bet-at-home — Consistent cash generation

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 currently 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 FY18, 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. Given the importance of regulation to the investment thesis, we provide a fuller analysis of the regulatory framework on pages 6–11.

BAH’s shares have rebounded 28% ytd, but are still down c 60% from the highs in 2017, with regulatory concerns continuing to weigh on sentiment. With Switzerland implementing e-gaming IP blocking in July, investors are looking for comfort in the larger markets. In our view, a major catalyst for a further re-rating would be concrete evidence of positive regulation in Germany and Austria.

The most straightforward way to value BAH is via a peer group comparison, and Exhibit 9 on page 14 compares it to many of the European gaming operators. For FY19e, BAH trades at 14.9x P/E and 10.9x EV/EBITDA, which is at the top end of the peer group, but its 8.5% dividend yield is over 70% higher than the peer average.

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) that operate throughout Europe and also 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 23%, vs 25% in FY18. Using a WACC of 8.0% produces a value per diluted share of €67. Our valuation assumes that 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 €58.7. Our core €67 DCF valuation equates to 12.8x EV/EBITDA and 17.1x P/E for FY19e, which is clearly at the top end of the peer group, but still equates to a dividend yield of 7.5% for FY19e.

Since 2015, BAH has increased net gaming revenues (NGR) and EBITDA by 5% CAGR, despite the ongoing tax increases and other regulatory challenges. This includes a 1.4% decline in gross gaming revenue in FY18, which was predominately a result of the IP blocking in Poland.

Although the impact of the Polish regulation has now been lapped, we note that there are no major sporting events in FY19 and the legal situation for both online sports betting and gaming in Switzerland is very unclear (we assume BAH will exit the market in mid-2019). We therefore forecast a 4.9% decline in GGR for FY19, returning to a 2% growth in FY20, as BAH participates in general market growth. Our forecasts assume no changes in regulatory regimes in key markets and assume no major new markets are entered. In line with recent trends, we forecast overall marketing spend of c 27.5% of GGR and our forecast EBITDA margin is 22.9% for FY19 and 23.4% for FY20. Altogether we estimate that EPS will decline by 15.5% in FY19, with a CAGR of 4.1% for FY19–21.

Our FY19 revenue (€136.3m) and EBITDA (€31.2m) forecasts are in line with the company guidance of FY19 revenues of €130–143m and an EBITDA of €29–33m.

BAH ended FY18 with net cash of €70.6m (excluding customer balances) and has proposed a €6.50 dividend to be paid in May 2019. We forecast a continued high dividend distribution of €5.0 per year (€35m). This equates to a c 130% payout ratio, which we believe is sustainable for the foreseeable future, given the high net cash position and consistent operating cash flow of c €25m per year. We further believe that the cash distribution is an important feature for the parent company (Betclic) and therefore the generous dividend policy is likely to remain in place in the near term. Clearly this is a finite game, and therefore at some point in the longer term, the payout ratio would need to return to less than 100%.

The key sensitivity for BAH is regulatory uncertainty across all core markets. The most drastic scenario is a situation where governments implement IP blocking (eg e-gaming products in Poland and Switzerland) or where taxes are significantly increased (15% to 21% in the UK, which is a less important market for BAH). More generally, online regulators have been imposing fines and/ or injunctions on a number of companies for a variety of different reasons (social responsibility measures, AML, advertising breaches, etc) and it is very likely that BAH will continue to receive occasional fines (currently the company is disputing injunctions in the Netherlands and Germany).

The online gaming market is also maturing in many European markets and there is a risk that the company will not be able to grow at the expected rate without increasing marketing spend.

At a corporate level, we note that the company is majority owned by Betclic and although this certainly brings many benefits (in the form of better purchasing power, etc), it is important to note that a majority shareholder may not always have the same interests as outside investors.

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 is 42% sports and 58% e-gaming, demonstrating successful cross-selling into gaming. The BAH brand name is very strong and its five 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 (36% of gross win), Austria (30%) and Eastern Europe (19%). 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 2017’s IP blocking in Poland for e-gaming and similar measures to be enforced in Switzerland from July 2019. We provide a fuller analysis of regulatory risks across the main markets on pages 6–11.

For FY18, gaming and betting volumes grew 0.4% to €3.188bn, while GGR fell by 1.4% to €143.3m. The decline was predominately due to the closure of the Polish e-gaming market, which was not fully offset by strong FIFA World Cup revenues. We note that in a few of its smaller markets, BAH is unable to cross-sell into gaming (eg Poland), which may have an impact on the product mix going forward.

bet-at-home.com is one of the largest sports betting providers in Europe. In 2018, the sportsbook comprised 42.2% of gross gaming revenues. During the year, sports bets were placed on more than 411,000 events in 83 types of sport, ranging from football to tennis, volleyball and ice hockey on 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 2018, gross gaming revenue (Hold) for the product sports betting amounted to c €60.5m, which equates to a sports win margin of 10.8%. This level is considerably higher than international peers such as Kindred and Betsson and broadly in line with GVC, whose subsidiary bwin is BAH’s closest competitor.

