32Red has announced a positive 2016 post-close trading update and strong current trading with a 21% increase in January revenues (to 30th). We expect 2016 EBITDA to have doubled to £10.5m (a marginal reduction on our previous forecast due to lower win margins), helped by the highly accretive Roxy acquisition. Our unchanged 2017/18 forecasts are for continued very strong profits growth as the business scales up, with more favourable supplier agreements and Italy now in profit. The 2017e EV/EBITDA of 6.8x looks much too low for a high growth, 77% regulated, cash generative gaming business in a consolidating market.
32Red has announced record net gaming revenues (NGR) of £62.3m for 2016, 28% up on 2015. We have trimmed our 2016e EBITDA forecast by £0.5m to £10.5m due to below-average H216 win margins, as widely reported across the industry. We see no reason to change our 2017/18 forecasts given the strong start to the year. Margins are benefiting from economies of scale, more favourable terms from platform providers Microgaming (from 1 November 2016) and Kambi Solutions (from 1 January 2017) and a move into profit in Italy.
32Red’s key opportunity is to grow its share of the UK casino market, currently only 3-4% (see our Initiation report dated 21 September 2016). The doubling of EBITDA in 2016e reflects not just the full year synergies from Roxy Palace (acquired July 2015), but also improved returns from a more ROI-focused marketing policy. The growth momentum is continuing into 2017 and should accelerate as 32Red’s content offering widens (the new Microgaming deal allows it to add alternative suppliers). Italy is now profitable and other geographies offer expansion potential.
32Red’s shares have moved sideways over the past six months, caught up in general sector malaise. Yet the government’s ‘triennial review’ is mainly expected to impact betting shops and the extension of UK gaming tax to free play is already in our forecasts. The 2017e EV/EBITDA is only 6.8x, a 15% discount to the peer group. A 10x 2017e EV/EBITDA would imply a share price of 192p (P/E of 13.8x) while our DCF gives 243p (10% WACC). In a consolidating market, with plenty of M&A activity, we consider that 32Red might attract even more of a premium given its brand strength, regulated bias, track record and growth momentum.