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1 E 217E 218E COMPANY ANALYSIS 14 March 216 Summary Mr Green (MRG.ST) Increased marketing up ahead The Q4 report was largely in-line with our estimates, with positive deviations on the result level. The growth during the quarter was weak, compared to historical levels; however this was something we had accounted for because of to the platform change during the period. We expect to see an increase in marketing activity during the coming quarters, leading to a restoration of the growth path. The marketing has been on halt during H2, leading to the slower growth rates. We reiterate our Fair value estimate, in Base-case, of 61 SEK per share. On an adjusted basis, Mr Green looks deeply undervalued compared to peers. The high degree of insider activity, since the beginning of the year, increases our confidence in our valuation assessment and we see a significant potential from today's share price levels. List: Aktietorget Market Cap: 1,373 MSEK Industry: Betting/Entertainment CEO: Per Norman Chairman: Tommy Trollborg OMXS 3 Mr Green Jul 13-Oct 11-Jan Redeye Rating ( 1 points) Management Ownership Profit outlook Profitability Financial strength 7. points 9. points 6.5 points 7. points 6. points Key Financials E 217E 218E Revenue, MSEK ,2 1,143 Growth 36% 2% 17% 14% 12% EBITDA EBITDA margin 3% 4% 15% 19% 19% EBIT EBIT margin 1% 9% 8% 13% 15% Pre-tax earnings Net earnings Net margin -4% -4% 8% 12% 14% Dividend/Share EPS adj P/E adj EV/S EV/EBITDA Share information Share price (SEK) 38.3 Number of shares (m) 35.8 Market Cap (MSEK) 1,373 Net debt (MSEK) -21 Free float (%) 6 % Daily turnover ( ) 88 Analysts: Kristoffer Lindström Kristoffer.lindstrom@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, 1tr, 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 to +1 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 Low growth, but mostly in-line Mr Greens report for the fourth quarter was, more or less, in-line with our estimates, with some positive deviations on the result level. The company reported a Game win of 21 MSEK (estimate of 26 MSEK) and an EBITDA of 29 MSEK (we expected 25 MSEK). Mr Green: Deviation table Diff % MSEK Q3 Q4E Q4A We assumed that the low marketing during Q3 would lead to relatively flat turnover growth Game win % COGS Gross profit % Marketing expenses % Other expenses % EBITDA* % D&A % EBIT* % Gamewin growth q/q 4% 2% % Gamewin growth y/y 2% 18% 15% COGS % Sale 3% 3% 29% Marketing exp. % Sale 28% 37% 36% Other exp. % Sale 22% 21% 21% Gross profit margin 7% 7% 71% EBITDA margin 2% 12% 14% EBIT margin 12% 6% 8% Källa: Redeye Research *Adjusted for Items affecting comp. & Impairment On an annual basis the revenue grew by roughly 15%, quarterly wise the revenue stayed more or less flat. However, this was something we had accounted for as we assumed that the low marketing during Q3 would lead to a relatively flat turnover levels (compared to Q3). The primary reason behind the relatively prudent marketing (in relation to Game win) during Q3 was the upcoming platform change, which made Mr Green to hold back on marketing efforts. During Q4, the marketing was back on more normalized level, we expect marketing expenses (as part of sales) above 4% during the coming quarters to further drive the customer intake, activity, and deposit rates, leading to higher growth rates through 216 than H

