US iCasino Expansion And Proprietary Content Will Drive Long Term Value Creation

Catalysts

About Bragg Gaming Group

Bragg Gaming Group is a dual listed provider of proprietary iGaming content and technology platforms to regulated online casino, sports betting and lottery operators worldwide.

What are the underlying business or industry changes driving this perspective?

• Accelerating adoption of regulated online casino in the United States, where market size is expected to triple by 2030 while Bragg is already delivering 86 percent revenue growth and half of its proprietary content revenue from this market, should drive sustained top line expansion and operating leverage.
• Rapid formalization and growth of new regulated markets such as Brazil, along with anticipated openings like Finland, position Bragg to convert its early aggregation presence and strong operator relationships into higher margin proprietary content revenue and expanding gross margins.
• Continued shift in product mix toward fully owned casino game IP, which already delivers 35 percent year over year proprietary content revenue growth and compounding recurring sales from an expanding back catalog, should support structurally higher gross profit and EBITDA margins.
• Ongoing optimization of internal structures and processes, including redeployment of resources from lower margin contracts such as the anticipated BetCity migration, is set to enhance SG and A efficiency, lifting adjusted EBITDA margins and cash generation over the medium term.
• Improved balance sheet flexibility through the new lower cost revolving credit facility with Bank of Montreal enables disciplined investment in high growth, margin accretive initiatives in North America and Brazil, supporting higher revenue growth and stronger free cash flow.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Bragg Gaming Group's revenue will grow by 3.1% annually over the next 3 years.
• Analysts are not forecasting that Bragg Gaming Group will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Bragg Gaming Group's profit margin will increase from -7.1% to the average CA Hospitality industry of 19.7% in 3 years.
• If Bragg Gaming Group's profit margin were to converge on the industry average, you could expect earnings to reach €22.9 million (and earnings per share of €0.86) by about December 2028, up from €-7.5 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 6.5x on those 2028 earnings, up from -6.4x today. This future PE is lower than the current PE for the CA Hospitality industry at 16.1x.
• Analysts expect the number of shares outstanding to grow by 1.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.64%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The Netherlands has already seen a 22 percent revenue decline due to regulatory headwinds. Further tightening or similar restrictions in other regulated markets could offset high growth regions, weighing on overall revenue and slowing earnings expansion.
• Only 12 percent of the U.S. population is currently under regulated iCasino. If further state level legalization progresses more slowly than expected or faces pushback, the long term addressable market for Bragg's proprietary content could be smaller than anticipated, limiting revenue growth and margin expansion.
• Bragg is investing heavily in proprietary game development and technology, which carries significant amortization and development costs. If new titles fail to achieve sufficient player traction, the company could remain in an IFRS operating loss position, constraining net margins and long term earnings growth.
• The planned migration of BetCity off the Bragg PAM and the broader shift away from lower margin contracts may not be fully offset by higher margin wins in emerging markets such as Brazil and Finland. This could reduce scale benefits and pressure gross margins and adjusted EBITDA.
• Strategic reliance on a revolving credit facility and continued cost optimization assumes stable or improving cash generation. If macroeconomic conditions or competitive dynamics in iGaming weaken, Bragg could face higher financing risk and less flexibility to invest in growth, negatively impacting free cash flow and long term earnings potential.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of CA$7.25 for Bragg Gaming Group based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €115.8 million, earnings will come to €22.9 million, and it would be trading on a PE ratio of 6.5x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of CA$3.02, the analyst price target of CA$7.25 is 58.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.