Transitioning To An iGaming-only Strategy Will Drive Operational Efficiency

Key Takeaways

• Enhanced focus on key markets and an iGaming-only strategy in the U.S. are expected to improve revenue, margins, and overall profitability.
  
• Strong cash position and dividend strategies signal confidence in profitability, positively impacting shareholder returns and demonstrating financial stability.
  
• Reliance on U.S. iGaming market and strategic market exits may hinder profitability amid potential tax hikes and high marketing expenditure impacting margins.

Catalysts

Operates as an online sports betting and gaming operator.

• Super Group has refined its global footprint by focusing on key growth markets, which is expected to lead to increased revenue and expanded market share by optimizing operations and marketing efficiencies in existing regions. This improved focus is likely to enhance revenue and profit margins.
  
• The transition to an iGaming-only strategy in the U.S. is anticipated to drive higher revenue growth while aligning operational efficiency towards profitability. This strategic shift is expected to reduce overhead and marketing costs, aiming for a path to positive net income in the U.S. market, impacting overall earnings.
  
• Super Group's commitment to increasing its ex-U.S. long-term margin target to greater than 24% demonstrates their focus on operational efficiencies and cost management, likely leading to improved net margins and higher adjusted EBITDA.
  
• Expansion into new markets, particularly in Africa, while maintaining strongholds in existing markets, is projected to offer sustainable long-term revenue growth and heightened customer engagement, positively affecting revenue and customer acquisition costs.
  
• The increase in quarterly dividends and the possibility of future special dividends highlight a strong cash position and confidence in ongoing profitability, indicative of robust free cash flow generation and a favorable impact on shareholder returns.

Super Group (SGHC) Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Super Group (SGHC)'s revenue will grow by 8.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.7% today to 15.6% in 3 years time.
• Analysts expect earnings to reach €342.0 million (and earnings per share of €0.66) by about April 2028, up from €113.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €388.1 million in earnings, and the most bearish expecting €296.0 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.3x on those 2028 earnings, down from 29.1x today. This future PE is lower than the current PE for the US Hospitality industry at 22.4x.
• Analysts expect the number of shares outstanding to grow by 0.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.57%, as per the Simply Wall St company report.

Super Group (SGHC) Future Earnings Per Share Growth

Risks

• The reliance on green shoots in the U.S. iGaming market, including a focus on new market entry and competitive iGaming-only strategy, may not yield anticipated profitability, negatively impacting earnings.
  
• The potential increase in gaming taxes in crucial markets like the U.K. and anticipated regulatory changes such as Australia or New Zealand's tax introduction can reduce net margins and impact revenue growth.
  
• The company's expenditure on marketing, maintained at 23% of revenue, could be inefficient if the anticipated return on marketing investments does not manifest, potentially affecting net profit margins.
  
• Super Group's fluctuating performance in regions like Germany and strategic decisions to withdraw from markets like Brazil, citing unpreparedness to compete, indicates potential revenue stagnation or loss.
  
• The company's cash-intensive dividend policy, alongside suggested future strategic acquisitions, may limit available resources for other growth opportunities or capital allocations, potentially affecting shareholder value and earnings.

Valuation

• The analysts have a consensus price target of $10.6 for Super Group (SGHC) 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 $12.0, and the most bearish reporting a price target of just $9.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €2.2 billion, earnings will come to €342.0 million, and it would be trading on a PE ratio of 17.3x, assuming you use a discount rate of 7.6%.
• Given the current share price of $7.45, the analyst price target of $10.6 is 29.7% 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.