(Disclaimer: We do not give any financial advice)

Betsson has a long history of growth. During the autumn Betsson had regulatory headwinds and internal disagreements of the future leadership. Betsson´s CEO got fired and reinstated one month later. Soon after, the chairman of the board resigned. In the middle of the internal chaos, the gaming authority in the Netherlands forced Betsson and other i-gaming companies to stop serving dutch customers on their .com domains. The company forecasts an impact of 25 million SEK per month until their license application is submitted and approved.

A bumpy period that reduced the trust in the leadership of Betsson and with a significant reduction of EBIT for Betsson. Betsson seems to be valued as if it is operating in a sunset market, but the reality is rather the opposite. It's a structurally growing market, that gains more acceptance in the world. Many countries try to regulate their home market. As an example, markets in both North and South America are about the regulate. The process of regulation is a bit bumpy for the i-gaming companies, creating initial margin pressures and it could also reduce the growth potential. But Kindred have talked a lot about the fact that it is beneficial for the larger actors in the market and after a couple of years the initial margin impact of the betting duties is gone. After the initial period, the i-gaming provider has stable incomes that are independent of business cycles, with less risky cash flows that should be valued higher.

I believe Betsson is traded at EV/EBIT for 2022 of 5-6. That is attractive for a company with a CAGR of 12% for the last years, where structural growth just seems to have started.

Headwinds

This is why I believe the market is so stingy when assessing Betsson.

The internal turmoil

The autumn started with rumors about an interest to acquire Betsson, from American i-gaming companies. The stock reached three-year highs but soon after, the chairman of the board fired the CEO.

A short summary of the timeline

2021-09-17 - The CEO, Pontus Lindwall get fired, by a unanimous board.

2021-09-23 - The chairman of the board, Patrik Svensk resigns.

2021-09-27 - The former CEO sell 20.000 stocks.

2021-09-28 - The former CEO gets a seat on the board.

2021-10-21 - The board member Jan Nord resigns from the board.

2021-10-25 - The former CEO gets reinstated as CEO.

2021-10-28 - The CEO, Pontus Lindwall, buys back (a lot cheaper) the 20.000 stocks that he sold a month earlier.

Netherland's regulation

The gaming authority in the Netherlands changed the rules for non-regulated actors in the market just before going live with the regulation. If a company wants to apply for a license, they cannot operate with their .com domains in the Netherlands from October 1st. Previously the i-gaming suppliers were only restricted to not marketing themselves towards Dutch customers.

Betsson took the decision to stop accepting Dutch customers on its international websites with the objective to start to operate under the new Dutch licensing regime sometime during 2022, link to the press release. Betsson is also talking about their decision in the Q3 earnings call, link to the earnings call.

The license

The application is expected to be submitted no later than by the end of the first quarter of 2022, in connection with the end of the cooling-off period. The outcome of the application process is expected to be concluded after the summer of 2022. The leadership of Betssons seems to have high expectations that they in the Netherlands can gradually regain their market position, because of a strong brand and an organization with good local knowledge. They also base their expectation on a similar process in France.

Until then, the effect on average will be 25 million SEK per month until they get a license, based on historical figures.

Turkey

Turkey is a never-ending concern for Betsson. Betsson has a B2B relationship with a customer that at least partly has Turkish customers and Turkey is not a regulated market. Turkey has been a ghost popping up now and then for over a decade, especially when other risks are in focus for Betsson. During November the Turkish lira once again took a big hit and this is of course not good for Betsson, at least it is partly counteracted by the high inflation in Turkey. How much impact this has on Betsson is hard to know, since it's not reported in any detail. In Betsson's reporting, Turkey is probably part of the CEECA segment together with Poland, Estonia, Latvia, Lithuania, and the newly launched Croatia and Greece. 31% of the revenue came from CEECA during the quarter.

The development of TRY/SEK over time can be seen below. The situation with an unstable currency in Turkey is not a new phenomenon and could be seen as business as usual for Betsson.

Q4 guidance

As many other betting companies reported, the start of Q4 was weak because of a low betting margin. This was written in the report:

TRADING UPDATE This trading update is an indication of how the fourth quarter has started, however it is not a revenue forecast for the quarter. The average daily revenue in the fourth quarter 2021 up until and including 17 October was 17.6 per cent lower than the average daily revenue of the full fourth quarter 2020. Adjusted for currency effects and acquisitions, the average daily revenue until 17 October was 12.9 2021/Q3 Betsson AB (publ), Interim report July-September 2021 4 per cent lower than the average daily revenue of the full fourth quarter 2020. During this period, the sportsbook margin has been 4.2% which is extra ordinary low compared to the average over a longer period of time. The strongest reason behind the decrease in revenue is the low sportsbook margin, but the decision to close down international gaming sites for customers from Netherlands also had a negative effect on revenue.

The largest impact was the betting margin. I am not too worried about it, since betting margins do fluctuate over time and one month is a very short time period. But it might delay a potential revaluation of Betsson.

History

Betsson has had a history of growth. With a CAGR of 12% per share since 2013. Betsson has a high return on equity of 20%, which explains how Betsson has been able to grow and at the same time return 61% of the EPS on average as dividends. The margin decreased over the years and especially during the introduction of the Swedish regulation of the i-gaming market. That trend seems to be broken. Lately, the margin has been growing at the same time as Betsson has been making big investments in new markets and in the betting platform for the North American market.

