Product Leap Initiative Will Enhance Gaming Portfolio In 2025

Key Takeaways

• Expansion in Brazil and the Philippines, alongside regulatory adaptation, could drive significant revenue growth from regulated markets.
  
• Strategic share repurchase and talent acquisition may improve shareholder value and operational efficiency.
  
• Regulatory challenges and cyber-security issues in key markets are pressuring margins and earnings, with persistent impacts expected over the next few quarters.

Catalysts

Develops, produces, markets, and licenses online casino systems to gaming operators in Europe, Asia, North America, Latin America, and internationally.

• Evolution is expanding its studio network with major projects in Brazil and the Philippines, indicating future revenue growth potential as they tap into these regulated markets.
  
• The ongoing Product Leap initiative is expected to enhance Evolution's gaming portfolio in 2025, which could drive increased player engagement and revenue.
  
• Evolution's focus on adapting to shifting regulatory environments, including ring-fencing measures, is aimed at increasing compliance and could lead to long-term growth in revenue from regulated markets.
  
• The company's improved recruitment momentum and talent acquisition are expected to drive better operational efficiency, potentially positively impacting net margins in the second half of 2025.
  
• The proposed €500 million share repurchase plan for 2025 could boost earnings per share, reflecting a strategic capital allocation to enhance shareholder value.

Evolution Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Evolution's revenue will grow by 8.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 56.2% today to 51.5% in 3 years time.
• Analysts expect earnings to reach €1.5 billion (and earnings per share of €7.46) by about March 2028, up from €1.2 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €1.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.4x on those 2028 earnings, up from 11.9x today. This future PE is greater than the current PE for the GB Hospitality industry at 11.9x.
• Analysts expect the number of shares outstanding to decline by 2.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.17%, as per the Simply Wall St company report.

Evolution Future Earnings Per Share Growth

Risks

• Cyber-attacks and fraud in Asia are impacting revenue growth, as the company is in the process of resolving these issues, which are expected to persist for a few more quarters.
  
• The situation in Georgia is affecting overall capacity and resource mix, leading to higher operational costs and pressured net margins until mid-2025.
  
• The emphasis on regulated markets, although a long-term growth driver, may lead to initial increased costs and reduced margins, impacting earnings due to necessary adaptations to comply with different regulations.
  
• Margin guidance for 2025 is estimated to be lower due to increased operational costs associated with expansion and a more expensive resource mix, which may constrain earnings growth.
  
• U.K. Gambling Commission investigation and potential regulatory changes pose risks by possibly requiring operational adjustments, affecting revenue and compliance costs.

Valuation

• The analysts have a consensus price target of SEK1084.282 for Evolution 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 SEK1680.71, and the most bearish reporting a price target of just SEK683.68.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €2.9 billion, earnings will come to €1.5 billion, and it would be trading on a PE ratio of 15.4x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of SEK796.4, the analyst price target of SEK1084.28 is 26.6% 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.