Omnichannel Strategy Will Drive Future Success In Italian iGaming Market

Key Takeaways

• Significant growth in the online segment and omnichannel strategy enhances market share and profitability, improving revenues and net earnings.
  
• Potential synergies and buyback authorization support cost efficiencies and EPS growth, positively impacting EBITDA and net profit.
  
• Shifts towards online models and M&A strategies pose risks, including potential retail cannibalization, misallocation risks, and margin pressures from regulatory changes.

Catalysts

Operates in the gaming market in Italy.

• Lottomatica is experiencing strong growth in the online segment, driven by a combination of increased active players and higher average revenue per user (ARPU), which is expected to significantly boost revenues and margins over the coming years.
  
• The company's competitive position in a consolidating Italian market, especially with a strong omnichannel strategy, positions it to capture increased market share, thereby potentially improving future revenues and net earnings.
  
• The ongoing shift from gaming retail to iGaming is expected to drive a substantial increase in EBITDA as online operations are less capital-intensive and more profitable, positively affecting overall financial margins.
  
• Potential synergies from the SKS (now PWO) acquisition are anticipated to realize significant cost efficiencies and bolster EBITDA margins as these synergies are fully integrated by 2026, impacting net profit growth favorably.
  
• The company’s ongoing buyback authorization and disciplined capital allocation could enhance earnings per share (EPS) through return of excess cash to shareholders, assuming no immediate accretive M&A opportunities arise.

Lottomatica Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lottomatica Group's revenue will grow by 9.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.9% today to 16.1% in 3 years time.
• Analysts expect earnings to reach €421.0 million (and earnings per share of €1.65) by about March 2028, up from €98.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €470.2 million in earnings, and the most bearish expecting €367 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.1x on those 2028 earnings, down from 41.8x today. This future PE is lower than the current PE for the IT Hospitality industry at 20.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.97%, as per the Simply Wall St company report.

Lottomatica Group Future Earnings Per Share Growth

Risks

• The potential adjustments to marketing and sponsorship regulations, such as the removal of certain restrictions, may not significantly impact Lottomatica's competitive position or revenue growth due to already available marketing alternatives.
  
• A reliance on strategic bolt-ons and the quality of retail networks for growth might limit Lottomatica's ability to scale online revenues significantly compared to a pure focus on digital growth avenues.
  
• The potential cannibalization of retail gaming due to online migration could risk overall revenue declines if online growth does not sufficiently compensate for retail contraction.
  
• The focus on M&A for capital deployment carries inherent risks of misallocation, especially if the targeted deals do not result in expected synergies or are impacted by changing market conditions.
  
• Regulatory changes, such as new tax rates or other government interventions encouraged by the shifting market towards online gaming, could negatively affect net margins if not aligned with structural market trends.

Valuation

• The analysts have a consensus price target of €19.899 for Lottomatica Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €23.0, and the most bearish reporting a price target of just €14.75.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €2.6 billion, earnings will come to €421.0 million, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 13.0%.
  
• Given the current share price of €16.36, the analyst price target of €19.9 is 17.8% 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.