Elevator Pitch/TLDR
Gaming Realms is a B2B provider of a unique gaming IP in an expanding market that is growing EBITDA at 30%+ yet trades at 7x EV/EBITDA ‘24F.
Company
Develops, publishes, and licenses gaming content with a focus on “Slingo” that was acquired from RealNetworks in 2015 for £12m. Slingo is a combination of bingo and slots. The game is licensed to online casinos that pay a fee to Gaming Realms. 2024F consensus estimates for revenue and EBITDA are £27m (+44% over ’22) and £13m (+76% over ’22) respectively. The company is net cash with an EV of £96m, resulting in a 7x EV/EBITDA ‘24F.
Slingo
Created in 1994, Slingo has featured on PC, Nintendo DS, Hasbro, handheld game (see below), AOL, in the Philippines as TV game show, etc. If the game of slots and bingo had a child, then that would be Slingo. There is the slot element via spinning numbers that result in 5 new numbers every time with a limited number of initial spins, followed by pay per spin. And there is the bingo element via have a card that you need to form horizontal, vertical, or diagonal lines. The more lines, the more you win. Gaming Realms acquired the Slingo IP in 2015 and it generates most of its revenues.
Source: Amazon.sg
The company has taken the basic game and has developed multiple variations (eg. Monopoly, Tetris, X-Factor, etc). The goal is essentially the same (fill lines) but the different look, colours and music give it a slightly different feel. This is important to keep players engaged, to play longer during sessions but also to attract them back. It is a common tactic that is done with the slot machine genre but has also used in typical gaming. For example, mobile game Subway Surfers is just a runner-type mobile game but has themes that have kept it popular. Similarly, Fortnite releases a new battle royale island where players again have the same basic task of outlasting each other. Variations and new releases are not important and enhance the moat.
Slingo is a genre of its own, as Blackjack, Roulette and Slots are. Online Casinos usually list Slingo separately with players entering the category and choosing among all the Slingo variations. The Online Casinos will naturally use Gaming Realms not only to access the original game (versus a knockoff) but also to get access to all the variations. To better understand Slingo and the other products, play the demos for free here.
As of September, the company had a portfolio of 70 games: the majority Slingo variations. The company has won several awards, including:
- 2018 WhichBingo – “Innovation of the Year” – Slingo Rainbow Riches
- 2020 WhichBingo – “Best Slot Game” – Slingo Rainbow Riches
- 2021 Eilers & Krejcik – “Top Performing Online Table Game” – Blackjack Xchange
- 2022 EGR B2B awards – “Mobile Supplier of the year” – Gaming Realms
Revenue Sources
There are 3 main revenue sources: content licensing, brand licensing and social. Content licensing are the main revenues and are basically fees that are earned as a percentage of online casino revenue earned after winnings are paid. These revenues grew from £0.8m in 2017 to £14.9m in 2022 (79% CAGR, 54% adjusted EBITDA margin). Brand licensing (2022: £0.6m) consists of items such as North American lottery printed scratch games. Social (2022: £3.6m) consists of revenues from social gaming sites (in-app purchase and in-app advertising). Blastworks is a wholly owned subsidiary that publishes Slingo Arcade and related games on the App Store and Google Play. This is another source to try Slingo for free.
Source: Apple App Store
Consensus Estimates & Analysts
The company doesn’t provide specific guidance for revenue but has stated at the interim that they see the strong momentum to continue into the second half. If we consider that H1 revenues were up 36% yoy at £11.5m, the full-year consensus of £23m should be in the bag.
2H22 content licensing revenues were £8.5. Assuming +30% yoy (H1 was 37%) on that and add £3.6m full year for social (flat yoy) then you get £23.5m. So, I’m not too worried about FY23. 2024 revenues are only expected to grow by 18% while EBITDA margin will naturally expand in this asset light business. (Above consensus growth is another potential catalyst for the stock). All 3 analysts that cover the stock have a buy recommendation and an average target price of 53p (Investec 48p, Canaccord Genuity 50p, Peel Hunt 60p)
Insider buying, Board of Directors and Executive Team
Strong board with a lot of gaming and M&A experience. Chairman and CEO have worked together in previous company that was sold to PartyGaming. The Ex-CEO of PartyGaming is also on the board. Chairman has a large stake, and my impression is that he is very much interested in growing this company, creating value, not doing any wasteful acquisitions or deals that require share dilution.