4 Are insiders leading the way? We wanted to highlight the high activity amongst the company s insiders since the last report. The share has had a relatively weak performance since the start of the year, mainly driven by concerns about top-line growth. Our DCF-valuation, in Base-case, indicates a substantial potential from today s share price levels. We believe that an investor can find value in Mr Green, and it looks as insiders in the company agree with us. High insider buying along with relatively low share prices bodes well according to us Stock price and insider activity Insider volume (ksek) Mr Green Source: Bloomberg & Holdings The significant insider activity indicates that, in our view, the key personnel finds the stock as attractively valued given the prospects of the company, which gives us increased confidence in our valuation of the Mr Green. Insider activity in Mr Green Date Name Position Shares Value (ksek) Keld Knudsen CFO Malta subs Jesper Kärrbrink CEO Malta subs Bo Wänghammar Resign. CEO Malta subs Jesper Kärrbrink CEO Malta subs Jan Tjernell Chief Legal Officer Source: Holdings We applaud the fact that the newly appointed CEO of the Malta subsidiary, Jesper Kärrbrink, has acquired shares worth about SEK.7 million within the period of two weeks. Mr Kärrbrink has held earlier positions as the CEO of Svenska Spel and Eniro and has extensive experience of online and traditional gaming companies. Revoking the 215 Dividend In the report, it was announced that the Board of Directors proposed not to pay out a dividend for 215 as we have suggested in the previous analysis. We see this as a natural choice to pass the dividend for the benefit of longterm shareholders. 4

5 214-Q1 214-Q2 214-Q3 214-Q4 215-Q1 215-Q2 215-Q3 215-Q4 Game win Game win to deposit ratio (%) 213-Q4 214-Q1 214-Q2 214-Q3 214-Q4 215-Q1 215-Q2 215-Q3 215-Q4 Active customers Customer growth y/y Mr Green Customer and deposit growth The active customers during the quarter amounted to about 83.5 thousand. This corresponds to a growth on a quarterly basis of 13% and yearly 3%. The deposits totaled roughly SEK 551 million, down by 14% quarter on quarter but up 1% compared to last year. The customer base grew 13% on a quarterly basis and 3% yearly Active customers & Customer growth y/y % 2% 15% 1% 5% % -5% -1% Active customers Customer growth y/y Source: Mr Green & Redeye Research Game win amounted to about 37% of the deposits during the quarter, inline with previous quarters. We expect normalized levels in the region 35-37% going onwards. Game win & Game win to deposit ratio (%) % 4% 39% 15 38% 37% % 35% 34% 33% Game win Game win to deposit ratio (%) Source: Mr Green & Redeye Research 5

6 214-Q1 214-Q2 214-Q3 214-Q4 215-Q1 215-Q2 215-Q3 215-Q4 COGS % Game win Austrian betting duties % Game win Mr Green Austrian tax affecting COGS COGS, as % of Game win, amounted to 28.7% during the quarter; this corresponds to an increase of almost nine percentage points compared to Q The significant increase was mainly driven by betting duties in Austria and an increased presence in re-regulated markets. Given that the legal processes in Austria will most likely continue for an extended period to come, Mr Green is making ongoing provisions (from Q3 and onwards) for an amount corresponding to the taxation levels directly in the income statement. The tax in Austria is set at 4% of Gross game win, a rate too high for a functional market in our view. In the long-term, we believe the most re-regulated market will settle at tax rate in the region of 15-2% of Gross game win, like in the UK and Italy. We expect COGS as % of Game win in the region of 27-29% during 216 with a gradual increase as Mr Green increases their presence in re-regulated markets in the coming years. If Austria would settle for less conservative taxation legalizations, the COGS as % of Game win for Mr Green would probably decrease by roughly five percentage points. We, just like the company, will make the precautionary measure to account for a full taxation rate in Austria in our estimate. Mr Green still contests the obligation to pay tax; we will treat the event that the legal action would have a successful outcome as a value enhancing option but not account for it (when in doubt conservatism is the best medicine). COGS % Game win & Austrian betting duties % Game win Austrian We betting expect COGS duties as % of Game win 35% Game win in the region of 27-29% during 216 with 3% a gradual increase as Mr Green increases their 25% presence in re-regulated markets in the coming 2% years 15% 1% 5% % 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % COGS % Game win Austrian betting duties % Game win Source: Mr Green & Redeye Research 6