Including dividends, Betsson had a negative return of 24%, 33%, and 40% over 5, 3, and 1 year respectively. This is not caused by how Betsson delivered operationally but mostly caused by a change in the valuation of Betsson.

Future

History has been strong, but what about the future.

Market cap and enterprise value

At a price of 50 SEK, with 137 million stocks and net debt of -65 million the enterprise value for Betsson is 6.8 billion SEK.

The impact of the Dutch i-gaming regulation

The regulations in the Netherlands will impact Betsson negatively with 25 million SEK per month and 300 million per year until they get a license. After getting the license, there will be a period of market investments. The leadership expects to get most of the customers back based on similar experiences.

I believe

• That they will get most of the customers back again

• That they will get a license

But since the politicians have been unpredictable in the Netherlands, the discount factor is high. Even if my assumptions are true, there will take time and investments to get there.

Valuation

Bear scenario, no growth -> EV/EBIT 6.3

Betsson had revenue of 1301 million SEK LTM. Excluding EBIT from the Netherlands, that would imply EBIT of 1000 million SEK for last year without the Netherlands included. Adding the Inca bet LTM EBIT gives EBIT of 1073. And an EV/EBIT multiple of 6.3.

The conservative scenario EV/EBIT 4.8

The rest of the world is growing fast and is now starting to be a significant part of Betsson's revenue. If we should try to make a conservative estimate of the revenue excluding the chaos in the Netherlands, this is my take.

1. Nordics are stable, will have a quarterly revenue of 550 million SEK per quarter as the two last quarters, during 2022. A growth of 2% for 2022 compared to LTM. This should be compared to a growth of 10% LTM 2021-Q3.

2. Western Europe will have revenue of around 400 million SEK per quarter, excluding the loss in the Netherlands. As the last LTM period, even if Germany now reduce their restrictions applied during the pandemic.

3. Central Europe, Eastern Europe, and Central Asia will have revenue of 2200, a growth of 5 % compared to the LTM growth rate of 30 %.

4. RoW will have a growth rate of 50% compared to an LTM growth rate of 100%. And will then have revenue of 1500 excluding the recently acquired Inca bet.

5. Inca bet will grow 50%. Compared to when Betsson bought the company it had a growth of 146%, and a revenue of 220 million och and EBIT of 73 million SEK. This would imply EBIT of 110 MSEK and revenue of 330 million SEK for 2022.

These conservative assumptions would give Betsson a revenue of 2200+1400+2200+1500 = 7500 million SEK. A growth of 7% and including Inca bet a growth of 12%.

Assuming that the profit grows linearly to the growth, the profit will be last year's profit of 1301 MSEK minus 300 MSEK from the Netherlands multiplied by 7%. This equals 1070 and if we assume that the Inca bet grows by half the pace of last year, we have a total EBIT of 1180 million SEK.

Assuming that Betsson within a couple of years will get back 33 % of the EBIT from the Netherlands, even if the leadership seems confident being able the regain a larger part of the market. Valuing this at 10 times EBIT. That would be worth 1 billion SEK today.

Then EV minus 1 billion SEK is 5.8 which in this scenario gives an EV/EBIT multiple of 4.9.

The call option

Betsson is making big investments to deliver a betting solution B2B in North America. 15 million over the income statement only in q3 and probably more over the balance sheet. Betsson has a history of successful spin-offs, where NetEnt was given to the owners and later sold to Evolution for 17 billion SEK. Other companies coming from Betsson are Cherry, Yggdrasil, and Angler gaming. Betsson will be launching a B2C brand in Colorado in Q1 2022, mostly as a proof of concept to show the other actors what they can do and that it actually works. This part could be worth a lot for Betsson in a couple of years, this does not seem to be valued at all by the market, leaving a great upside potential. Either if it fails, then the profits will rise since they are making big investments today or even greater value will be unleashed if they get customers onto the platform. When Kambi lost one of their big customers, the customer said something in line with: "Kambi is a really professional partner, but we want a betting platform tailored for the North American market". That is what Betsson will try to take to the market in 2022.

Wrap-up

I believe the risk premium will fall when the impact of the Netherlands will be included in one or two quarterly reports. Turkey seems to have enough on its plate already with large inflation pressure. I do not believe a gaming regulation will be at the top of the government's to-do list. Somewhere during H1, I believe the market will look more at the potential and not only the risks. And there are plenty of opportunities with a fast-growing Latin-American market, possibly boosted by the world cup and the launch of the B2B betting platform tailored for the North American market.

An EV/EBIT multiple of 5-6 is not expensive for a company with a long history of growth that now is done with a product for the North American market that could a big opportunity for Betsson. And in this multiple, I did not even include 2022 cash flow. 2021 LTM free cash flow is 1000 million SEK.

Adjustments after first publication,

2021-12-10 -> Changed the Western Europe revenue assumption for the conservative scenario, from 400 million SEK per quarter to 350 million SEK, after feedback from another investor. The weakness from both the new gaming tax in Germany and the reduced focus on Great Britain will probably impact the revenue also going forward. My expectation is that it will grow from here, but since it is a conservative estimate, 350 million SEK is more prudent.