net sales ,193 Total operating costs Depreciations total EBIT Taxes on EBIT NOPLAT Depreciation Gross cash flow Change in WC Gross CAPEX Free cash flow DCF valuation Cash flow, MSEK WACC (%) 10.2 % NPV FCF ( ) 203 NPV FCF ( ) 965 NPV FCF (2025-) 861 Non-operating assets 155 Interest-bearing debt 0 Fair value estimate MSEK 2184 Assumptions (%) Average sales growth 9.7 % Fair value e. per share, SEK 61 EBIT margin 15.4 % Share price, SEK 37.4 Profitability E 2016E 2017E ROE 8% -4% -6% 12% 21% ROCE 9% -4% -7% 12% 22% ROIC 9% -5% -8% 16% 29% EBITDA margin 21% 3% 6% 15% 19% EBIT margin 13% -5% -5% 8% 13% Net margin 12% -4% -5% 7% 12% Data per share E 2016E 2017E EPS EPS adj Dividend Net debt Total shares Valuation E 2016E 2017E EV 1, , , , ,037.2 P/E P/E diluted P/Sales EV/Sales EV/EBITDA EV/EBIT P/BV Share performance Growth/year 13/15e 1 month -1.6 % Net sales 28.7 % 3 month -3.6 % Operating profit adj 12 month EPS, just 27.6 % Since start of the year Equity % Shareholder structure % Capital Votes Hans Fajerson 19.4 % Henrik Bergquist 18.7 % Fredrik Sidfalk 12.0 % Martin Trollborg 5.5 % Mikael Pawlo 5.0 % Guntis Brands 3.1 % Tommy Trollborg 2.8 % Karl Trollborg 2.7 % Henrik Stridsman 1.7 % Anette Rasch 1.5 % Share information Reuters code MRG.ST List Aktietorget Share price 37.4 Total shares, million 35.8 Market Cap, MSEK Management & board CEO CFO IR Chairman Per Norman Simon Falk Frida Adrian Tommy Trollborg Financial information Q1 report February 19, 2016 Capital structure E 2016E 2017E Equity ratio 79% 66% 60% 67% 67% Debt/equity ratio 0% 0% 2% 0% 0% Net debt Capital employed Capital turnover rate Analysts Philip Skogby [email protected] Redeye AB Mäster Samuelsgatan 42, 10tr Stockholm Growth E 2016E 2017E Sales growth 52% 36% 22% 21% 23% EPS growth (adj) 96% 21% -2% 2% 102% 35

36 Revenue & Growth (%) EBIT (adjusted) & Margin (%) ,0% ,0% E 2016E 2017E 50,0% 40,0% 30,0% 20,0% 10,0% 0,0% E 2016E 2017E 10,0% 5,0% 0,0% -5,0% -10,0% Net sales Net sales growth EBIT adj EBIT margin Earnings per share Equity & debt-equity ratio (%) E 2016E 2017E 4,5 4 3,5 3 2,5 2 1,5 1 0,5 0 0,9 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0, E 2016E 2017E 2,0% 1,5% 1,0% 0,5% 0,0% -0,5% EPS, unadjusted EPS, adjusted Equity ratio Debt-equity ratio Sales division Geographical areas Conflict of interests Philip Skogby owns shares in Mr Green: Yes Redeye performs/have performed services for the Company and receives/have received compensation from the Company in connection with this. Company description Mr Green is currently a online casino focused company. The online casino has grown immensely during the last few years due to its scalable brand and effective marketing strategy. 36

37 DISCLAIMER Important information Redeye AB ("Redeye" or "the Company") is a specialist financial advisory boutique that focuses on small and mid-cap growth companies in the Nordic region. We focus on the technology and life science sectors. We provide services within Corporate Broking, Corporate Finance, equity research and investor relations. Our strengths are our award-winning research department, experienced advisers, a unique investor network, and the powerful distribution channel redeye.se. Redeye was founded in 1999 and since 2007 has been subject to the supervision of the Swedish Financial Supervisory Authority. 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