7 213-Q4 214-Q1 214-Q2 214-Q3 214-Q4 215-Q1 215-Q2 215-Q3 215-Q4 Game win growth q/q Marketing % Game win Mr Green Increased marketing activity coming up? As discussed earlier, Mr Green held back on their marketing activity during H2 216, primary Q3, which lead to a lower growth compared to historical levels during the end quarter of the year. Game win growth q/q & Marketing % Game win 16% 14% 12% 6% 5% We expect marketing investment above 4% of Game win in the coming quarters, which should generate growth rates 1% 8% 6% 4% 4% 3% 2% 2% % 1% -2% % Game win growth q/q Marketing % Game win Source: Mr Green & Redeye Research Marketing expenses could, in reality, be divided in maintenance marketing and growth marketing. The maintenance part is needed to sustain current revenue levels (enough to compensate customer churn) but won t lead to growth. We regard levels (in relations to Game win) in the region of 25-3% as maintenance and levels and 3%+ as market investments for further growth. As discussed earlier, with the new platform now in place we expect Mr Green to increase their marketing investment above 4% of Game win and thus returning to a healthy growth rate. 7

8 Product broadening and new markets After the period ended Mr Green announced that they will diversify their offering with a sportsbook and launch it during 216 (most likely H2 according to us). Mr Green states that many of their clients inquire the possibility of sports betting, and we see the diversification to betting on sports as a natural move for the company. Sports betting can also be used as an acquisition tool for new casino players, as the threshold for these players also to conduct casino gambling is lesser than contrariwise. The sportsbook offering will most likely start contributing to revenue levels by H2 216 Mr Green strategy is to increase their presence in re-regulated markets and in July the company acquired a local gambling license in the UK, one of the largest sports betting markets in the world. The launch of the sportsbook offering is most likely a strategic choice to take further advantage of the growth opportunity within the UK market. Both the Nordic and the UK sports betting markets are substantial and were estimated at EUR 932 million in the Nordic and EUR 1.8 million for the UK in Net game win during 215. Both the Nordics and the UK markets are expected to grow at an annual rate of 12% the coming years (H2 Gambling Capital). Game win per region Q1 214-Q2 214-Q3 214-Q4 215-Q1 215-Q2 215-Q3 215-Q4 Game win Nordic Game win Rest. Europe Game win Rest. World Source: Mr Green & Redeye Research We expect to see continued growth from the rest of Europe in the coming years with the entrance in the UK market and other re-regulated markets as significant contributors. Growth in the Nordic region has been slow We must highlight stagnation of growth within the Nordic region for the past two years. This is an effect of a larger focus on marketing efforts outside of the Nordics or an increasingly competitive environment is difficult to assess. We expect that an increased presence outside of the Nordics will drive the growth going onwards but also by an enhanced mobility activity will contribute to fuel growth further. 8

9 Mobile driving growth Increased gambling with the mobiles is a strong structural growth trend within the online casino market and most likely a significant contributor to Mr Green s growth the coming years. The growth of mobile gambling is primarily driven by the following factors: The online gambling market grows significantly faster than landbased gambling. Online gambling only stands for about 17% (H2Gambling Capital) of the total gambling market, and there is still large room for future growth. The transition to online gambling from land based is an important structural growth driver for the whole industry. Increased smartphone penetration leads to an increased usage of Internet entertainment such as mobile gambling. Online casino through the mobile reaches a larger customer base than websites. The threshold to start gambling is reduced through the mobile and the acceptance of gambling as an everyday entertainment increases, leading to a rise in the potential player base. The growth of mobile gambling is expected to be substantial the coming years with an annual growth rate of plus 2% (H2 Capital gaming). At The International Gaming Awards, Mr Green was awarded as the best Mobile operator of the year, a significant sign of an quality offering. The Mobile Game win for Mr Green has grown at a significant rate the last few years. We expect that the newly launched IOS and Android apps will drive the Mobile Game win growth rates even further with growth rates exceeding the markets. The threshold to start gambling is reduced through the mobile and the acceptance of gambling as an everyday entertainment increases, leading to an increase of players Game win web and mobile Q1 214-Q2 214-Q3 214-Q4 215-Q1 215-Q2 215-Q3 215-Q4 Source: Mr Green & Redeye Research Web Game win Mobile game win 9

