CDRO - Codere Online Luxembourg: At A Nascent Stage

2023-08-12 05:58:51 ET

Summary

• Codere Online Luxembourg has seen an 18% rise in share price in 2023, supported by robust growth for 2022 and Q1 2023.
• Rapid growth in the online gambling market indicates further growth for it. The company's also expected to turn profitable next year.
• However, regulations for online gambling are tightening, which could slow it down. And its market valuations don't suggest an upside for now either.

Online casino and sports betting company Codere Online Luxembourg ( CDRO ) has seen a notable 18% rise in share price in 2023 so far. But, it's still trading at less than half the levels of its first close after its public listing in December 2021. Here, I take a closer look at whether this implies upside to the stock or not.

Fast growing market

The estimates for the size of the global online gambling market vary anywhere between USD 65 billion to over USD 100 billion. But all estimates indicate that it's still expected to grow fast. According to Statista, the industry's revenues are expected to see a compounded annual growth rate [CAGR] of 8.5% between 2023 and 2027.

This is already a promising start for the company, which was founded only in 2014, and reflects in its own revenue growth, which will be discussed later.

Further, its biggest market, Spain, which accounts for 49% of Codere's revenues, features among the top 10 markets for the sector (see table above). Mexico is another big market for it, with a 41.6% contribution to revenues in 2022. The remainder comes primarily from Colombia, but also from Panama, the city of Bueno Aires in Argentina and Italy, the business for which was sold in 2022.

In terms of segments too, the company has an advantage, in that sports betting brings in half of its revenues, with the rest garnered through online casinos. Sports betting is the biggest segment of online gambling today, with online casinos being the next largest (see chart below), which also bodes well for the company.

Rising sales, reducing losses

Healthy market growth also shows up in Codere's own net gaming revenue [NGR] rise of almost 48% in 2022, where the NGR is a non-GAAP measure, which is close to total revenues. This was followed up by an even stronger 55% increase in the first quarter of this year (Q1, 2023). Growth has been seen across all major markets, but Mexico stands out among them (see table below).

While the company still reports a loss, there are some encouraging trends here. First, its adjusted EBITDA loss shrank to EUR 2.3 million in Q1 2023, almost a sixth of the EUR 13.2 million in Q1 2022.

Next, its Spanish market is profit making on an adjusted EBITDA basis. In fact, its adjusted EBITDA margin improved from 13.3% in 2021 to 24.3% in 2022. It has improved further to 33.2% in Q1 2023. Also, Codere's Colombian market reported an adjusted EBITDA profit in the latest quarter, with a margin of 17.4%, while Mexico and other markets showed shrinking losses (see table below).

The outlook

For the full year 2023, while the company expects to remain loss making, the adjusted EBITDA loss is seen shrinking to EUR 20-30 million, down from EUR 50.3 million in 2022. It expects to turn a corner in 2024, though it hasn't mentioned any number so far. Analysts in fact, expect a small positive earnings per share [EPS] number in 2024 as well.

Codere expects NGR to come in the range of EUR 140-150 million in 2023. In stark contrast with the growth seen in Q1 2023, however, this represents only an 18% increase for the full year, if the number comes in at the midpoint of the range provided.

That said, the relative slowing down in revenue growth will probably come in only in the second half of the year, owing to a strong base effect from the previous year. This implies that for Q2 2023, the number for which are due on September 1, revenue growth could probably be sustained at higher levels than those expected for the full year. This is also corroborated by analysts' estimates of 33.4% increase during the quarter.

Market valuations

This brings me to its market valuations. Its forward price-to-sales (P/S) ratio at 0.9x is in line with the consumer discretionary sector. Compared to other online gambling companies like Elys Game Technology ( ELYS ) and Bragg Gaming Group ( BRAG ) too, there's no clear case for a price change. While ELYS has a forward P/S of 0.4x, that for BRAG is at 1.1x. In fact, given this and the nascent stage of the online gambling space, I think it's a good idea to make an assessment based on the comparison with the sector alone.

It's worth noting here that CDRO's trailing twelve months [TTM] P/S is at 1.1x, which is actually higher than the 0.9x for the sector. This indicates, that on balance there's a possibility of some correction in its share price from here.

The risk

This is especially so, since for gambling, more than other industries, there are risks to consider too. Gambling addiction is a very real challenge. In the US, for instance, it's estimated that 2 to 4 million people will suffer a gambling disorder during their life. Similarly, in the UK, 1.4 million people are estimated to being harmed by their gambling, while another 1.5 million people are seen as at risk.

Recognising this, regulations are catching up with the online gambling segment, which took off first with reliable and increased internet penetration and then with smartphones and now gives access to everyone everywhere to dabble in games of their choice. The new regulations could restrict the fast growth that the segment has seen so far.

What next?

As such, the future of the industry is still unfolding. This means, that the real story for Codere will play out only over the next few years. It's still a very young company and it's yet to turn profit making.

All things remaining the same, though, we should expect continued growth for now. It's even expected to become profitable from next year onwards. Numbers for its big Spanish market in particular look encouraging.

At the same time, the market valuations don't suggest a Buy case for Codere right now. Going back to the start of this article, this means it's unlikely to g back to its initial close anytime soon. And given that it's still evolving, with risks ahead, it's more of a wait-and-watch stock than anything else. I'm going with a Hold rating on it.

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