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Aspire Global
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==Investment summary<ref name=":0" />== ===Company description: iGaming infrastructure and services=== AG is an online gaming technology, services, and content company with two main reportable business segments. The B2B offering comprises a robust technology platform, managed services, and content (ie games) that provide everything required to launch and operate an iGaming brand. The platform can be offered in isolation or with a wide range of managed services. The B2C offering includes a number of proprietary online gaming brands, which it markets to its own online customers. In March 2021, management announced that it is reviewing the role of the B2C segment within the group structure to determine how to enhance its growth prospects. AG is exposed to favourable growth trends. First, its customers in the online gaming market are enjoying structural growth due to increasing global wealth and internet/mobile penetration. The geographic markets to which AG currently has some exposure are forecast to grow gross gaming revenue (GGR; ie customer wagers less their winnings) from US$37.6bn in 2019 to US$69.1bn by 2025 (source: H2 Gambling Capital). Secondly, the online gaming markets are highly competitive, and each country typically has different regulations, if regulated at all, and they are subject to regular change. These forces combine to make the operation of an online gaming brand challenging, particularly when working across many geographies. The broad long-term trend is for markets to become regulated, which typically leads to higher costs for operators; therefore, the operators seek partners that can help mitigate these cost pressures. AG’s full-service platform, managed services and content can minimise the investment requirements of its customers, leading to a faster and more efficient route to market and ongoing ‘shared’ operating ‘cost efficiencies’. AG’s strategy is to increase its exposure to regulated markets, in line with the direction of travel of the market which, although it incurs greater costs, also brings more clarity on market structure and predictability of financials. Management’s strategy has four key pillars: a stronger product offer, organic growth, M&A, and geographic expansion. The aim is to expand its scalable platforms into more markets and increase the number of customers per market, both organically and through the acquisition of complementary companies. At the end of FY20, AG had 150 partners (customers) including many of the leading online gaming companies: betfair, Codere, Cofina, Editec, Entain, 888.com and William Hill; with broad geographic coverage, in 26 countries across most continents, which is testament to the quality of AG’s platform, services and content. The Pariplay acquisition and consequent further investment in the US have led to a breakthrough in the US market, which represents an important growth market. At the start of FY21, AG received an interim iGaming supplier licence for West Virginia and has filed applications in Pennsylvania and Michigan, with more to come. AG is building up the organisation to support its US expansion. ===Financials: Improving profitability and cash flow generation=== Edison Investment Research forecasts EBITDA growth of 15% (pro forma) in FY21, and 17% in FY22. Our forecast for EBITDA of €32.8m in FY21 is greater than management’s longstanding (December 2018) guidance of €32.0m, which reflects the higher margins of recent acquisitions. Edison Investment Research expects improving free cash flow, mainly due to higher profitability as investment levels relative to revenue are maintained. AG has a robust balance sheet with limited net debt excluding IFRS leases (€5.2m), and a capital-light business model. FY20 net debt included debt of €27.9m due to mature in April 2021, which is to be funded by cash on hand and a c €10m bridging loan from controlling shareholders, ahead of the receipt in March 2022 of a loan made to NeoGames, which shares two board directors with AG, of up to c €18.0m including accrued interest. The FY20 balance sheet also included deferred and contingent consideration of €22.9m, of which c €5m will be paid in FY21 and the balance in FY23. ===Valuation: Discount to peers and DCF=== AG is trading at a significant discount to the majority of its peers when comparing all multiple-based valuation measures, and it potentially offers a higher dividend yield than all of its peers should it resume dividend payments from FY21, given an expected improved financial position. AG’s EV/EBIT multiple for FY21 of 10.2x is a 63% discount to an adjusted average of peers (ie excluding some extreme multiples) and its P/E of 11.3x is a 74% discount to the adjusted average of 44.1x. A DCF-based valuation with a WACC of 9% and terminal growth of 2% suggests a share price of SEK95. AG continues to scale well through a combination of organic growth and M&A. As it continues to scale, Edison Investment Research expects the valuation gap relative to its peers to narrow. ===Sensitivities: Regulation, competition, and execution=== AG’s revenue sharing model makes it closely aligned with the fortunes of its operator customers and the geographies in which they operate. The gaming industry is highly competitive, as is the market for AG’s products and services, and regulatory risk is high for operators. To grow geographically and develop its product offer, AG must continue to invest to remain competitive in a rapidly changing industry, through a combination of internal investment and M&A, which have execution and integration risks.
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