Description

Investment Thesis

Gaming Innovation Group (GiG) is a unique opportunity to buy equity in a rapidly growing high-quality company with various attractive characteristics at <4x 2024 EBITDA. The company has strong tailwinds from double-digit TAM growth, strong potential for major margin expansion, significant barriers to entry, an exceptional management team, limited competition in several of its product offerings, a perpetual royalty stream, highly-recurring SaaS revenue, and a rapidly growing FCF conversion rate. 2-year base-case price target (end of 2024) is 93.03 SEK, indicating 294% upside.

Company Overview

GiG is headquartered in Malta and is listed on the Stockholm and Oslo Stock Exchanges. The company has two segments: Media and Platform/Sports. GiG Media consists of two subsegments: Publishing and Paid Media, and is the crown jewel of GiG with almost 50% EBITDA margins, a 23% 3-year revenue CAGR, and a high FCF conversion rate. GiG Media is also arguably the highest-quality player in the affiliate industry within online gambling (see this publication by Symmetry for a thorough overview of the history and current state of the affiliate industry within online gambling). GiG Media makes up the vast majority of the value of GiG today – in fact this segment alone is likely worth more than the entire EV of GiG today. The second segment: GiG Platform/Sports, is a B2B platform company servicing online casino and sports betting operators. GiG Platform/Sports is now beginning to reach consistent profitability (positive and growing EBITDA for the last three quarters) and has a strong potential to grow revenue at 25%+ and 30%+ in FY2023 and FY2024 (and 20%+ for several years afterwards), approach 50%+ EBITDA margins in the coming years, and have a 60%+ FCF conversion rate. In short, the segment has significant potential and, with good execution, could have substantial value (€263M+) for GiG by the end of FY2024.  

GiG Media: Overview

(Adapted from XLMedia's Investor Presentation)

GiG Media: GiG Publishing

GiG Publishing is essentially a portfolio of affiliate websites, which are each built to drive traffic to either online casino sites, like LeoVegas, or to sports betting sites, like Bet365. Currently this portfolio has two primary websites: TOPS Casino Online (for online casino, primarily Europe-focused) and WSN (for sports betting, primarily US-focused). These websites are very well-optimized to appear high up on relevant web searches and have substantial growth rates: 148% for TOPS and 90% for WSN. To illustrate how GiG makes money off of these sites, let us consider the following example:

Suppose that a user searches for the term “best online casino sites” on Google Search. With good SEO, that user then lands on GiG’s TOPS website. After looking through the information that TOPS provides on the pros and cons of various online casino platforms, he/she decide to sign up for LeoVegas – depositing money and playing the online casino games. This is considered a successful referral of a player by GiG to LeoVegas, and LeoVegas will, in return, pay GiG a commission.

On December 2nd, GiG Publishing entered into a partnership with News UK, owned primarily by Rupert Murdoch and his family. GiG started out by delivering online sports betting and online casino content, as well as exclusive offers to The Sun and talkSPORT websites in the UK. In the span of 60 days after the deal was announced, the results from this partnership were already incredible (already delivering material revenues to GiG according to management), so much so that GiG has already also expanded with The Sun into Ireland. Even more significantly, GiG & News Corp. are looking to enter the lucrative US market by the end of Q1 2023. News Corp. has a lot of widely distributed news publications in the US, including The Wall Street Journal, The New York Post, Dow Jones, MarketWatch, Realtor, and Barron’s – the potential for massive new amounts of referred NDCs, and, therefore, a substantial increase in revenues for GiG from this partnership is simply insane. It is also worth noting that Better Collective is currently responsible (since January 2022) for delivering a similar arrangement to The NY Post as GiG is doing for The Sun and talkSport, but that GiG has delivered much more impressive results with its operations. Therefore, it would not be at all surprising if, in the future, News Corp. contracts with GiG for The NYPost iGaming affiliation section instead of with Better Collective. This would likely be a strong indication to other major news outlets of who they should contract their iGaming referral section to, and, perhaps, put GiG on the path to becoming the go-to supplier of these services – a very lucrative business for GiG, of course.

