2023-09-05 06:39:26 ET
Summary
- The company’s revenues rose by 18.9% year on year in Q2 2023 while the adjusted EBITDA margin surpassed 19%.
- In addition, the balance sheet continues to be strong, and Bragg Gaming revised its guidance for the full year slightly upwards.
- Yet, the enterprise value has recently surpassed $110 million, and I think this could be a good time for investors to trim or close positions.
Introduction
In June, I wrote an article on SA about iGaming technology company Bragg Gaming Group (BRAG) (BRAG:CA) in which I said that it could be in the black by the end of 2023 and that it was likely to meet its guidance for the year.
On August 10, Bragg Gaming posted its Q2 financial results , and they looked strong as adjusted EBITDA soared by 51.3% year on year to €4.7 million ($5.1 million) while net income rose by over 300% to €0.4 million ($0.4 million). Yet, I think that the company is no longer cheap from a fundamentals standpoint as the market capitalization has increased by over 76% since my previous article and the share price recently surpassed my $5.22 target. In view of this, I’m cutting my rating on the stock to neutral. Let’s review.
Overview of the Q2 2023 financial results
If you aren't familiar with Bragg Gaming or my earlier coverage, here's a short description of the business. Bragg Gaming used to be a digital media company named Breaking Data Corp before it acquired Slovenian gaming studio Oryx Gaming in 2018. Following that, the company bought Wild Streak Gaming in 2021 and Spin Games in 2022 and today it’s a B2B online gaming technology platform and casino content aggregator with a portfolio of over 6,500 casino game titles. Those include aggregated licensed games, exclusive third-party content, and titles developed by its own in-house studios. Bragg Gaming also owns a player account management platform ((PAM)) that features tools to operate an online gaming business, including player engagement and data analysis software. The latter is being used by several iCasino and sportsbook brands.
In addition, Bragg Gaming has a content delivery platform named Bragg Hub, and a gamification and engagement toolset under the Fuze brand. The company has offices across the cities of Toronto, Las Vegas, Reno, London, Ljubljana, Malta, and Chennai.
Looking at the Q2 2023 financial results, revenues grew by 18.9% year on year to €24.7 million ($27.2 million), which is a new quarterly record for the company. In addition, I find it encouraging that wagering revenue generated by games and content offered by Bragg Gaming rose to €5.5 billion ($6.1 billion) following a quarter without growth.
During the quarter, the company continued to expand its partner network in Europe, launched operations in new markets, and continued growing its presence in the USA.
The gross profit margin improved slightly to 55.9% thanks to the shift of the revenue mix to higher-margin products - in-house created proprietary and exclusive third-party content, turn-key PAM and managed services partnerships. Yet, the adjusted EBITDA margin improved by 410 basis points to 19.2% thanks to economies of scale. This was a record high for the company and I’m optimistic that there’s further room for improvement as Bragg Gaming is targeting a gross profit margin of 60% by 2025 by boosting the share of by increasing proprietary content, PAM and turnkey solutions revenues (see slide 7 here ). Yet, it’s worth noting that the target year for this gross margin was 2024 just three months ago (see slide 7 here ).
Following the solid Q2 2023 financial results, Bragg Gaming revised its guidance for the year slightly upwards and it now expects to book revenues of €95 million ($104.5 million) to €97 million ($106.7 million) and adjusted EBITDA of €15.5 million ($17.1 million) to €16.5 million ($18.2 million). Previously, the company forecast to register revenues of €93 million ($102.3 million) to 97 million ($106.7 million) and adjusted EBITDA of €14.5 million ($16 million) to €14.5 million ($17.1 million). In my view, Bragg Gaming has strong momentum at the moment, and I think it has a good chance to surpass the upper end of its revenue and adjusted EBITDA guidance for 2023. Looking at the balance sheet, cash and cash equivalents decreased by €4.4 million ($4.8 million) quarter on quarter due to higher receivables. Yet, the balance sheet continues to look strong as Bragg Gaming continued to pay off debts and its net cash position stood at €6.2 million ($6.8 million) at the end of June.
Overall, I think that Bragg Gaming booked strong financial results for Q2 2023 and I’m optimistic that revenues and adjusted EBITDA could surpass €110 million ($121 million) and €27 million ($29.7 million) by 2025. That being said, the valuation of the company is starting to look stretched as the market capitalization recently surpassed the $120 million mark. Bragg Gaming has an enterprise value of $114.3 million as of the time of writing, which means that it’s trading at 6.5x EV/adjusted EBITDA based on the midpoint of the updated 2023 EBITDA guidance of $17.7 million. Considering that this is a relatively small business without a discernible moat, a level of above 6x EV/EBITDA seems high in my opinion. In my view, there is little margin of safety left here and it could be a good time for investors to start thinking about decreasing or closing their positions.
Investor takeaway
Bragg Gaming booked decent Q2 2023 financial results and slightly improved its guidance for the full year. I’m encouraged by the strong growth in wagering revenue and adjusted EBITDA although I expected a higher improvement in the gross margin. The market has reacted positively to the results, but I think that the market capitalization of Bragg Gaming is now at a level where the stock no longer looks cheap based on fundamentals. While I’m optimistic about the financial performance of the company over the coming years, the enterprise value has surpassed $110 million and I think this could be a good time for investors to decrease or close their positions and take profits.
For further details see:
Bragg Gaming: Time To Take Profits (Rating Downgrade)