Short bios:
- Michael Buckley. Chair. Ex-Chair Cashcade (UK gaming) that was sold to PartyGaming plc in 2009 for GBP 96m.
- Mark Segal. CEO. Joined company 05/13. Ex-finance director at bwin.party, ex-finance director at Cashcade. Chartered accountant.
- Geoff Green. CFO from 02/23, joined company 07/19. Ex-BDO for 8 years.
- Jim Ryan. Non-exec. Currently CEO of Pala Interactive (real money gambling operator). Ex Co-CEO bwin.party. 22 yrs leadership roles in onlinegaming. Ex-CEO of PartyGaming.
- Mark Wilson. Non-exec. Ex-CEO Television Games Network. Ex-managing member New Mexico Gaming, ex-general counsel Churchill Downs.
- Mark Blandford. Non-exec. Ex-owner B&M bookmaker chain for 15+ years, founded Sportingbet that was sold in 2014 for GBP 485 to William Hill & GVC.
- Anna Massion. Non-exec from 11/22. Serves on boards of Playtech, PlayAGS, Betmakers AU, etc. Ex-senior Analyst for PAR Capital Management, ex-director of gaming, lodging and leisure at Hedgeye, ex-Marathan Asset Mgmt, ex-JPM.
Insider buying: In August 2023, non-executive Mark Blandford purchased £303k worth of stock (870k shares at an average price of 34.9p). Since August, the stock has mostly traded between 33-36 (52-week high 39.5p) so purchases at these levels are in line with insiders.
As the company is small and still generally unknown, the low participation on the conference calls is almost a 1on1 with a lot of opportunities to ask questions.
Major Shareholders (30/09/2023):
- 8.8% Michael Buckley (chair)
- 6.9% Canaccord Genuity Wealth Management
- 6.1% Richard Ricci
- 4.3% Mark Blandford (non-exec)
- 3.1% M&G Investment Management
Growth / M&A target
Company still in a high growth phase due to:
- North American market expansion. (US iGaming GGR to grow from $5b in 2022 to 22b in 2027).
- Slingo are still being adopted and introduced into markets. For example, Italy has the potential to be over 50% of UK (UK: 10x revenues of Italy).
- Not all versions of Slingo are released to every client from the start. Slow release so essentially there are no mature markets yet.
- Currently only in regulated markets. Entry into grey markets would re-start the cycle.
- Other games (eg. award winning Blackjack Xchange) or new games would be further monetized or expanded on
Base case scenario is that the company is taken out by a larger firm in the space (eg. Evolution, Playtec, etc). Even if purchased at a significant premium, the acquisition would make sense. 40% of Evolution Gaming’s revenues are from regulated markets. This means they would not only benefit from the growing revenues with regulated but also easily double the revenues as they introduce Slingo to non-regulated markets. The cost and time to develop a similar game wouldn’t be worth it when they can pick up the 70+ game portfolio at a small cost.
Some other points (in no order, from various discussions) that may be of interest:
- Company take (%) so far has never experienced compression on contract renewals.
- 2024-26 CAPEX will continue to be 5-6m regardless of business growth (expanding FCF). This would only change in the case of a new game.
- Cost/fees for licenses (eg. Deal no deal) offset by premium fee charged for game.
- Likely to see EBITDA to FCF conversion of 50% (ballpark)
- The end payout to clients (online casino clients) is similar to slots.
Conclusion
High growth small cap with a competitive advantage and aligned management with skin in the game that is trading a low multiple relative to its growth. Though much larger, Evolution is trading at over double the multiple and is a likely acquirer. Due to the nature of the industry, the market potential, and the product itself, this is a case were the management just needs to avoid any mistakes or go off track. Simply continuing what they are doing is enough and I expect the multiple to go up along with sales, EBITDA and FCF. I am happy to hold on to this compounder without worrying too much about a specific valuation level but for reference/sense check if the company were to trade at Evolutions’ multiple then the price would be 66p. (In full disclosure I presented this idea at the Cyprus Value Investor Conference in September 2023. The story has not changed since then. My cost is 31.9p).
Disclaimer: Any opinions expressed within are the authors’ and under no circumstances do they represent a recommendation to buy or sell a security. In no event shall the author be liable to any person for any damages of any kind arising out of the use of any content in this report.