On December 15th, GiG acquired several European publishing assets (including AskGamblers: one of the largest single sites in the gambling affiliation space) from distressed competitor Catena Media for €45M. This acquisition is very significant: I estimate that it increases GiG’s presence in Publishing by more than 40% (annualizing the disclosed Q1-Q3 €12.9M of revenue of the acquired brands leads to a €17.2M revenue increase, compared to GiG Publishing’s €40.8M of revenue in FY2022). GiG will pay €20M for the acquisition when the deal closes, €10M 12 months later, and the remaining €15M 12 months after that. The acquired assets are estimated to have produced ~€11.2M of EBITDA (65% EBITDA margin) in FY2022 (which should grow going forward), likely with 80%+ FCF conversion. Therefore, GiG paid a 4x EBITDA multiple for the acquisition, which is effectively only 2x when taking into account the timing of the payment terms: a brilliant showing from management. There are several reasons why Catena sold these assets to GiG for such a low valuation:

1. Catena has pivoted its corporate strategy to focusing primarily on the Americas’ iGaming market, and is therefore actively trying to dispose of its non-US assets

2. Catena has been desperately trying to sell off these assets for over a year at this point with limited interest (it is rumored that Catena initially valued these assets at EUR 80M and gradually had to decrease the selling price due to the lack of initial interest)

3. The current recession causing depressed valuations and a “buyer’s market”

4. These assets’ revenue decreased significantly in 2022 due to high German and APAC iGaming market exposure, which have both undergone significant regulatory changes recently (causing many gambling operators that operated in the grey markets of these territories to exit once they became white markets). This was a one-time event, and before this regulatory change occurred the assets were growing strongly.

5. Poor management of the assets from Catena’s management

Going forward, these assets should grow nicely (likely at least low-to-mid teens), which can already be seen from how these assets have developed over the recent period: going from about 220k annualized organic traffic visits on December 15th 2022 to 355k annualized organic visits in mid-January 15th 2023.

GiG Publishing has seven primary competitors: Better Collective, Catena Media, XLMedia, Gambling.com, Raketech, Game Lounge Limited, and HighLight Media. It is difficult to have a durable competitive advantage in Publishing, but it is important to highlight that only GiG, Better Collective, and Gambling.com have been able to grow strongly in both the US and Europe over the last several years.

GiG Media: Paid Media

The second subsegment of GiG Media is GiG Paid Media, which has stronger competitive advantages (one of the two players in a duopoly) but lower margins (due to the cost of buying ads on advertising platforms like Google) when compared to GiG Publishing. In this segment, GiG buys advertising space on primarily Google platforms, such as Google AdWords and YouTube ads, but also on other platforms like Facebook and Instagram. It is crucial to note that GiG Paid Media is NOT an advertising agency. They do not place money directly from a specific online casino, like LeoVegas, or a specific sports betting site, like Bet365. Rather, GiG buys the ad space on its account with its own money, and then works with a lot of online casino and sports betting operators who only pay GiG if a player signs up for their platform and becomes a Net Depositing Customer (NDC). This model has increased downside if the paid media company places ads poorly – if GiG does not convert a client that interacts with an ad to a paying user of the sports betting or online casino platform displayed on the ad, GiG loses all of the money spent on displaying that ad. Yet, the upside potential for a high-performance paid media company, which GiG Paid Media has proven to be historically, is huge. This is because the potential ROI from individual ads increases: GiG can optimize not only for factors like what to pay for ads, what sports and online casino games to showcase, what advertising message to be shown, what age and gender categories to target, etc., but also what online casino or sports betting operator to market. 

Today, the B2B paid media market for sports betting and online casino clients is pretty much a duopoly with Better Collective (primarily entered the market in October 2020 with its acquisition of Atemi Group) and GiG (primarily entered the market in September 2017 with its acquisition of Rebel Penguin) as the two players. These are the only two companies with market-leading technology, with other companies having inferior databases and algorithms for ROI optimization of ads. It is a catch-22 situation, on the one hand, competitors have an inferior paid media algorithm and database leading to less desire for online casino and sports betting operators to work with them, and, on the other hand, competitors are not able to improve their paid media offerings compared to GiG’s and Better Collective’s because the low amount of ad spend with operators gives these competitors insufficient data to improve their paid media algorithms to the level of Better Collective and GiG. Therefore, over the last several years, GiG and Better Collective have continuously been gaining market share within paid media, while competitors (like XLMedia and Catena Media) have continuously been losing market share. Both Better Collective and GiG are generally pushing for perpetual rev-share contracts over CPA, with GiG being the original company that pushed for such an arrangement and Better Collective following in GiG’s footsteps later on. 

