AI And Operations 2.0 Will Transform Margins And Drive A Long-Term Turnaround

Catalysts

About Evoke

Evoke is a diversified international online and retail betting and gaming company focused on profitable growth and disciplined capital allocation.

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

• Scaling in high growth international core markets such as Italy, Romania, Denmark and Spain, supported by strong local brands and platform migrations, is set to drive sustained double digit top line expansion and support higher group revenue and EBITDA.
• Ongoing rollout of AI, automation and Operations 2.0 across customer journeys is reducing manual intervention and marketing inefficiency, which should structurally lift gross margins and expand net margins over the next several years.
• Migration onto in-house platforms and sports trading, along with brand licensing deals such as the ComeOn partnership, are replacing third party revenue share with capital light, higher margin models. This supports continued EBITDA growth and faster deleveraging.
• Investment in product and UX, including new gaming machines in retail, upgraded self service betting terminals and enhanced William Hill and 888 apps, positions Evoke to capture increased customer engagement and wallet share, boosting revenue and operating leverage.
• Disciplined focus on profitable growth, with optimized bonusing and more targeted marketing, is already delivering higher contribution from flat or modestly growing revenue. This provides a clear path to rising earnings and improved free cash flow for debt reduction.

Assumptions

This narrative explores a more optimistic perspective on Evoke compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Evoke's revenue will grow by 7.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -6.4% today to 8.8% in 3 years time.
• The bullish analysts expect earnings to reach £192.6 million (and earnings per share of £0.42) by about December 2028, up from £-113.3 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as £53.1 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 4.2x on those 2028 earnings, up from -0.9x today. This future PE is lower than the current PE for the GB Hospitality industry at 14.8x.
• The bullish analysts expect the number of shares outstanding to grow by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 17.29%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Sustained pressure on U.K. retail betting, from structurally weaker high street footfall, racing industry challenges and higher National Insurance and National Living Wage costs, could prevent retail from returning to a robust growth curve and compress group EBITDA margins and earnings over time.
• Flat to declining U.K. online revenue, particularly the double digit revenue decline in the 888 brand as marketing is cut back, may signal that the focus on profitable growth over volume is eroding market share in a mature market, which could cap long term revenue growth and limit operating leverage driven margin expansion.
• Rising or restructured gaming taxes in key markets such as the U.K., combined with broader regulatory tightening and potential shifts of customers to black market operators, would structurally raise the cost of doing business and could materially reduce net margins and after tax earnings even if top line growth continues.
• High starting leverage at around 5 times EBITDA and the need to prioritize cash for debt servicing and transformation investment mean deleveraging relies heavily on sustained EBITDA growth, so any slowdown in international core markets or execution setbacks in Operations 2.0 and platform migrations could weaken cash generation and delay improvements in net income.

Valuation

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

• The assumed bullish price target for Evoke is £1.1, which represents up to two standard deviations above the consensus price target of £0.82. This valuation is based on what can be assumed as the expectations of Evoke's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £1.1, and the most bearish reporting a price target of just £0.33.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be £2.2 billion, earnings will come to £192.6 million, and it would be trading on a PE ratio of 4.2x, assuming you use a discount rate of 17.3%.
  
• Given the current share price of £0.23, the analyst price target of £1.1 is 79.3% 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.