Thanks Bro, this is good stuff. Did management reflect on their acquisition of NetEnt? If this misstep (investor's perspective) is reflected and they would avoid going forward, this is actually positive. However, if management views the issue very differently than investor, there could be more value destructive M&A to come.
Since the EUR2.1bn (20x EV/EBITDA) acquisition of NetEnt in 2020, EVO continued to make several bolt-ons in RNG/slot games, including EUR450m (16x EV/EBITDA) for Big Time Gaming in 2021, EUR340m (15x EV/EBITDA) for Nolimit City in 2022 and EUR80m (9x EV/EBITDA) for Galaxy Gaming in 2024. The latter acquisitions came with a lower valuation multiple, while including an earn-out to mitigate the risk of underperformance post-acquisition. EVO also rebuilt its IT infrastructure in 2021 to integrate the back office of the live casino and RNG/slot games, enabling cross-selling opportunities. The management team has tried their best they can to "do things right".
However, I am not convinced that they have been doing the right things. Against the above backdrop, RNG/slot revenue only recorded single-digit growth in 2023 and 2024. RNG/slot generated less than EUR300m revenue in FY2024 despite EUR3bn paid for acquisitions (~EUR2.6bn excluding earn-out) in aggregate. Assuming a 68% EBITDA margin, the RNG/slot segment may contribute less than EUR200m EBITDA (EVO provided no breakdown of EBITDA by segment). EVO is currently trading at 9x EV/EBITDA, compared to 13-15x EV/EBITDA paid for RNG/slot acquisitions.
The management remains committed to reviving its RNG business. EVO still has approximately EUR 1 billion in net cash on its balance sheet, while nearly 100% of its FCF in 2025 is directed towards dividends and share buybacks. If there's any value-destructive M&A in their pipeline, potential damage could be limited to EUR 1 billion, as EVO aims to be in a net cash position. Given that the exercise price of its 2025/28 incentive plan is ~SEK870, roughly 17% above its current share price, and the warrants of its 2023/26 incentive plan are likely to expire worthless in Nov 2026, I believe the management team will be incentivised to be more disciplined in order not to miss the big windfall again in May 2028. It is also worth noting that the management team subscribe to warrants on a buy-one-get-one-free basis according to the incentive plan, so they get a negative payout if the warrants expire worthless.
It's interesting to see the overlap in our portfolios. I initially came here for your excellent coverage of BAT and the broader nicotine space—thank you for that—but was pleasantly surprised to see you also cover Diageo (which is on my watchlist) and Evolution Gaming. I also initiated a position in Evolution this year for similar reasons, shortly after selling my stake in Philip Morris (too early).
One is tempted to say "great minds think alike," but it's more likely we're operating in a similar investment bubble. Let's hope it proves to be a profitable one!
Haha that’s interesting. Perhaps we share a few common screening criteria in stock picking. Happy to know that my non-tobacco articles are also relevant to your interest.
Thanks Bro, this is good stuff. Did management reflect on their acquisition of NetEnt? If this misstep (investor's perspective) is reflected and they would avoid going forward, this is actually positive. However, if management views the issue very differently than investor, there could be more value destructive M&A to come.
Since the EUR2.1bn (20x EV/EBITDA) acquisition of NetEnt in 2020, EVO continued to make several bolt-ons in RNG/slot games, including EUR450m (16x EV/EBITDA) for Big Time Gaming in 2021, EUR340m (15x EV/EBITDA) for Nolimit City in 2022 and EUR80m (9x EV/EBITDA) for Galaxy Gaming in 2024. The latter acquisitions came with a lower valuation multiple, while including an earn-out to mitigate the risk of underperformance post-acquisition. EVO also rebuilt its IT infrastructure in 2021 to integrate the back office of the live casino and RNG/slot games, enabling cross-selling opportunities. The management team has tried their best they can to "do things right".
However, I am not convinced that they have been doing the right things. Against the above backdrop, RNG/slot revenue only recorded single-digit growth in 2023 and 2024. RNG/slot generated less than EUR300m revenue in FY2024 despite EUR3bn paid for acquisitions (~EUR2.6bn excluding earn-out) in aggregate. Assuming a 68% EBITDA margin, the RNG/slot segment may contribute less than EUR200m EBITDA (EVO provided no breakdown of EBITDA by segment). EVO is currently trading at 9x EV/EBITDA, compared to 13-15x EV/EBITDA paid for RNG/slot acquisitions.
The management remains committed to reviving its RNG business. EVO still has approximately EUR 1 billion in net cash on its balance sheet, while nearly 100% of its FCF in 2025 is directed towards dividends and share buybacks. If there's any value-destructive M&A in their pipeline, potential damage could be limited to EUR 1 billion, as EVO aims to be in a net cash position. Given that the exercise price of its 2025/28 incentive plan is ~SEK870, roughly 17% above its current share price, and the warrants of its 2023/26 incentive plan are likely to expire worthless in Nov 2026, I believe the management team will be incentivised to be more disciplined in order not to miss the big windfall again in May 2028. It is also worth noting that the management team subscribe to warrants on a buy-one-get-one-free basis according to the incentive plan, so they get a negative payout if the warrants expire worthless.
It's interesting to see the overlap in our portfolios. I initially came here for your excellent coverage of BAT and the broader nicotine space—thank you for that—but was pleasantly surprised to see you also cover Diageo (which is on my watchlist) and Evolution Gaming. I also initiated a position in Evolution this year for similar reasons, shortly after selling my stake in Philip Morris (too early).
One is tempted to say "great minds think alike," but it's more likely we're operating in a similar investment bubble. Let's hope it proves to be a profitable one!
Haha that’s interesting. Perhaps we share a few common screening criteria in stock picking. Happy to know that my non-tobacco articles are also relevant to your interest.
Great Pitch!
Great write up - I found you via PitchStack. I highlighted them as well on my substack: https://hurleyinvesting.substack.com/p/company-deep-dive-a-industry-leading