GiG Media - Revenue Model

The diagram above (from oddspill.com) is an illustration of how a rev-share model works, which accounts for about 60% of GiG Media’s revenues. In a given quarter, an affiliate company, such as GiG Media, refers net depositing costumers (NDCs) to an operator, the number of which typically grows organically every year. The referred players then play and the operators make money. Some players may decide to try another online casino or sports betting platform, but some will stay and play on the same platform. As time passes, an increasingly smaller number of the NDCs will keep playing, but this still creates a base business that will continually get built on top of. As additional time passes, the revenue stream to the affiliate company will increasingly become more diversified – being spread among a larger number of NDCs. Additionally, a growing percentage of the revenue share will come from players that keep playing and depositing new money on an ongoing basis. This creates a growing perpetual royalty stream for GiG – especially because GiG’s take rate on the losses of referred NDCs is constant in perpetuity (GiG’s take rate is undisclosed but is likely mid-single digits). This is an incredible asset to have – especially with the number of First Time Depositors (a person who places wagers or deposits an amount of money for the very first time) that GiG has referred to operators growing very quickly historically: a staggering 91% YoY increase in Q4 2022, for example. This trend suggests continued strong momentum in the segment going forward.

Out of the 40% of GiG Media’s revenues that are not from rev-share, 16% are from CPA (Cost Per Action – a one-time fee that is paid by an operator for a player that GiG referred) and 24% are from listing fees (money that sports betting and online gambling operators pay GiG to be featured in a prominent digital location, such as high up on a webpage on GiG Publishing’s websites) and other services. The percentage of GiG Media’s revenues that are rev-share is likely to increase going forward as 95% of new FTDs are on a rev-share or hybrid deal.

The key question that readers likely have at this point is: Why do operators agree to these perpetual rev-share agreements instead of developing their own in-house solution? Here are the reasons:

• In regard to Publishing, operators cannot logically publish their own affiliate websites. It does not make sense for the operator because they would need to feature other online gambling or sports betting platforms besides their own, which is clearly against their interest. 

• In regard to Paid Media, very large operators frequently do have their own in-house solution, which likely has inferior technology to those of GiG and Better Collective (because of the smaller variety of data that the in-house platforms have access to) but makes greater economic sense for those operators due to the lack of an affiliate fee. For smaller and medium sized operators, this is not the case: it would be economically inefficient for operators of this size to in-house paid media solutions and close-to-impossible for those in-house solutions to successfully compete with GiG for ad spots. 

Therefore, GiG Media is in a strong position to continue to gain market share and increase its perpetual royalty stream.

GiG Platform

Historically, when a company wanted to create an online gambling or sports betting operator, it would need to contract with a back-office supplier and would need to build the front-end in-house. It would then also need to individually contract with various external parties, like a games supplier, an odds supplier, and a payment provider. The higher the volume that the operator brought to these suppliers, the lower the royalty rate that these external parties would offer the operator. 

GiG’s management thought that this model was inefficient and wanted to solve the problem of operators needing to have their own development teams, as well as also solving the problem of operators needing to contract with multiple suppliers. 

With GiG Platform you only contract with one player: GiG. GiG Platform consists of eight product offerings, six of which were developed in-house: Player Account Management, CRM, Bonus & Rewards, Compliance, Content Management System, and a Logic Engine, as well as two externally-sourced offerings: Online Casino Games (from game suppliers like Evolution Gaming and Pragmatic Play) and a Payment Platform, which utilizes technology from Visa, Mastercard, etc. These offerings provide critical functions for operators – whether it be in helping them to upgrade their ancient frontend to one that is much more appealing for the user, helping to ensure that the operator adheres to regulations, creating/upgrading a loyalty rewards program, tweaking the payouts and cost of games, developing a strong omni-channel approach (especially important for land-based clients trying to go online), or targeting existing players with high ROI promotional campaigns (separate from GiG Media’s focus on referring new players). To see how much of a value proposition GiG Platform truly is, one only needs to look at GiG Platform client SkyCity: the largest casino in New Zealand, which only employs 1-2 people in their online casino division – with everything else being outsourced to GiG. No other B2B iGaming company can match the value proposition that GiG offers in this regard, as none of them match GiG’s excellence in all of Publishing, Paid Media, and Platform – a truly best-in-class turnkey solution.

Unless you are a very large operator, it simply makes sense to partner with a B2B platform provider, like GiG. Trying to develop an in-house version of GiG Platform would require substantial fixed costs (tens of millions of euros and dozens of developers to develop a base product) and be extremely time-consuming (a couple of years at a minimum, which is a major issue in the rapidly evolving iGaming market). Variable costs may also be higher for the small operator, as GiG gets to pay a lower royalty rate to a games supplier like Evolution when compared to a small online casino, as GiG generates substantially more traffic for Evolution.

