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Gaming Realms — Update 7 June 2016

Gaming Realms — Update 7 June 2016

Gaming Realms

Analyst avatar placeholder

Written by

Gaming Realms

Strategic partnership to maximise agency value

New strategic partnership

Travel & leisure

7 June 2016

Price

20.75p

Market cap

£53m

US$1.44/€1.29/£

Net cash (£m) at 31 December 2015

2.3

Shares in issue

256.9m

Free float

67%

Code

GMR

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

0.0

9.2

(37.1)

Rel (local)

(0.7)

7.7

(30.3)

52-week high/low

34.5p

18.2p

Business description

Gaming Realms creates, develops and markets interactive next-generation online gambling and social games delivered via mobile, tablet and desktop computers. It listed on AIM via a reverse takeover (of Pursuit Dynamics) in August 2013.

Next events

AGM

June 2016

Analysts

Eric Opara

+44 (0)20 3681 2524

Jane Anscombe

+44 (0)20 3077 5740

Gaming Realms is a research client of Edison Investment Research Limited

Gaming Realms has announced a strategic partnership with the Ayima digital marketing agency whereby it is injecting its QuickThink Media (QTM) assets in return for a 10% stake valued at £540k. The rationale for the deal is to allow Gaming Realms’ management to further focus on its core strength, being the development and publishing of mobile optimised social and real money games, while also strengthening QTM’s outlook by placing it within a growing complementary business.

Year end

Revenue (£m)

EBITDA*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/14**

11.2

(7.8)

(5.0)

0.0

N/A

N/A

12/15

21.2

(4.1)

(2.2)

0.0

N/A

N/A

12/16e

37.1

0.8

(0.1)

0.0

N/A

N/A

12/17e

54.3

6.9

2.1

0.0

9.9

N/A

Note: *Normalised (and diluted EPS), excluding exceptional items, amortisation of acquired intangibles and share-based payments. **15-month period to December 2014.

Gaming Realms to retain interest in future prospects

The terms of the deal will see Gaming Realms receive shares in Ayima equal to 10% of the enlarged Ayima share capital (valued by Gaming Realms at £540k) following its completion. We believe that the QTM assets will benefit from revenue synergies as a result of being part of a successful specialist digital marketing business, enabling it to continue to develop its service offering while also taking advantage of Ayima’s enhanced sales channels. Consequently QTM should be better placed to achieve growth going forward, with Gaming Realms remaining leveraged to its future success via its Ayima shareholding.

Revised forecasts

We have reduced our 2016 revenue forecasts from £40m to £37.1m to reflect the disposal, with a commensurate reduction in Gaming Realms’ cost base to arrive at an unchanged 2016 adjusted EBITDA forecast of £0.8m. We have also taken the deal as an opportunity to revisit our 2017 forecasts including the full year impact of the QTM disposal and the effect of the extension of the UK Point of Consumption tax (POCT) to free play; we have reduced our 2017 revenue forecast from £65.0m to £54.3m and our adjusted EBITDA forecast from £11.6m to £6.9m.

Valuation: Revised 2017 forecasts still suggest value

Gaming Realms trades on a 2017e EV/EBITDA of 7.1x, placing it at a discount to its peer group average of 8.6x. We believe that the discount reflects a level of historic business mix volatility and the fact that Gaming Realms is yet to achieve profitability. We continue to expect EBITDA profitability to be achieved this year. EBITDA profitability coupled with a period of stability should be rewarded with a positive re-rating.

Deal rationale and terms

QuickThink Media background

QuickThink Media (QTM) is a specialist marketing agency. It has a team of c 20 digital marketing professionals whose tasks are divided between a digital marketing agency and an online gaming affiliate business. It has a number of external clients including Macmillan Cancer Trust and Iceland in addition to providing services to Gaming Realms itself.

The sale of the QTM assets reflects a continuation of Gaming Realms’ strategy of concentrating its efforts on those activities from which it is able to achieve the best return on its investment. The continued strong KPIs delivered by games on its proprietary Grizzly platform including the 2015 acquisition of Slingo, compared to the relatively stagnant revenues reported for the QTM business support this view. Although QTM has successfully retained a number of high-quality clients including Macmillan Cancer Trust, management believes that its growth prospects would be better served under the stewardship of a larger specialist digital marketing organisation.

