2023-06-20 19:26:36 ET
Summary
- Bragg Gaming booked strong Q1 2023 financial results thanks to organic growth and I think is likely to meet its guidance for the full year.
- The company is valued at just 3.5x EV/EBITDA based on the midpoint of its 2023 EBITDA guidance.
- In my view, Bragg Gaming should be trading at above 6x EV/EBITDA which translates into $5.22 per share at EBITDA of $17 million.
Introduction
At Microcap Review, we like to write about micro-cap stocks on SA, and today I'm taking a look at Bragg Gaming Group ( BRAG ) ( BRAG:CA ). It’s a Canada-based iGaming technology firm that has been growing rapidly over the past few years thanks to acquisitions and organic growth. I think that Bragg Gaming could be in the black by the end of 2023, and the company is starting to look undervalued based on fundamentals. My rating on the stock at the moment is a speculative buy. Let’s review.
Overview of the business and financials
Bragg Gaming is a B2B online gaming technology platform and casino content aggregator. The company has more than 6,500 casino game titles, including games developed by its own in-house studios (Wild Streak Gaming, Spin Games, Atomic Slot Lab, Indigo Magic, and Oryx Gaming), exclusive titles developed by third-party partners, and aggregated licensed games. It also has a player account management platform ((PAM)), which provides tools to operate an online gaming business such as player engagement and data analysis software. Bragg Gaming employs over 400 people across offices in Toronto, Las Vegas, Reno, London, Ljubljana, Malta, and Chennai and it operates in Europe, North America, and Latin America. Looking at the financial results for the past decade, we can see that revenues have increased over 20x since FY14, and the main driver behind these was several acquisitions.
Bragg Gaming used to be an artificial intelligence services provider named Breaking Data Corp until late 2018 when it acquired a gaming and turnkey solutions provider named Oryx Gaming. Following this, Bragg Gaming bought iGaming content studio Wild Streak in June 2021, and iGaming technology supplier and content provider Spin Games in June 2022.
Looking at the Q1 2023 financial results, we can see that organic growth has picked up as revenues rose by 18.1% year on year to €22.9 million ($25.2 million) thanks to a 42.8% growth in the number of unique players to 2.8 million as well as a 35.7% increase in the total wagering generated via games and content €5.2 billion ($5.7 billion).
As you can see, the gross profit margin improved by 170 basis points to 53.5% while adjusted EBITDA grew by 28.1% to €3.9 million ($4.3 million). The main reasons behind this include economies of scale as well as growing contributions from proprietary content. Bragg Gaming is targeting a gross profit margin of 60% by 2024 by increasing proprietary content, PAM and turnkey solutions revenues (see slide 7 here ). They don’t have any cost of sales compared to third-party games and content which have associated third-party costs.
Turning our attention to the balance sheet, I think the situation looks much better compared to December 2022 as an improved cash flow from operating activities enabled Bragg Gaming to boost cash and cash equivalents to €15.1 million ($16.6 million). The net cash position, in turn, grew to €9.6 million ($10.5 million) from €4.5 million ($5 million).
Looking at what to expect for the future, Bragg Gaming has reiterated its 2023 guidance for revenues of €93 million ($102.2 million) to 97 million ($106.6 million) and adjusted EBITDA of €14.5 million ($15.9 million) to €14.5 million ($18.1 million). In my view, the company is likely to meet its guidance for the full year as it’s accelerating the release of new titles as well as the launch of operations in new markets. In Q1 2023, Bragg Gaming launched a total of 26 online titles, which is 89% higher compared to a year earlier. In addition, the company set foot in Italy, Mexico, and Belgium and brought in new partners in Switzerland, Spain, and the UK. According to the latest corporate presentation, Bragg Gaming was on track to release 33 distinct exclusive online content titles in H1 2023, including 15 from its own studios (see slide 12 here ). In my view, economies of scale and an increased share of revenues from proprietary content are likely to enable the company to book a positive quarterly net income by the end of 2023 (the Q1 2023 net loss was $0.5 million).
Turning our attention to the valuation, Bragg Gaming has an enterprise value of $58.9 million as of the time of writing and is trading at an LTM EV/adjusted EBITDA ratio of 4.2x. At the midpoint of the 2023 EBITDA guidance of $17 million, the EV/EBITDA ratio would drop to just 3.5x. Considering that Bragg Gaming has a steadily growing business with improving margins thanks to economies of scale and an increasing share of revenues from proprietary content, I think that it should be trading at above 6x EV/EBITDA. At an annual EBITDA of $17 million, this translates into $5.22 per share which represents an upside potential of 58.2%.
Looking at the risks for the bull case, I think that the major one is that the new games developed by the in-house studios of Bragg Gaming over the remainder of 2023 underperform in terms of revenue and wagering, which would negatively impact margins. This could also lead to a miss of the lower end of the 2023 EBITDA guidance. In addition, investors should keep in mind that this is a thinly traded stock, with a daily trading volume rarely exceeding 10,000 shares on NASDAQ. The situation on the TSX is even worse with the daily trading volume often being below 2,000 shares. In view of this, there could be significant share price volatility, and it could be challenging to exit a large position.
Investor takeaway
Bragg Gaming booked strong Q1 2023 financial results thanks to organic growth and I think the company is likely to meet its guidance for the full year. I expect economies of scale and an increasing share of revenues from proprietary content to enable Bragg Gaming to book a positive quarterly net income by the end of 2023 and the company is valued at just 3.5x EV/EBITDA based on the midpoint of its 2023 EBITDA guidance. However, this is a thinly traded stock, and a lot depends on the success of upcoming games from in-house studios. This is why I’m putting a speculative buy rating on Bragg Gaming.
For further details see:
Bragg Gaming: 2023 Is Shaping Up As A Good Year As Margins Improve