32Red’s brand punches above its weight in the UK online casino market. Management has adopted a more aggressive stance since mid-2015, both in terms of marketing and with the highly accretive £8.4m Roxy Palace acquisition. Interims show H116 EBITDA rising to £4.5m (H115: £1.2m) and we initiate with forecast EPS more than doubling in 2016 and growing by over 65% between 2016 and 2018. Yet the 2016e P/E is only 13.5x and our peer group comparison and DCF suggest a value of 193-247p per share, 46-86% above the current share price.
32Red is a well-recognised UK online casino brand, yet it only has a 3% share of a fast-growing market. It adopted a more aggressive ROI-based marketing approach in mid-2015 and has reported 32% l-f-l revenue growth for H116. The acquisition of the Roxy Palace online casino in July 2015 added further scale, with overall H116 revenue up 63%. The group’s growing confidence is reflected in new high-profile marketing deals (eg Leeds United, ITV brands). A new deal with platform provider Microgaming, announced today, is excellent news and gives greater product flexibility. Elsewhere, 32Red’s small Italian operation is scaling up rapidly and will achieve break-even this year, while other geographies offer expansion potential.
Economies of scale mean that strong top-line growth translates into improving margins. On top of that, the rapid integration of Roxy helped propel H116 EBITDA to £4.5m (H115: £1.2m). We expect an EBITDA margin of 17.0% in 2016, up from 10.8% in 2015, with Roxy enhancing EPS by over 30%. Our 2017e EBITDA of £15.5m is £1.5m above previous market consensus, partly reflecting better commercial terms from Microgaming, as margins rise to 20% despite the extension of POC gaming tax to free bets from mid-2017. Cash conversion is strong and we expect £10.0m of net cash at the year-end, up from £8.6m at end 2015.
32Red’s 2017e EV/EBITDA is only 6.0x and we believe that investors have not yet recognised the shift in scale and growth momentum that is taking place. Our peer group comparison suggests a share price of 188-198p (average 193p), although the strength of the brand, strong regulated bias and management’s track record could justify a greater premium. Our DCF gives 247p.