Ayima background

Ayima is a specialist digital marketing agency providing search engine optimisation (SEO) and pay-per-click (PPC) solutions to some of the world’s biggest brands including British Airways, bwin, M&S and Verizon. The company was founded as a specialist search consultancy business in 2007 by its three founders, who have longstanding gaming sector experience, having come together at PartyGaming. All three founders remain with the business, which now employs over 100 people in five countries and has been recognised as one of the fastest growing tech companies in the UK and Europe by The Sunday Times Tech Track.

Terms of the deal

The deal is a non-cash transaction that will see Gaming Realms receive newly issued shares in Ayima. The shares will constitute 10% of the enlarged issued share capital of privately held Ayima and have been valued by Gaming Realms at approximately £540,000.

The strategic partnership with Ayima will result in the majority of QTM staff being transferred to work under the Ayima umbrella. A small number of QTM staff members will remain with Gaming Realms in order to ensure that it retains a level of dedicated digital marketing capability in house to continue to support the house brands.

The use of shares to settle the deal is representative of the confidence of Gaming Realms management in the expertise of the QTM staff that will be transferred to Ayima and in the ability of Ayima’s management to maximise the value of the QTM assets.

For the financial year ended 31 December 2015, losses attributable to QTM were approximately £20k and the company was valued at approximately £400k on Gaming Realms’ balance sheet as at the end of 2015.

Financials: Revised estimates

We have revised our forecasts to reflect the disposal of the QTM business. Our 2016 forecast for marketing services revenue falls from £7.5m to £4.6m, which comprises a five-month contribution from QTM together with a 12-month contribution from BingoPort. We have also slightly rebalanced our social (including licensing revenues) and real money gaming mix in favour of social gaming revenues in reflection of the early success achieved in licensing and what we believe to be a promising pipeline of further deals. The net effect is to reduce 2016e revenues from £40.0m to £37.1m, while our 2016e adjusted EBITDA remains unchanged.

2017 will be the first year that will see a full year impact from the announced deal. The previously announced extension of the UK POCT to incorporate free plays and bonus credits will also come into effect from August 2017. The industry awaits further clarification from the government on exactly how the tax is to be calculated; as a result, it remains unclear exactly how much the tax will cost. However, we recognise that the tax will have a direct cost impact and is likely to result in a lower level of marketing efficiency as industry participants look for alternative approaches to what continues to be one of the industry’s most effective marketing tools. For the sake of prudence we have reduced our revenue forecasts and increased the gaming tax charge that we expect. The effect of this is summarised in Exhibit 1:

Exhibit 1: Changes to forecasts

Revenue (£m)

EBITDA (£m)

EPS (p)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2016e

40.0

37.1

(7.3)

0.8

0.8

N/A

(0.0)

(0.1)

N/A

2017e

65.0

54.3

(16.5)

11.6

6.9

(40.5)

3.8

2.1

(44.7)

Source: Edison Investment Research

Balance sheet and cash flows: Gaming Realms had net cash of £2.3m at the end of 2015. We do not expect the QTM deal to have any material impact on its end 2016e net cash position and as a result our forecast remains unchanged at £2.7m. Importantly despite our downgrade to 2017e revenues and profits, our analysis still leads us to believe that it will be the first year of significantly positive operating and net cash flows, which we forecast at £4.9m (previously £9.6m) and £2.9m (previously £7.6m), respectively, leaving the company with an end December 2017 net cash position of £5.6m. As a result, we do not expect the need for any further external funding in the absence of further M&A activity.

Exhibit 2: Financial summary

£m

2013*

2014**

2015

2016e

2017e

September/December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

0.88

11.23

21.21

37.08

54.30

EBITDA

 

 

(2.32)

(7.82)

(4.11)

0.76

6.92

Operating Profit (before amort. and except.)