GiG Platform has a variety of client types: including taking land-based casinos online (i.e. SkyCity and Aspers), taking large tier-one clients to their non-core markets (i.e. Betsson in Eastern Europe, also Betway and Luckydays), providing the infrastructure for “local champions” – small niche casinos that are really strong in a specific location (i.e. Kazoom in Sweden), and taking clients that operated in countries that were previously iGaming gray markets (unregulated markets) back into the market when the market becomes a white regulated market (i.e. various operators in Germany and the Netherlands). Combining this versatility of GiG Platform’s offering with GiG’s soon-to-be network of 36 geographic licenses (29 right now), which completely surpasses any competitor, lays the groundwork for substantial future growth in the division. 

On paper, there are four primary competitors to GiG Platform, including GAN, Oryx (owned by Bragg Gaming), Nyx (owned by Light & Wonder, formerly called Scientific Games), and Playtech. Yet, only Playtech and GiG have a strong presence in territories outside of the US, Italy, Ontario, and Germany. This means that in most of GiG’s soon-to-be 36 licensed geographies (including a very strong position in Europe, Latin America, and New Zealand), GiG either faces no major competition or only Playtech as a true competitor (GiG’s management has confirmed this). As GiG’s and Playtech’s B2B platform offerings are of roughly comparable standards (GiG’s offering is a little bit cheaper, takes a smaller royalty for revenue share, and has a slightly faster implementation cycle, while Playtech has a superior live casino offering and is a little bit more adaptable to each unique customer), GiG is in a strong position to win deals going forward.

It is important to understand the high barriers to entry and economies of scale that exist within the B2B iGaming Platform market. In 2019-2020, GiG worked on smaller projects in Europe (i.e. Belgium and Switzerland) that none of GiG’s competitors cared about in those days. Fast forward to today, and GiG now has a market leading position in those countries, with growing perpetual revenues in those locations and a massive lead on anyone who tries to enter those markets. The fixed investment to gain the licenses, build a compliant platform, etc. in those countries was significant, but now that this work is done, GiG is able to add new clients in those markets at an extremely low marginal cost: driving major economies of scale. In more recent years – 2020 to 2022 and a little bit in 2023, GiG has been investing very significantly in expanding into new geographies and will be operating in over 36 markets in 2023 – more than any other competitor. From my discussions with management, they believe that the benefits from these high-value fixed investments are going to primarily pay off in 2024 and later (along with a little bit in 2023). From that time, GiG Platform will become a cash cow with a very high free cash flow conversion rate (GiG management has stated to me that they see a 60%+ FCF conversion rate for Platform), low marginal costs to add additional clients, and significant competitive advantages in most of the markets that the company operates in (frequently being one of only a few or the only major B2B Platform provider in a region) – driving high incremental EBITDA margins and major economies of scale. 

GiG Sports

In 2021, the GiG Sports segment was close to worthless. GiG’s sportsbook offering failed to gain any real traction in the marketplace and consistently had negative profitability. By 2022, GiG had announced a plan to decommission their own sportsbook and acquired Sportnco: completely transforming the segment with a company that is expected to grow 20%+ in the coming years (likely in-line with historical growth), is highly profitable with 55%+ EBITDA margins, and likely has a strong FCF conversion profile.

Sportnco’s platform is an end-to-end sportsbook solution with a proprietary player account management (PAM) system, sportsbook, and betting platform, and offers a complete live and pre-match betting offer on 50,000 prematch events, 25,000 live events, over 5,000 leagues, and 50 sports. The company has over 40 clients and operates the leading B2B betting networks in France and Spain, and is active in other regulated markets like Belgium, Portugal, and Greece, as well as in South America and the US.

GiG acquired Sportnco in April of 2022 for a maximum consideration of €93M (dependent on various earn-outs in 2023 and 2024). Sportnco’s 2021 EBITDA was €5M, leading to an 18.6x pre-synergies EBITDA acquisition multiple, which at first glance appears fairly expensive. There are several reasons why this is not the case:

1. Cost synergies: GiG is expecting €8M+ of annualized cost synergies, all of which are on track to be realized by the end of Q2 2023. Some of these result from a reduction in infrastructure costs: i.e., a migration to a new tech platform. Others, meanwhile, are from a substantial reduction in future CAPEX needs: Sportnco has 12 geographic licenses, 10 of which are in territories that GiG does not currently operate in. With these new licenses and the corresponding Sportnco platform in each of these territories, GiG Platform will be able to enter these markets (pending regulation of online casino) at a very low marginal cost, as opposed to the 3+ years and tens of millions of euros that it would have taken GiG to enter these markets without the acquisition. Post the €8M of cost savings, EBITDA rises to €13M and the acquisition multiple decreases to 7.15x – quite a bargain.  