10 Current Cash Situation Provides Stability Cash increased to SEK 19 million (SEK 139 million in the previous quarter) million will be paid during 216. 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 15-2% EBIT-margins in the longer-term. A listing on Nasdaq Stockholm will most likely decrease the valuation gap of Mr Green We have only made some minor adjustments to our estimates Mr Green Reveals Strong Shareholder Attention We expected its proposed listing to take place in 216 on Nasdaq Stockholm this will create conditions to converge the current price to its intrinsic value. Arguably, this should have been done earlier and the company is heading in the right direction in regards to this aspect. Subsequently, this will also open up M&A opportunities for the company hopefully, unleashing its full potential in a consolidating market. Estimate revisions It is in our opinion that substantial growth is still possible for Mr Green, however, due to the somewhat less intense turnover development, we have lowered our estimates for 216 to SEK 896 million (earlier 97). Added revenue and profitability support are expected by the sportsbook implementation later in the year. EBIT changes from SEK 77 million to 71 million as the company is improving its financial performance. Estimates MSEK Q1'15 Q2'15E Q3'15E Q4' Q1'16E Q2'16E Q3'16E Q4'16E 216 Game win growth 27% 21% 2% 15% 2% 9% 13% 13% 17% 13% COGS 21% 21% 3% 29% 25% 29% 29% 28% 28% 29% Marketing expenses 46% 35% 28% 36% 36% 35% 36% 35% 4% 37% Other expenses 2% 23% 22% 21% 21% 21% 21% 21% 21% 21% EBIT (%) 2.5% 12.8% -41.% 8.4% -5% 9.% 8.% 1.% 5.% 8% Source: Redeye Research, Mr Green 1

11 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 Our estimated CAGR amounts to roughly 12% between the years We believe that a continued high growth of mobile gambling (because of structural factors) will support the high growth rates. We model a gradual decline in EBIT margins, due to the entry into re-regulated markets, leading to an average margin of 13% through the forecast period. In the terminal year, we model an FCF growth of 4% and an EBIT margin of 11.5%, which might be a somewhat conservative assumption to make. Our terminal valuation indicates an exit multiple, based on EBIT, of 13x which is in-line with valuation levels of more mature/larger gambling companies. Our Fair value estimate, in Base-case, is unchanged at 61 SEK per share. We regard the valuation discrepancy as attractive given the current share price levels. Mr Green: Base-case Assumptions DCF-value CAGR Sales 12% WACC 1.2% EBIT margin (avg) 13% Net presenst value FCF 768 Net present value of Terminal 1246 Terminal EV 214 Terminal growth FCF 4.% Net debt 19 Terminal EBIT margin 11.5% Minorities Exit EV/EBIT multiple 13x Dividend correction DCF-value 2 24 Estimated Fair Value 61 Todays share price 39. Potential/Risk 58% Source: Redeye Research 11

12 Relative valuation The table below illustrates a comparison of comparable competitors: The above illustration loses significance as the company accelerates its high-growth trajectory pushing down profitability, we recommend viewing the adjusted table (in the section below) instead to recognize the underlying value of Mr Green. The growth numbers for its competitors includes acquisitions whereas Mr Green are organic. At a maturity stage The table below illustrates the company s relative value to the competition, at the maturity stage. 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 the market, in this example by the end of 215 or 216. This illustrates the company s attractiveness relative to its competitors, which have entered a maturity phase. Mr Green appears attractive on an adjusted basis, on all multiple comparisons The valuation of the company in the current year should, therefore, be increased by 1 to 15 percent, based upon comparable companies EV/EBIT for the current year. For 217, if growth occurs in accordance with our prognosis and legal circumstances do not develop against Mr Green, the stock has an upside potential of 2 to 225 percent. 12

