bet-at-home — A cautious tone ahead of German regulation

BAH is an online sports betting and gaming company, licensed in Malta and headquartered in Dusseldorf, Germany. It was co-founded in 1999 in Austria by Franz Ӧmer and Jochen Dickinger, who have a 1.0% and 2.8% stake respectively. The company listed in Germany in 2004 and in 2009, Betclic Everest, a private French online gaming and sports-betting group, acquired a 49.2% stake. At end FY19, Betclic Everest had a 51.7% stake.

BAH’s core markets are Germany, Austria and Eastern Europe. Most of these countries have limited formal gaming regulation and BAH operates through its sports betting and gaming licences issued in Malta. The company pays taxes and VAT as applicable, but regulatory risks are very high and there is particular uncertainty surrounding the impact of regulation on German e-gaming (estimated 20% of EBITDA). We provide a fuller analysis of German regulation on page 7.

BAH’s shares have declined by 35%year to date with regulatory ambiguity in Germany a major investment consideration. At present, there is a great deal of uncertainty on the legality of German e-gaming and, in our view, a major catalyst for the shares would be concrete evidence of positive regulation in Germany.

The most straightforward way to value BAH is via a peer group comparison and Exhibit 9 compares it to many of the European gaming operators. For FY20e, BAH trades at 12.3x P/E and 7.4x EV/EBITDA, which is towards the top end of the peer group.

We note that although its closest competitor in Germany is bwin (GVC), GVC’s scale and retail business make the overall comparison slightly less relevant in our view. Within the group, we believe the nearest peers are the Scandinavian players (Kindred, Betsson), which operate throughout Europe and have relatively high exposure to grey markets (unregulated, but not illegal).

We have also performed a DCF with a terminal growth rate of 2% and a terminal EBITDA margin of 20%, vs 24.5% in FY19. Using a WACC of 8.0% produces a value per diluted share of €48. Our valuation assumes there are no major negative changes to the current trading environment. If we flex the WACC to 9% to account for a higher risk profile, our DCF would be €42. Our core €48 DCF valuation equates to 11.1x EV/EBITDA and 17.2x P/E for FY20e, which is clearly at the top end of the peer group, but still equates to a dividend yield of 5.0% for FY20e.

FY19 GGR were flat, not helped by the lack of major sporting events (vs FIFA world cup in FY18) as well as IP blocking in Switzerland from mid-July 2019 (c 2% of GGR). For FY20, the company should benefit from UEFA Euro 2020, although the impact of Switzerland’s IP blocking will only be lapped in H220 and BAH has provided revenue guidance of €120–132m for FY20.

As required by the regulator, BAH has recently applied for a sports-betting licence in Germany and our forecasts assume that German sports-betting will be affected by new licence restrictions (eg wagering limits and no in-play betting). Importantly, we assume that there is no interim ban on German e-gaming ahead of next year’s regulation and we further assume that the tax rates will not increase going forward.

Altogether, for FY20 we forecast a GGR decline of 10.7% and EBITDA of €26.2m as the company continues to feel the impact of the closure of the Swiss market, as well as continuing challenges in Poland. For FY21 we forecast 2% GGR growth as restrictions in Germany are offset by general market growth.

In line with recent trends, we forecast overall marketing spend of c 27.5% of GGR and our forecast EBITDA margin is 20.4% for FY20. Altogether we estimate that adjusted EPS will decline by 34% in FY20, before returning to c 5% annual growth for FY21 and FY22.

BAH ended FY19 with net cash of €46.8m (excluding estimated €8m customer balances) and has proposed a €2 dividend to be paid in May 2020 (this is lower than our previous estimate of €4). In line with the company’s cautious outlook, we have also lowered our dividend estimates for FY21 to €2.4 (from €4 previously).

Following the publication of FY19 results, our estimate changes are shown in Exhibit 1.

BAH was founded in Austria in 1999 as a pure online sports betting operator. Benefiting from the growth of the online gaming market throughout Europe, its portfolio has expanded to include online casino, live casino, Vegas games, poker and virtual sports. The current mix of GGR between sports and e-gaming is 41/59%, demonstrating successful cross-selling into gaming. The BAH brand name is very strong and its 5.2 million customers are testament to an attractive product offering and competitive odds.

In terms of technology, BAH has developed its own front-end (CRM etc) capabilities and outsources much of the ‘back-end’ to other platform providers. These include Net Entertainment (casino, slots), Microgaming (sports), Evolution gaming (live casino) and Playtech. As is typical for gaming companies, these arrangements are based on a revenue-sharing agreement, with costs reflected in ‘other operating expenses’. One major advantage of the Betclic relationship seems to be better purchasing power as the third-party provider fees appear to be slightly lower than peers.

The company’s core markets are Germany (35% of gross win), Austria (c 30%) and Eastern Europe (17%). A few of its smaller markets are fully regulated (eg UK), but formal licensing has not yet been introduced in many of its main markets, where it pays taxes and VAT as applicable and operates under its EU licence (Malta). Regulatory risks are high, as shown by IP blocking in Poland and Switzerland and there is continued uncertainty surrounding the future of e-gaming in Germany (see pages 7 and 8).