E-gaming comprises 57.8% 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. It is interesting to note that this strategy is similar to peers such as bwin (GVC) and that pure casino operators are rarely able to meaningfully replicate the cross-sell in the other direction (ie from casino to sports).

According to H2 Gambling Capital (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. We note that 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 that mobile usage in Europe for gaming will rise from 41% in 2018 to 55% in 2023. In this context, BAH derived 54% of its GGR in FY18 from mobile users, and is clearly a beneficiary from increased mobile penetration.

Across Europe, there are a myriad of different regulatory frameworks in place, for both e-gaming and sports betting. These frameworks have largely determined the size of the market, number of participants and level of illegal gambling:

Given the regulatory framework 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. There are also many inconsistencies prevalent in the German market.

In this section, we discuss the regulatory challenges across the company’s core markets.

There is a high degree of inconsistency within the German regulatory framework and a reasonably high risk of change. After many years of confusing legislation and disagreement among member states, Germany remains a grey market, where companies operate through another European licence (typically Maltese) and pay VAT on casino revenues and a turnover tax on betting. BAH currently pays betting tax/VAT on all of its German revenues.

Sports betting: Inconsistency throughout

In Germany, BAH was among the 20 successful applicants for a sports betting licence in 2014. However, this process was subsequently suspended after being challenged by operators who failed to secure licences and therefore licences were never granted. In 2017, a proposed Second Amendment to the State Treaty on Gambling would have seen all 35 operators (including BAH) that fulfilled the minimum criteria in the licensing procedure receiving sports betting licences in 2018. However, the proposed Second Amendment was never ratified, with a growing number of states calling for more significant changes to the State Treaty on Gambling than those presented by the Second Amendment.

Recently, ruling coalition parties in the German state of Hesse have said they will withdraw from the proposed German Interstate Treaty on Gambling (IST) if no progress is made on ratification by the end of 2019. Discussions are underway between the states and the final draft of the newest regulations is expected to be unveiled at the German prime ministers’ conference, taking place on 21 March 2019.

Four key states could potentially implement their own regulatory regimes, regulating not only sports betting but also online casino. These states are Schleswig-Holstein, North Rhine-Westphalia, Rhineland Palatine and Hesse.

E-gaming: Injunctions but trading continues

The biggest area of confusion surrounds the issue of online gaming, with online casino and poker technically illegal under the current reading of the Interstate Treaty, a ruling upheld in the recent case against 888 (one of BAH’s competitors). BAH has also been subject to a number of e-gaming related injunctions (Berlin, Federal State of Hesse and Schleswig-Holstein), although in all cases the company 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.

It is also possible that a move to a formalised sports betting regulated regime could kill off the larger online gaming sector and therefore the majority of operators continue to lobby for the creation of a legal framework of licensing for casino and poker as opposed to a ban.

There is limited formal gaming regulation in Austria and online gaming is dominated by Casino Austria, which is partially state owned. Similar to many other EU jurisdictions, offshore operators such as BAH have been able to participate via EU licences and we estimate that foreign operators account for c 60% of the Austrian market.

On 27 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 new 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.

Until 2017, BAH operated in Poland via its EU licence for both sports betting and e-gaming. However, in April 2017, an amendment to the gambling laws of Poland became effective and the state monopoly (Totalizator Sportowy) was granted exclusive rights to operate remote casinos and poker. Although the enforcement measures (such as IP and payment blocking) are generally considered a violation of EU law, the appeals by international operators to the European Court of Justice have been unsuccessful. We therefore assume there will be no liberalisation of the Polish e-gaming market.

In terms of sports betting, private providers are permitted to apply for a sports betting licence, although the 12% turnover tax is generally considered highly punitive. Following the amendments in 2017, BAH initially decided not to apply for a licence, although it has now done so. Other recent entrants include Cherry, Fortuna, Superbet and Typiko.

As a result, we expect that the contribution from Poland will be minimal in the near term, since the high turnover tax, combined with the inability to cross-sell to gaming, will limit revenues in our view.

In June 2018, a Swiss referendum resulted in local Swiss casinos receiving exclusivity to apply for e-gaming licences for six years, essentially barring all international operators. The new Money Gaming Act came into effect in January 2019 and international operators are required to agree a deal with a local land-based operator in order to continue serving players. We understand that BAH does not yet have any such deal.

