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Gaming Realms — Update 6 May 2016

Gaming Realms — Update 6 May 2016

Gaming Realms

Analyst avatar placeholder

Written by

Gaming Realms

Building momentum

Final results

Travel & leisure

6 May 2016

Price

20.00p

Market cap

£51m

US$1.45/€1.26/£

Net cash (£m) at 31 December 2015

2.3

Shares in issue

256.9m

Free float

67%

Code

GMR

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.4)

(2.4)

(40.3)

Rel (local)

(2.7)

(6.7)

(33.5)

52-week high/low

34.5p

18.2p

Business description

Gaming Realms creates, develops and markets interactive next-generation online gambling and social games delivered via mobile, tablet and desktop computers. It listed on AIM via a reverse takeover (of Pursuit Dynamics) in August 2013.

Next event

AGM

June 2016

Analysts

Eric Opara

+44 (0)20 3681 2524

Jane Anscombe

+44 (0)20 3077 5740

Gaming Realms is a research client of Edison Investment Research Limited

Gaming Realms’ 2015 final results show a business that continues to build momentum, as revenues more than doubled to £21.2m (2014 pro forma: £9.8m). Growth is being driven by its real money and social gaming (including licensing) verticals, which were up 362% and 294%, respectively. Gaming Realms also recently announced that it has extended its licensing deal with Scientific Games to land-based gaming machines as part of its strategy of taking the Slingo brand into adjacent markets. 2015 adjusted EBITDA losses fell by 30% to £4.1m and the Q1 trading update (revenues up 100% y-o-y) supports our view that the company can break even at the EBITDA level this year.

Year end

Revenue
(£m)

EBITDA*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/14**

11.2

(7.8)

(5.0)

0.0

N/A

N/A

12/15

21.2

(4.1)

(2.2)

0.0

N/A

N/A

12/16e

40.0

0.8

(0.0)

0.0

N/A

N/A

12/17e

65.0

11.6

3.8

0.0

5.3

N/A

Note: *Normalised (and diluted EPS), excluding exceptional items, amortisation of acquired intangibles and share-based payments. **15-month period to December 2014.

Results in line with expectations

Gaming Realms’ 2015 revenue (£21.2m) and EBITDA loss (£4.1m) were broadly in line with both its previous guidance and our own forecasts (£21.5m and £4.0m respectively). The slight difference in the revenue was largely as a result of slower than expected game launches at the end of 2015 in the social vertical, which was largely offset by a lower marketing spend. Its proprietary Grizzly platform continues to perform strongly, with 81% of players playing on mobiles and the customer cost per acquisition (CPA) of £79 comparing favourably with its peers.

Early success with high-margin licensing strategy

Gaming Realms’ Q1 trading update revealed early traction in its efforts to maximise the commercial value of the Slingo brand and it now has licensing deals in place with both Zynga in social gaming and Scientific Games in scratch cards and gaming machines. Management reports that there continues to be a good pipeline of potential future deals. While the announcement of such deals is likely to be somewhat lumpy, we believe that the high-margin nature of the revenues coupled with further operational efficiencies as the company continues to scale are supportive of our view that it can move to a positive EBITDA position this year.

Valuation: Momentum suggests attractive value

2017 continues to be the first year during which we expect meaningful profitability. As a result, we believe 2017 valuation comparisons are instructive. On our forecasts, Gaming Realms trades on a 2017e EV/EBITDA valuation of c 4.2x. This is less than half the average of some of its more established peers. We believe that this discount should begin to materially close following further confirmation that the present business momentum is being maintained, offering the potential for significant share price appreciation.

2015 results highlights and Q116 trading update

2015 results

Gaming Realms’ 2015 revenue of £21.2m was broadly consistent with the guidance provided in its 27 January 2016 trading update. A breakdown of those revenues details real money gaming revenues that were in line with our forecasts at £10.8m, while marketing services were slightly ahead at £7.8m (versus our £7.5m estimate). Social Gaming revenues fell short of our forecasts at £2.5m (£3.2m forecast) with the shortfall largely as a result of a couple of delayed game launches. These games were launched in beta mode at the end of last year and as a result did not benefit from a fully scaled marketing campaign. Management reports that it is happy with the performance that these games have shown in recent months.

Gaming Realms reported a normalised EBITDA loss of £4.1m, fractionally behind our £4.0m forecast as the effects of the slightly lower than expected revenues and higher admin costs, which were mitigated by the lower marketing spend.

Effective data driven marketing continues to be one of Gaming Realms’ competitive advantages and the company reported that it achieved a customer CPA of £79. The fact that many of Gaming Realms’ players are still relatively new means that it is still difficult to ascertain their ultimate lifetime values. Our analysis suggests that lifetime values should prove to be significantly higher than the £125 average revenue per player seen in 2015 as players engage for longer periods. Strong growth in depositing player numbers means player numbers were heavily weighted towards the second half of the year, meaning that many players registered significantly less than a full year of available playing time.

2015 operational progress

Gaming Realms made significant operational progress during 2015; key milestones included:

■

Successful fund-raising: Gaming Realms completed a £12.5m fund-raising to fund the acquisition of the GameHouse social gaming business together with Slingo IP and additional games.