For FY19, gaming and betting volumes grew by 0.9% to €3,217m, with GGR flat at €143.3m. The lack of growth was predominately due to the absence of any major sporting events (vs FIFA World Cup in FY18), as well as IP blocking in Switzerland, which became effective in mid-2019.

bet-at-home.com is one of the largest sports-betting providers in Europe. In 2019, the sportsbook comprised 41% of GGR. During the year, sports bets were placed on more than 473,000 events in over 80 types of sport, ranging from football to tennis, volleyball and ice hockey to motorsports. Bets range from single bets to combi-bets or system bets and c 60% of the sportsbook is from in-play. BAH’s products are available in 11 different languages.

In 2019, GGRs (Hold) for the product sports betting amounted to €59m.

E-gaming comprises 59% of total GGR, indicating a successful strategy to cross-sell from sports to e-gaming. The product suite includes casino, poker, Vegas games and virtual sports. This strategy is similar to peers such as bwin (GVC) and, by contrast, pure casino operators are rarely able to meaningfully replicate the cross-sell in the other direction (from casino to sports).

According to H2GC, the European online sports betting and gaming market is expected to grow at a 6.5% CAGR between 2018 and 2023, to c €33bn. Europe comprises approximately half of the global online betting and gaming market.

As shown in Exhibit 4 below, a key driver for online gaming growth has been increased mobile penetration rates and H2GC estimates mobile usage in Europe for gaming will rise from 41% in 2018 to 55% in 2023. In this context, BAH derived 60% of its GGR in FY19 from mobile users and is clearly a beneficiary from increased mobile penetration.

Gaming legislation varies widely across Europe and BAH is focused mainly on grey markets, which are characterised by ambiguous regulation. By gaming volume, these markets comprise Germany (35% of gross win), Austria (c 30% of gross win) and Eastern Europe (17% of gross win).

In terms of NGR, we estimate that Germany comprises 30% (20% gaming and 10% betting) and Austria comprises 24% (14% gaming and 10% betting). See below for further details on both these markets.

Given the lack of formal legislation across most of its markets, BAH typically operates through its sports-betting and gaming licences issued in Malta. Under EU law, these licences are effective in all EU member countries due to the freedom of movement within the EU, as long as online gaming and sports betting is legal in the respective member country.

In some markets (such as Poland), BAH has been subject to IP blocking for e-gaming, which is generally considered a violation of EU law. Switzerland has also blocked online gaming and BAH exited the market in mid-2019. Because Switzerland is not part of the EU, it is therefore not bound by the EU free-trade laws and international operators are not likely to dispute the legality of this ruling.

Germany is BAH’s largest market, comprising 35% of total turnover. At the moment, it is a grey market, where online gaming companies operate through either a Schleswig-Holstein licence or another European licence (typically Maltese) and pay VAT on casino revenues and a turnover tax on betting. To date, legislation has been very confusing and there has been a high level of disagreement among Germany’s member states. The most recent industry consensus is that there will be full regulation of both sports and e-gaming from July 2021, although there are a number of restrictions and tax implications.

In March 2019, German state ministers approved amendments to the Interstate Treaty, establishing an interim sports betting licensing regime from January 2020. The amendments also lifted the cap on licences in preparation for a future agreement on a more permanent regime from June 2021. It is important to note that these licences carry restrictive terms, particularly an interim ban on e-gaming (see below) and restrictions on live play betting, as well as the setting of monthly wagering limits for players (€1,000 per month across all sites).

Despite these restrictive terms BAH has applied for sports-betting licences and the State of Hesse has stated that it has already achieved a high channelisation rate (ie moving from unregulated to legal). It is notable that Mr Green (William Hill) has ceased its betting offering in Germany and bet365 has applied for a betting licence and ceased all e-gaming operations in Germany.

The biggest area of confusion surrounds online gaming (c 20% of BAH’s total net gaming revenues), with online casino and poker technically illegal under the current reading of the Interstate Treaty. In March 2019, the draft amendments maintained a federal ban on online casino set in 2012, with the exception of Schleswig-Holstein (see below) and in December 2019, the interior minister of Hesse (the state in charge of licensing) confirmed that online gaming will be prohibited as part of fulfilling the temporary betting licence obligations. Somewhat to the contrary, an announcement in January 2020 confirmed all 16 states have agreed in principle that the permanent regime (from 1 July 2021) would include e-gaming (casino and poker), not just betting as originally envisaged. Although this is clearly far better than a total ban, there will be staking limits and potential tax increases and there are still doubts over the legality of e-gaming in the interim period (from January 2020 to June 2021).

We estimate that c 20% of BAH’s net gaming revenues are derived from German e-gaming and therefore the ability to operate with legal certainty throughout Germany would be a huge positive for the company. We note that German e-gaming is subject to 19% VAT; we expect this rate to be reviewed in due course. In comparison, sports betting (c 10% of BAH’s NGR) is taxed at 5% of turnover, which is equivalent to c 45% tax on GGR.