13 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 to 2 points. The maximum score for a valuation key is 1 points. Management 7.p Rating changes in the report No changes in rating. We are able to place confidence upon the management team, given their value-adding contribution for the operations in the company. The company has delivered good growth as well as profitability. Ownership 9.p We perceive the significant ownership held by highly and relevantly experienced shareholders as positive. Retention of Mikael Pawlo and Henrik Berquist ownership in our thesis is important 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 and taxed. Profitability 7.p 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.p 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. 13

14 Income statement E 217E 218E Net sales ,2 1,1143 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 217E 218E 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) 1,13 1,82 1,16 1,234 1,366 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 1,13 1,82 1,16 1,234 1,366 Free cash flow E 217E 218E Net sales ,63 1,19 Total operating costs Depreciations total EBIT Taxes on EBIT NOPLAT Depreciation Gross cash flow Change in WC Gross CAPEX Free cash flow Capital structure E 217E 218E Equity ratio 66% 49% 55% 57% 56% Debt/equity ratio % % % % % Net debt Capital employed Capital turnover rate DCF valuation Cash flow, MSEK WACC (%) 1.2 % NPV FCF ( ) 32 NPV FCF ( ) 671 NPV FCF (226-) 997 Non-operating assets 19 Interest-bearing debt Fair value estimate MSEK 2178 Assumptions (%) Average sales growth 12.2 % Fair value e. per share, SEK 61 EBIT margin 15.7 % Share price, SEK 38.3 Profitability E 217E 218E ROE -4% -6% 14% 2% 23% ROCE -4% -6% 14% 21% 24% ROIC -5% -7% 23% 33% 47% EBITDA margin 3% 4% 15% 19% 19% EBIT margin -5% -5% 9% 13% 15% Net margin -4% -4% 8% 12% 14% Data per share E 217E 218E EPS EPS adj Dividend Net debt Total shares Valuation E 217E 218E EV 1, , , , P/E P/E diluted P/Sales EV/Sales EV/EBITDA EV/EBIT P/BV Share performance Growth/year 14/16e 1 month 3. % Net sales 18.8 % 3 month % Operating profit adj 12 month - EPS, just 3.4 % 99,999,999, 9. % Since start of the year % Equity -5.1 % Shareholder structure % Capital Votes Henrik Bergquist 18.7 % 18.7 % Hans Fajerson 16.6 % 16.6 % Fredrik Sidfalk 1.5 % 1.5 % Share information Reuters code MRG.ST List Aktietorget Share price 38.3 Total shares, million 35.8 Market Cap, MSEK Management & board CEO CFO IR Chairman Per Norman Simon Falk Frida Adrina Tommy Trollborg Financial information Q1 report April 29, 216 Q2 report July 2, 216 Q3 report October 28, 216 Analysts Kristoffer Lindström Kristoffer.lindstrom@redeye.se Redeye AB Mäster Samuelsgatan 42, 1tr Stockholm Growth E 217E 218E Sales growth 36% 2% 17% 14% 12% EPS growth (adj) 21% 3% 4% 69% 31% 14

15 Revenue & Growth (%) EBIT (adjusted) & Margin (%) E 217E 218E 6.% 5.% 4.% 3.% 2.% 1.%.% E 217E 218E 2.% 15.% 1.% 5.%.% -5.% -1.% Net sales Net sales growth EBIT adj EBIT margin Earnings per share Equity & debt-equity ratio (%) E 217E 218E E 217E 218E 1.% 9.% 8.% 7.% 6.% 5.% 4.% 3.% 2.% 1.%.% EPS, unadjusted EPS, adjusted Equity ratio Debt-equity ratio Sales division Geographical areas Conflict of interests Kristoffer. Lindström. owns shares in the company Mr Green: No 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. 15

16 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 27 has been subject to the supervision of the Swedish Financial Supervisory Authority. 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