■

Launch of proprietary Grizzly platform: Gaming Realms launched its proprietary made-for-mobile Grizzly, which has demonstrated KPIs ahead of those the company achieved on third-party platforms. The company successfully migrated the PocketFruity brand onto the Grizzly platform, which has subsequently delivered improved performance metrics.

■

Social game launches: The Slingo Blast and Lucky Streak social games were launched towards the end of 2015. While primarily a revenue generator in its own right, the Slingo Blast game also helps to introduce additional players to the Slingo format through its freemium business model. These can subsequently be converted to real money players in regulated markets such as the UK.

Q116 trading update

Gaming Realms released a Q116 trading update alongside its full year results. The company has made an encouraging start to 2016, with revenues up 100% to £7.5m on the same period last year and up 7% against the seasonally stronger fourth quarter of 2015. Real money gaming revenues were up 128% to £4.2m (Q115: £1.8m), while social and licensing revenues jumped 643% to £2m (Q115: £0.3m), reflecting the aforementioned social game launches and early success in Gaming Realms’ strategy of realising greater commercial value from the Slingo brand IP. While it is still early, we are encouraged by the potential for Slingo-related licensing revenues to add incrementally higher-margin revenues. The recently announced extension of its deal with Scientific Games will see the Slingo brand rolled out across Scientific Games’ land-based gaming machines globally, including the US, the UK and Italy.

Q116 operational highlights

■

Slingo licensing deals: Licensing deals were announced with both Zynga and Scientific Games during Q1 and Gaming Realms continues to explore further opportunities to leverage the brand.

■

Freemantle and Endemol licensing deals: Licensing deals were signed for the Britain’s Got Talent (BGT) and Deal Or No Deal (DOND) brands. A BGT branded gaming website utilising the Slingo game format was launched during Q1 (DOND followed in April). Management is pleased with the early traction that both websites have had.

■

White-label business disposal: Gaming Realms announced the disposal of its Dragonfish platform based white-label skins in February (discussed in detail in our February update). This was designed to enable it to focus its resources on games played through its Grizzly platform, where it achieves a higher return on investment.

■

81% of real money players on Grizzly playing via mobile: Gaming Realms set out to be a ‘mobile-first’ developer and marketer of real money and social games. To that end, it is pleasing to see the company achieve market-leading mobile game player rates.

2016/17 outlook and forecasts

We have slightly reduced our 2016 revenue forecast from £42.5m to £40.0m to reflect our expected growth from the Q116 revenue base as indicated by the trading update. Our 2017 revenue forecasts remain unchanged. We have also slightly tweaked our cost forecasts to better reflect the scaling up of the business and to reflect the slightly differing cost profile resulting from the earlier sale of the white-label business. We continue to expect Gaming Realms to achieve EBITDA profitability in 2016. Our revised 2016 and 2017 EBITDA forecasts of £0.8m and £11.6m, respectively, are down slightly from our previous forecasts of £1.4m and £12.0m, largely owing to higher operating and admin costs, which are partly mitigated by a lower marketing expense.

Exhibit 1: Recent results and estimates

£m

2014 (12m)

2014 (15m)

H115

H215e

2015

2016e

2017e

Real money gaming

1.62

2.67

4.18

6.62

10.80

24.50

35.50

Social gaming and licensing

1.10

1.18

0.05

2.49

2.54

8.00

20.50

Marketing services

5.42

7.38

3.72

4.12

7.84

7.50

9.00

Other

 

 

0.03

Revenue

8.14

11.23

7.95

13.26

21.21

40.00

65.00

Marketing expense

(8.77)

(10.21)

(5.05)

(6.46)

(11.51)

(16.00)

(23.40)

Marketing % revenue

107.8%

90.9%

63.5%

48.7%

54.3%

40.0%

36.0%

Operating expense

(1.26)

(2.06)

(1.77)

(2.45)

(4.23)

(8.80)

(11.70)

Operating expense % revenue

15.5%

18.3%

22.3%

18.5%

19.9%

22.0%

18.0%

Gaming tax est

(0.24)

(0.40)

(0.63)

(0.87)

(1.50)

(3.63)

(5.27)

Gaming tax % real money gaming revenue

15.0%

15.0%

15.0%

13.2%

13.9%

14.8%

14.8%

Other admin expense

(4.51)

(6.38)

(3.32)

(4.76)

(8.08)

(10.80)

(13.00)

Admin % revenue

55.4%

56.8%

41.8%

35.9%

38.1%

27.0%

20.0%

Adjusted EBITDA

(6.64)

(7.82)

(2.82)

(1.29)

(4.11)

0.77

11.63

Adjusted EBITDA margin

-81.6%

-69.6%

-35.5%

-9.7%

-19.4%

1.9%

17.9%

Source: Gaming Realms, Edison Investment Research. Note: Estimated gaming tax is calculated as 15% of real money gaming revenues; Marketing services revenues are stated net of the 15% UK POC tax, introduced on 1 December 2014.