BAH is subject to a couple of e-gaming related injunctions (Berlin, Federal State of Hesse), although it has continued to offer casino products in those regions as it believes the injunctions are a violation of EU law. There has been no conclusive result to any of these injunctions.

There is limited formal gaming regulation in Austria and online gaming is dominated by Casino Austria, which is partially state owned. In February 2018, the Austrian Ministry of Finance published a draft bill on the amendment of gambling laws. This draft envisaged that online gaming providers without an Austrian licence would be blocked by ISPs from October 2018. However, the draft was subsequently repealed days later and no amendment has since been published.

The government intends to include online sports bets in the gambling law, with the tax income directed towards sport. A new regulation for online casinos in Austria is also being discussed but there is no clarity on when a new draft law will be published.

bet-at-home.com was founded in 1999 in Austria and listed on the Frankfurt Stock Exchange in 2004, with the founders selling 3.5m shares. In 2009, Betclic Everest (Betclic) acquired a 49.21% stake from the founders and it holds a 52% stake. Betclic is a leading French group specialising in online gambling and sports betting, for whom BAH provides regional strength in Central/Eastern Europe.

bet-at-home.com is based in Düsseldorf. The company holds 100% of bet-at-home.com Entertainment, which is based in Linz, Austria, and is essentially the main operating company in charge of the technology. The business in Malta is part of bet-at-home.com and Maltese licences enable BAH to operate throughout the EU, due to freedom of trade.

BAH’s management board consists of two co-CEOs who report directly to a three-member supervisory board, some of whom are closely linked to the parent company, Betclic.

Unlike many of its European peers, BAH does not operate any share incentive schemes for employees and management and the only member of the board and management team that holds stock is co-CEO Franz Ӧmer, with a 1% stake. Instead, BAH’s major shareholder (Betclic) has approved variable compensation for the members of the management board.

As detailed above, the key sensitivity for BAH is the changing regulatory framework within the sector and across all markets. The most drastic scenario is where governments implement IP blocking (eg e-gaming products in Poland and Switzerland) or where taxes are significantly increased. At present the main regulatory risk comes from restrictions and uncertainty within the Germany market. Additional sensitivities include:

BAH’s shares have declined 35% in the year to date, with regulatory uncertainty in Germany the main negative drag on sentiment (apart from general market malaise due to coronavirus). For the industry in general, it is clearly positive that Germany looks set to regulate both sports betting and e-gaming, but the restrictions surrounding regulation could result in lower revenues (eg if in-play betting is not allowed). Furthermore, should the coronavirus result in the cancellation of sports fixtures, this will impact all sports betting companies. Our forecasts do not assume this will happen.

The most straightforward way to value BAH is via a peer group comparison and Exhibit 9 compares it to many of the European gaming operators. Following the recent share price declines across the sector, BAH trades towards the top of peer group on a P/E and EV/EBITDA basis, although its 7% dividend yield is higher than average for the group.

Although its closest competitor in Germany is bwin (GVC), GVC’s scale and retail business make the overall comparison slightly less relevant in our view. Within the group, we believe the nearest peers are the Scandinavian players (Kindred, Betsson), which operate throughout Europe and have significant exposure to grey markets.

We have also performed a DCF with a terminal growth rate of 2% and a terminal EBITDA margin of 20%, vs 24.5% in FY19. Using a WACC of 8.0% produces a value per diluted share of €48. Our core forecasts assume there are no major negative market changes (such as further IP blocking and/or higher taxes in core markets, specifically in Germany). We also assume no major sports match cancellations due to the coronavirus. If we flex the WACC to 9% to account for a higher risk profile, our DCF would be €42.

Our core €48 DCF valuation equates to 11.1x EV/EBITDA and 17.2x P/E for FY20e, which is at the top end of the peer group, but still equates to a dividend yield of 5.0% for FY20e.

FY19 results were above guidance, with flat GGR compared to FY18. Over the past few years, BAH has managed to maintain stable levels of EBITDA (€33–36m) despite the ongoing tax increases and other regulatory challenges. This includes IP blocking in Poland and Switzerland. However, guidance for FY20 (€120–132m GGR and €23–27m EBITDA) indicates a lower level of EBITDA and we have lowered our FY20 revenue forecast by 10% and our EBITDA forecast by 20%.

The upcoming regulation of the German market will bring clarity but is also likely to negatively impact revenues in the near term, due to responsible gambling measures (see above). Including these restrictions, we forecast a GGR decline of 10.7% in FY20 before returning to growth of 2% thereafter, as the company participates in general market growth. We have assumed there is no ban on German e-gaming ahead of full regulation. On our estimates, German e-gaming comprises 20% of NGR and therefore a ban would likely impact EBITDA by c 10% for both FY20 and FY21.

Our forecast EBITDA margin is 20.4% in FY20 and 20.9% in FY21 and we forecast an adjusted EPS decline of 34% in FY20 before returning to a 5% growth in FY21.

Despite the increased tax charges and historically high dividend payments, BAH has a robust balance sheet, with no debt and net cash of €46.8m at end FY19 (excluding estimated customer deposits of €8m). The company will provide full balance sheet details with the annual report in late March and therefore our FY19 balance sheet figures are largely estimates at this point.