 

(2.44)

(8.33)

(4.72)

(0.39)

5.77

Amortisation of acquired intangibles*

(0.05)

(0.80)

(1.68)

(0.90)

(0.80)

Exceptional items

(0.87)

(0.23)

(0.32)

(0.40)

0.00

Share based payments

(0.04)

(0.44)

(0.67)

0.00

0.00

Operating Profit

(3.40)

(9.80)

(7.39)

(1.69)

4.97

Net Interest

(0.00)

(0.04)

(0.39)

0.00

0.00

Profit Before Tax (norm)

 

 

(2.44)

(8.38)

(5.11)

(0.39)

5.77

Profit Before Tax (FRS 3)

 

 

(3.40)

(9.85)

(7.78)

(1.69)

4.97

Tax

0.00

0.09

0.34

0.02

(0.25)

Profit After Tax (norm)

(2.44)

(8.28)

(4.77)

(0.37)

5.52

Profit After Tax (FRS 3)

(3.40)

(9.75)

(7.44)

(1.67)

4.72

Average Number of Shares Outstanding (m)

36.4

165.2

215.7

259.2

261.7

EPS - normalised (p)

 

 

(6.7)

(5.0)

(2.2)

(0.1)

2.1

EPS - normalised diluted (p)

 

 

(6.7)

(5.0)

(2.2)

(0.1)

2.1

EPS - (IFRS) (p)

 

 

(9.3)

(5.9)

(3.4)

(0.6)

1.8

Dividend per share (p)

0.0

0.0

0.0

0.0

0.0

EBITDA Margin (%)

-264.1

-69.6

-19.4

2.1

12.7

Operating Margin (before GW and except.) (%)

-277.7

-74.2

-22.3

-1.0

10.6

BALANCE SHEET

Fixed Assets

 

 

6.03

17.06

29.27

24.79

25.64

Intangible Assets

5.92

16.76

28.93

24.60

24.60

Tangible Assets

0.12

0.30

0.34

0.19

1.04

Investments

0.00

0.00

0.00

0.00

0.00

Current Assets

 

 

6.53

6.24

6.55

6.41

11.34

Stocks

0.00

0.00

0.00

0.00

0.00

Debtors

1.34

2.22

4.02

3.50

5.50

Cash

5.06

3.99

2.34

2.71

5.64

Other

0.12

0.02

0.20

0.20

0.20

Current Liabilities

 

 

(1.80)

(5.26)

(9.32)

(6.10)

(7.00)

Creditors

(1.78)

(5.25)

(9.32)

(6.10)

(7.00)

Short term borrowings

(0.02)

(0.01)

0.00

0.00

0.00

Long Term Liabilities

 

 

(0.02)

(2.43)

(3.71)

0.00

0.00

Long term borrowings

(0.02)

0.00

0.00

0.00

0.00

Other long term liabilities

0.00

(2.43)

(3.71)

0.00

0.00

Net Assets

 

 

10.74

15.61

22.80

25.11

29.98

CASH FLOW

Operating Cash Flow

 

 

(3.90)

(8.02)

(3.83)

(1.64)

4.92

Net Interest

0.00

(0.04)

(0.25)

0.00

0.00

Tax

0.00

0.05

0.34

0.00

0.00

Capex

(0.44)

(0.69)

(2.49)

(1.00)

(2.00)

Acquisitions/disposals

3.42

(4.12)

(7.45)

1.70

0.00

Financing

5.91

11.81

12.00

1.30

0.00

Dividends

0.00

0.00

0.00

0.00

0.00

Net Cash Flow

4.99

(1.01)

(1.68)

0.36

2.92

Opening net debt/(cash)

 

 

0.00

(5.02)

(3.98)

(2.34)

(2.71)

HP finance leases initiated

0.00

0.00

0.00

0.00

0.00

Other

0.03

(0.03)

0.04

0.01

(0.00)

Closing net debt/(cash)

 

 

(5.02)

(3.98)

(2.34)

(2.71)

(5.64)

Source: Edison Investment Research, Gaming Realms accounts. Note: *Includes AlchemyBet and BeJig for two months. **15-month period as the year end changed to December.

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