Balance sheet and cash flows: Gaming Realms had net cash of £2.3m at the end of 2015. During 2015 it spent £7.5m net on acquisitions (GameHouse acquisition and Blueburra deferred consideration) and £2.5m on capex, while raising £12m net of financing costs to fund the acquisition and fund other operating expenditures. Net cash of £2.3m at end December 2015 was ahead of our previous forecast, partly as a result of a lower than expected working capital requirement. We expect the company to be broadly cash flow neutral (slight positive), negating the need for further additional capital to fund its day-to-day operations.

Exhibit 2: Financial summary

£'m

2013*

2014**

2015

2016e

2017e

September/December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

0.88

11.23

21.21

40.00

65.00

EBITDA

 

 

(2.32)

(7.82)

(4.11)

0.77

11.63

Operating Profit (before amort. and except.)

 

(2.44)

(8.33)

(4.72)

(0.13)

10.73

Amortisation of acquired intangibles*

(0.05)

(0.80)

(1.68)

(0.90)

(0.80)

Exceptional items

(0.87)

(0.23)

(0.32)

(0.40)

0.00

Share based payments

(0.04)

(0.44)

(0.67)

0.00

0.00

Operating Profit

(3.40)

(9.80)

(7.39)

(1.43)

9.93

Net Interest

(0.00)

(0.04)

(0.39)

0.00

0.00

Profit Before Tax (norm)

 

 

(2.44)

(8.38)

(5.11)

(0.13)

10.73

Profit Before Tax (FRS 3)

 

 

(3.40)

(9.85)

(7.78)

(1.43)

9.93

Tax

0.00

0.09

0.34

0.01

(0.50)

Profit After Tax (norm)

(2.44)

(8.28)

(4.77)

(0.11)

10.24

Profit After Tax (FRS 3)

(3.40)

(9.75)

(7.44)

(1.41)

9.44

Average Number of Shares Outstanding (m)

36.4

165.2

215.7

259.2

261.7

EPS - normalised (p)

 

 

(6.7)

(5.0)

(2.2)

(0.0)

3.9

EPS - normalised diluted (p)

 

 

(6.7)

(5.0)

(2.2)

(0.0)

3.8

EPS - (IFRS) (p)

 

 

(9.3)

(5.9)

(3.4)

(0.5)

3.6

Dividend per share (p)

0.0

0.0

0.0

0.0

0.0

EBITDA Margin (%)

-264.1

-69.6

-19.4

1.9

17.9

Operating Margin (before GW and except.) (%)

-277.7

-74.2

-22.3

-0.3

16.5

BALANCE SHEET

Fixed Assets

 

 

6.03

17.06

29.27

25.04

26.14

Intangible Assets

5.92

16.76

28.93

24.60

24.60

Tangible Assets

0.12

0.30

0.34

0.44

1.54

Investments

0.00

0.00

0.00

0.00

0.00

Current Assets

 

 

6.53

6.24

6.55

6.43

16.06

Stocks

0.00

0.00

0.00

0.00

0.00

Debtors

1.34

2.22

4.02

3.50

5.50

Cash

5.06

3.99

2.34

2.73

10.36

Other

0.12

0.02

0.20

0.20

0.20

Current Liabilities

 

 

(1.80)

(5.26)

(9.32)

(6.10)

(7.00)

Creditors

(1.78)

(5.25)

(9.32)

(6.10)

(7.00)

Short term borrowings

(0.02)

(0.01)

0.00

0.00

0.00

Long Term Liabilities

 

 

(0.02)

(2.43)

(3.71)

0.00

0.00

Long term borrowings

(0.02)

0.00

0.00

0.00

0.00

Other long term liabilities

0.00

(2.43)

(3.71)

0.00

0.00

Net Assets

 

 

10.74

15.61

22.80

25.37

35.20

CASH FLOW

Operating Cash Flow

 

 

(3.90)

(8.02)

(3.83)

(1.63)

9.63

Net Interest

0.00

(0.04)

(0.25)

0.00

0.00

Tax

0.00

0.05

0.34

0.00

0.00

Capex

(0.44)

(0.69)

(2.49)

(1.00)

(2.00)

Acquisitions/disposals

3.42

(4.12)

(7.45)

1.70

0.00

Financing

5.91

11.81

12.00

1.30

0.00

Dividends

0.00

0.00

0.00

0.00

0.00

Net Cash Flow

4.99

(1.01)

(1.68)

0.37

7.63

Opening net debt/(cash)

 

 

0.00

(5.02)

(3.98)

(2.34)

(2.73)

HP finance leases initiated

0.00

0.00

0.00

0.00

0.00

Other

0.03

(0.03)

0.04

0.01

0.00

Closing net debt/(cash)

 

 

(5.02)

(3.98)

(2.34)

(2.73)

(10.36)

Source: Edison Investment Research, Gaming Realms. Note: *Includes AlchemyBet and BeJig for two months. **15-month period as the year end changed to December.

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DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Gaming Realms and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. 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Schumannstrasse 34b

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London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

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US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Research: Consumer

PPHE Hotel Group — Update 5 May 2016

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