2. Revenue synergies: Two types of revenue synergies will likely result from the Sportnco acquisition. First, GiG Platform clients can be cross-sold to GiG Sports offerings, and vice versa. Although management has not mentioned this, there is also a strong possibility, in my opinion, that GiG Sports clients who previously did not know about GiG Paid Media’s offerings will discover them and hire the company in that department as well, and vice versa (additional cross-selling). Secondly, the acquisition more or less doubles the countries in which both the Platform offering and the Sports offering can be sold. Pre-acquisition, GiG had licenses in 14 jurisdictions and Sportnco had 11 licenses, with only 2 of them overlapping. In jurisdictions where both online casino and online sports betting is regulated, these licenses are valid for both a B2B platform offering for online casino and one for sports betting. So, suddenly with the acquisition, the number of countries in which GiG Platform and Sportnco can offer their product increases by 64% and 109% (when regulation is in place for both online casino and online sports betting in all of those countries), as shown below:

Source: GiG

GiG’s recently signed contracts indicate that some of the revenue synergies are already taking effect. Since the completion of the acquisition of Sportnco, Angola-based Full Games SA, US-based Crab Sports, Spain-based Starcasino, an undisclosed established Ontario-based operator, an undisclosed Colombia-based operator, an additional undisclosed client, and, most significantly, $1B+ operator Betsson have all contracted for combined offerings from both Sportnco and GiG Platform (the first seven companies to do so). However, management has stated that it will likely take until mid-to-late Q2 of 2023 for the synergies to really begin materializing.

GiG’s Management Team and Brief Company History 

Jonas Warrer – CMO & Managing Director of GiG Media: Joined GiG when the company acquired Rebel Penguin: a market-leading technology with proprietary databases and algorithms to optimize the ROI of ads – essentially what allowed GiG to emerge as one of the two dominant players in the aforementioned Paid Media duopoly. Since becoming Managing Director of GiG Media in October 2019, he has transformed GiG Media from a division that had declining revenues between Q4 2017 and Q4 2019 to one that has more than doubled revenues from Q4 2019 to Q4 2022.

Petter Nylander – Chairman of the Board of Directors: Previously the CEO of Unibet, where he grew revenues and EBITDA from 315 MSEK and 112 MSEK in 2004 to 1640 MSEK and 487 MSEK in 2010 (421% and 335%, respectively). He was also crucial in the firing of Robin Reed, one of GiG’s co-founders, as CEO – one of the most pivotal decisions in the company’s history. Robin was a very good entrepreneur, who was pivotal to GiG’s success in the company’s early years. Yet, he was not as skilled in the financial aspects of running a company. For example, Robin had a strong distaste for holding cash – leading him to quickly spend company cash, usually in a rash and ill-thought-out manner. It was not unusual for him to squander money on lavish company parties, or to invest it recklessly into new verticals: all without careful strategic evaluation and little thought about the ROIC of such decisions. This lack of capital discipline became an increasingly larger issue in the late 2010s, as iGaming faced increased regulation, which brought with it increased pressures and increased taxes. In December 2018, a new board of directors was elected with Petter Nylander as the new chairman. Shortly after, GiG’s Board of Directors initiated a strategic review of the business and came to the conclusion that the company lacked focus, had an unreasonably high debt load, and had an unsustainable cost basis. The Board approached Robin Reed with its findings and asked him to change his management style, yet Robin refused. Therefore, the Board was left with no choice but to fire Robin Reed as CEO in September 2019: ending his ten-year tenure as CEO of the company. The Board of Directors then instated Richard Brown as the company’s new CEO.

Richard Brown - CEO: Joined the company in February of 2016 as Managing Director of GiG Media – the only profitable segment of GiG at the time. Within less than two years, he was promoted to Chief Digital Officer, and less than one year later, he became Chief Operating Officer. As COO, he also took charge of GiG’s B2C vertical: quickly turning it around and making it profitable. Once Richard became GiG’s new CEO, he completely turned the company around through seven key strategic decisions:

1. Developed a variety of proprietary integration software that led to a lower ongoing cost structure, faster R&D and product launch cycles, and a more attractive product offering.

2. Under Robin Reed, GiG was a company with a needlessly lavish cost structure, which included private chefs, baristas, and expensive parties. Richard Brown quickly did away with these luxuries.