In addition, the act requires Swiss ISPs to block international sites, with the ISPs being compensated for doing so. Unlicensed operators will be blacklisted from July 2019.

Since 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 recent ruling.

We note the GVC has pulled out of Switzerland entirely, on the basis that sports betting has been prohibited from January 2019. At this stage, however, the blacklisting situation remains unclear and we assume that BAH will operate until it is no longer possible (likely mid 2019).

After many years of negotiations, the Dutch Senate has recently voted to adopt the Remote Gaming Bill, which will enable foreign gaming companies to receive a local licence. The new gaming legislation is expected to enter into force during Q320 at the earliest, which is when licence applications will be accepted. As expected, the gaming tax will be 29% of GGR, which is significantly higher than many other regulated markets and will certainly have an impact on net revenues.

Accompanying the new law is a proposal for a two-year cooling-off period for illegal operators. It is currently unclear which operators are considered “illegal” although we note that BAH has previously received fines for unlawful advertising and operating without a licence and might therefore be included in the “illegal list”. While the conditions of the cooling-off period remain uncertain, our understanding is that this is not a complete blackout period.

In December 2018, there were seven states that had already gone ‘live’ (Delaware, New Jersey, Mississippi, West Virginia, New Mexico, Rhode Island and Pennsylvania). Eilers & Krejcik estimates that these early-mover states could be generating $1.4bn by 2021 and that a further wave of states could add an additional $7.5bn of GGR in three years.

Market access is the critical starting point in the US, with access predominately controlled by land-based casinos as the primary licence holders. Regulations often allow retail before mobile and the number of mobile licences/skins per casino will vary state by state.

Since the repeal of PASPA in 2018, many US operators have partnered with European suppliers for their technology infrastructure and players such as Kambi, SBTech, GVC and William Hill have all entered the market. At this stage, it is unclear how BAH might benefit from the US market opening, because it also relies on third-party platforms, but it is possible that its marketing and front-end technology could be attractive to some US players.

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 SAS (Betclic) acquired a 49.21% stake from the founders and it currently holds a 52% stake. Betclic is a leading French group specialising in online gambling and sports betting, for which BAH provides regional strength in mid and 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. Compensation is based on share price performance; in 2017, for example, management each received a c €1m bonus.

As we explain in the European gaming section, 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 (15% to 21% in the UK). Additional sensitivities include:

BAH’s shares have rebounded 28% ytd, but this is still down c 60% from the highs in 2017, with regulatory concerns continuing to weigh on sentiment. With Switzerland implementing IP blocking in July, investors are looking for comfort in the larger markets. In our view, a major catalyst for a further re-rating would be concrete evidence of positive regulation in Germany and Austria.

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. As indicated below, BAH trades at the top end of the peer group on a P/E and EV/EBITDA basis, but its dividend yield is very attractive (over 70% higher than peers).

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) that operate throughout Europe and also 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 23%, vs 25% in FY18. Using a WACC of 8.0% produces a value per diluted share of €67. Our core forecasts assume that there are no major negative market changes (eg further IP blocking in core markets). If we flex the WACC to 9% to account for a higher risk profile, our DCF would be €58.7.

Our core €67 DCF valuation equates to 12.8x EV/EBITDA and 17.1x P/E for FY19e, which is clearly at the top end of the peer group, but still equates to a dividend yield of 7.5% for FY19e.

Since 2015, BAH has grown net gaming revenues and EBITDA by a 5% CAGR, despite the ongoing tax increases and other regulatory challenges. This includes a 1.4% decline in gross gaming revenue in FY18, as a result of the IP blocking in Poland, which did not fully offset momentum from the FIFA World Cup.

Although the impact of the Polish regulation has now been lapped, we note that there are no major sporting events in FY19 and the IP blocking in Switzerland will affect the company from mid 2019. We therefore forecast a 4.9% decline in GGR for FY19, returning to a 2% growth in FY20. This is in the context of overall European GGR growth of 6.5% per year.

Our forecast EBITDA margin is 22.9% in FY19 and 23.4% in FY20, and we estimate that after a 15.5% drop in EPS in FY19, earnings should grow by a 4.1% CAGR to FY21.

Our FY19 forecasts are roughly at the mid-point of company guidance of FY19 revenues of €130–143m and EBITDA of €29–33m.

BAH has a very robust balance sheet, with no debt and net cash of €70.6m at FY18 (excluding customer deposits of €7.7m). We note that the high cash balance is partly due to the fact that all loans to Betclic have now been paid back to BAH and dividends are effectively an ongoing means of returning the cash to the parent company.