3. Richard decided that GiG should be a pure-play B2B company and, therefore, exit the B2C business. The B2C business has generally inferior characteristics to that of the B2B business, including lower margins and more regulatory issues. At the time, GiG also had a hard time selling its B2B products as customers did not like that GiG was competing with them on their own B2C solution. Within only five months after becoming CEO, Richard was able to sell the B2C brands to Betsson. Although, the initial consideration price of the purchase was a bit lower than hoped for, there are several reasons why this was a very strategic move. First of all, GiG had a debt maturity that was maturing within only a single month (March 2020) of when the company announced the sale of the B2C brands (February 2020). By selling off these brands, GiG was able to pay down a portion of its outstanding bond with the proceeds from the sale and to issue a new bond with a June 2022 maturity date to pay off the remainder of the outstanding 2020 bond. This was absolutely crucial, of course, it essentially helped the company to avoid bankruptcy. The second reason why the sale of the B2C brands to Betsson was strategic is because of the long-term relationship that was created between GiG and Betsson. As part of the acquisition, Betsson committed to keep the acquired brands operating on GiG’s platform for a minimum of 30 months (leading to another couple of tens of millions of euros in revenue for GiG) and pay certain premium fees. Within six months after acquiring the brands, Betsson decided to expand their presence to Spain and Croatia (nowadays one of Betsson’s best performing markets), once again, of course, using GiG’s platform. A little while later, Betsson went from operating in the UK with three different platforms to operating only with GiG’s platform. Less than 2 years into the agreement, Betsson decided to extend the contract with GiG to Q4 2025 (a three-year extension), launched with GiG Platform in Colombia, and plans to enter several new geographic markets with GiG’s platform. These actions are a testament to the quality of GiG’s Platform. 

4. GiG previously had an in-house game studio that developed slot games. Richard Brown quickly realized that GiG would never be able to compete with industry behemoths like Evolution, and, therefore, closed down this division.

5. Focused the company’s growth CAPEX on reinvesting for growth in the Media division, which paid off handsomely and helped GiG Media to diversify away from the mature Scandinavian markets and into a variety of high-growth markets. As shown below, the effect of this was very positive:

6. Moved GiG away from a white-label platform model, which, in addition to suffering from a lack of scale, also had substantial legal liabilities and regulatory headwinds.

7. Transformed the sports segment from the revenue-declining and cash burning enterprise that it was in 2019 (-6.9M EBITDA) to the fast-growing highly profitable segment that it is today (>€9M of projected EBITDA in FY2023).

The net effect of all of these changes have led to a major turnaround with the business, as seen below:

Historical Financials & Balance Sheet

FY2022: GiG’s normalized revenues grew to €90.1M – an increase of 35.9% from FY2021. Adj. EBITDA grew to €34.2M (~38% Adj. EBITDA Margin, compared to 34.2% in FY2021). The Media division grew 37% YoY, all organic, with an Adj. EBITDA Margin of 48% vs. 46% in FY2021. The Platform & Sports division grew 33% YoY, of which 18% is organic excluding Betsson Premium Fees (Betsson’s aforementioned acquisition of GiG’s B2C brands led to special contract with GiG Platform that included extra premium fees required from Betsson, as that contract has ended, Betsson is now on a standardized GiG Platform contract), with an Adj. EBITDA Margin of 16.3% (a substantial increase from 7.9% in FY2021). Momentum in the Platform & Sport division is strengthening significantly, as seen by the 37% YoY organic revenue growth rate in Q4 2022.

GiG’s current financial position is very strong. Debt consists of €3.7M of short-term and €12.7M of long-term loans payable (all of which have an interest rate of 2.48% or less), €48.2M of senior secured bonds (with a floating coupon of 3 months STIBOR + 8.5% per annum, which are likely to be refinanced either this year or next year to a more favorable rate), and €3.1M of lease liabilities. Cash and equivalents is €15.1M, leading to a €52.6M net debt position and a 2.29x Net Debt/EBITDA ratio: very reasonable with GiG Media’s already high FCF conversion rate.

Financial Guidance & Projections

GiG’s management have issued guidance of 20%+ overall organic revenue growth in each of the coming years, as well as a 50%+ overall company EBITDA margin by FY2024. Based on my bottom-up analysis, both of these projections are very doable. Here are my estimates:

FY2023: Overall, I am projecting €136.3M of revenue (51.2% YoY growth) and €65.6M of EBITDA (a 48.1% EBITDA margin compared to 38.0% in FY2022). I estimate a 53.1% revenue growth rate for Media, out of which 19.7% is organic growth. This is based on a 25% organic growth rate for Media excluding the recently acquired brands from Catena (conservative compared to recent growth for this segment) and 10% organic growth for the acquired brands from Catena (lower than industry growth). My estimates put Media’s EBITDA Margin at 52.0%, composed of a blend between a 49.0% EBITDA Margin for Media excluding the Catena Brands (a 1% uptick from 2022 because of the impact of high-margin Publishing revenue from the News Corp. agreement and lower growth marketing expenses as a % of revenue due to slower revenue growth) and a 65.3% EBITDA Margin for the brands acquired from Catena (a 0.2% increase due to some minor expected cost synergies). For Platform & Sports, I estimate a 47.2% revenue growth rate, of which 25% is organic. This acceleration in the organic growth rate is primarily due to a combination of GiG reaping the benefits from substantial growth CAPEX that the company implemented in the last several years and fully integrating Sportnco by the end of Q2 2023. This full integration of Sportnco is also projected to lead to €8M of annualized cost savings by the end of Q2 2023, and I am estimating that about €5M of which are reflected in the P&L for FY2023. I am also assuming that Sportnco has 55% EBITDA margins pre-cost savings and am using a 40% incremental EBITDA margin for Platform in FY2023. This results in a 39.4% EBITDA margin for the combined Platform & Sports segment for FY2023.    

FY2024: Overall, I am projecting €168.6M of revenue (23.8% YoY growth) and €86.9M of EBITDA (a 51.5% EBITDA margin compared to 48.1% in FY2023). I estimate a 21.0% revenue growth rate for Media, out of which 19.0% is organic growth. This is based on a 20% organic growth rate for Media excluding the recently acquired brands from Catena and 15% organic growth for the acquired brands from Catena (management are anticipating significant revenue increases for these assets in the years to come). My estimates put Media’s EBITDA Margin at 52.9%, composed of a blend between a 50% EBITDA Margin for Media excluding the Catena Brands (a 1% uptick from 2022 because of the impact of high-margin Publishing revenue from the News Corp. agreement and lower growth marketing expenses as a % of revenue due to slower revenue growth) and a 65.5% EBITDA Margin for the brands acquired from Catena (a 0.2% increase due to some minor expected cost synergies). For Platform & Sports, I estimate a 30% revenue growth rate, all of which is organic. This acceleration in the organic growth rate is once again primarily due to a combination of GiG reaping the benefits from substantial growth CAPEX that the company implemented in the last several years and full integration of Sportnco. All of the previously discussed €8M of cost savings should be reflected in the P&L for FY2024. I am also once again assuming that Sportnco has 55% EBITDA margins pre-cost savings, but am now using a 55% incremental EBITDA margin for Platform in FY2024. This results in a 48.5% EBITDA margin for the combined Platform & Sports segment for FY2024. The overall company EBITDA margin is 51.5%, which exceeds management’s 50% target (keep in mind that this target was established before the acquisition of the Publishing assets from Catena, which have 65%+ EBITDA margins – substantially raising GiG’s margin profile).   

Valuation

Using the assumptions above, I get to €60.6M of EBITDA for the Media segment and €26.3M of EBITDA for Platform/Sports post-cost savings in FY2024. For Media, I value the segment at a 15x 2024 EBITDA multiple (in-line with Better Collective’s, the most relevant competitor, historical valuation – although it is arguable that GiG deserves to trade at a premium), which is very reasonable because this segment has a unique asset in the duopoly of Paid Media, perpetual royalty streams, a very high FCF conversion rate (likely 80%+), and operates in a market set to be growing low-double digits (I would expect the segment to continue growing above TAM growth). For Platform/Sports, I value the segment at a 10x 2024 EBITDA multiple (a slight premium to comps), which is very reasonable because of the segment’s limited competition, strong potential for 20%+ annual revenue growth, significant potential for further margin expansion, and strong potential for significant FCF conversion with limited additional costs/CAPEX needed for further growth. These assumptions result in a €1,172M fair EV. If GiG does not pursue any further acquisitions in the coming two years (current management’s track records suggests a high likelihood of further acquisitions being value-creating), the €152.5M of EBITDA that I expect the firm to generate in FY2023-2024 combined should result in more than enough FCFF to get to a zero net debt position (currently at €52.6M of net debt) by the end of FY2024, while also properly reinvesting in the business. Assuming a diluted weighted average shares outstanding increase of 17M (8.5M from stock options/grants and 8.5M from a payout to Sportnco), I get to 142.385M fully diluted shares outstanding and an end of 2024 fair value per share of 93.03 SEK: 294% upside.

It is worth noting that even if we theoretically assign no value to the Platform/Sports segment and simply value GiG Media’s 2022 EBITDA (€29.9M) at the same current multiple as Better Collective’s current depressed market multiple (13x), we get to a fair value share price of 30.99 SEK – 31% upside.

Why Does This Mispricing Exist?

This opportunity exists for a variety of reasons, including:

• Relatively unpopular stock exchange listings: Oslo and Stockholm Exchanges

• Limited analyst coverage

• Low float: average daily trading volume is only about $500k

• Continuous insider selling by the founders of Gaming Innovation Group stock (~20% of shares outstanding), due to bad blood

• Continuous ESG-forced selling by Formue Nord & Swedbank Robur (~13.5% of shares outstanding)

• Misunderstood operating history (revenue peaked in 2017, but the company is in its best-ever state nowadays)

• Current recession fears (online casino is relatively recession-resistant)

• Malta, where GiG is headquartered, was previously put on the FATF grey list

Risks

1. High Exposure to Google: Most of GiG Publishing’s traffic comes from Google Search and the vast majority of GiG Paid Media’s ad spend is on Google Search and YouTube. If either Google usage declines or GiG is unable to properly tweak its internal SEO and algorithms to optimize for the tweaks in Google’s algorithms, it would likely heavily damage the performance of GiG’s Media segment. This risk is somewhat mitigated by Google’s long-running growing usage and moat, as well as by GiG’s historical reputation for being best-in-class with keeping up with the changes in Google’s algorithms, but it is still a risk regardless.

2. Internalization Risk: The risk of companies internalizing the B2B services that GiG offers them. This risk is relevant for all of GiG’s offerings other than Publishing (even the largest online gambling and sports betting companies maintain B2B relationships with website publishers). CEO Richard Brown describes this risk well in his June 2022 interview with Redeye:

There’s always going to be some operators that wish to move in-house, that’s part of the industry and they may wish do so for various different reasons. On the other side, however, there is a continuation of increasing technical barriers to entry, increasing requirements for localization of product. And not everyone is able, even larger operators are not able to fulfill that requirement to have specialized product for various different local regulations. And, therefore, we think that while there may be some that move towards in-house tech, there will be others who will be moving towards having outsourced technology for specific markets, and we see that as a great opportunity. We have a number of clients, both on the GiG and the Sportnco side, who have their own tech but actually utilize us to be able to do those localized market entries where they want to take strong positions. So, in that sense, I think that while there will be some going in-house, there will also always be some that are looking for that localization, which we can provide. And also we think that the number of new markets that are opening up, both for regulatory purposes – especially continents like Africa, Latin America, North America, which are in very early regulatory stages. So as those regulations move forward, we are able to be responsive to that as well. And we see a number of [traditionally land-based wanting to move online and even online players] who do not have that the digital experience that we have, who don’t have the managed services that we have, who don’t have the products that we have. And, therefore, the demand will remain in that aspect.

I would also like to add that two of GiG’s largest clients have been continuously increasing their connection with GiG, rather than trying to diminish it. One of them is Betsson, which is using GiG for an increasing number of countries in which they operate, as mentioned previously. The other is SkyCity, the largest casino company in New Zealand, which recently invested €25M into GiG to help the company finance the Sportnco acquisition (through a corresponding share issuance, SkyCity now holds 11.4% of GiG’s shares outstanding). These examples demonstrate how truly valuable even large casino companies find GiG’s offerings.

Other general risks include executional and capital allocation risks, regulatory risks, and technological risks. All of these are somewhat mitigated by the high-quality of GiG’s management team, GiG generally being a strong beneficiary of regulation (GiG Media and GiG Platform/Sport only operate in regulated markets), and a lack of technological breaches/hacks of GiG’s web domains and platform historically.

Conclusion

At <4x 2024 EBITDA for a company that can reasonably experience 20%+ revenue growth and significant margin expansion for several years post-2024, has substantial competitive advantages, is run by an exceptional management team, has a variety of near-term catalysts, and contains a combination of perpetual royalty streams and highly-recurring SaaS revenues, GiG is one of the most attractive opportunities that I am seeing in today’s markets (with an estimated 294% upside by the end of FY2024).

Catalyst

• Highly probable spinoff of either GiG Media or GiG Platform/Sports: GiG just initiated a strategic review to seriously evaluate this very possibility. A spinoff will be crucial in helping the market to properly value each of the two segments.

• Increased sell-side coverage

• Listing on the LSE, NASDAQ, or NYSE

• Moving to a single-listing to improve per-exchange liquidity

• The Juroszek family (one of the richest in Poland and with significant exposure to the betting industry) has been continuously buying GiG shares and currently owns >5.7% of the shares outstanding.

• Refinancing of the 550M SEK bond (currently at 3 months STIBOR + 8.50% per annum): likely to happen in 2023/2024