Seeking Alpha • Jul 26
NeoGames: A Special Situation That Is Worth Taking A Look At
NeoGames, through their joint venture,NPI, is the leading iLottery provider in North America.
This is a market with huge growth potential because of a combination of changes in regulation, an increase in market penetration, and cross-selling of new games and services.
NeoGames is the company with the best positioning to capture this opportunity. This is reflected in their awards as being the best iLottery supplier and superior performance.
Besides, they recently acquired their parent company, Aspire. This, in my opinion, is a great acquisition that will give them a new source of cash flows and cost savings through synergies.
We are currently in an uncertain economic situation where we don't know whether we will continue to have high levels of inflation, a recession that will stop the growth of the economy, or even both, no economic growth and high levels of inflation. This current market status puts investors in a very uncomfortable situation. Recession fears make investors want to stay away from most securities and high inflation levels make investors want to stay away from cash or bonds since their real returns are negative.
In this article, I will talk about an interesting company that, given its business resilient nature and growth potential, offers investors an interesting investment alternative for this uncertain era. The company is NeoGames (NGMS), a leading iLottery provider in North America and Europe.
NeoGames: A leading iLottery provider in North America and Europe
NeoGames was born from Aspire, a leading iGaming provider in Europe. In 2014, they decided to spin off their iLottery division with the objective of focusing on capturing the new and very promising market of iLottery in the United States. To do so, they partnered with Pollard Banknote (OTCPK:PBKOF), a leading traditional lottery manufacturer. In this partnership, Pollard will provide the regulatory expertise as well as the relationships with the state lotteries and NeoGames would provide the specialized technology necessary to provide the best service available in the market.
This partnership worked very well and they currently dominate the sector with a market share of 67%. Also, the states where they operate have the best performance measured by market penetration. Even they have recently won the EGR B2B award of the lottery supplier of the year for the second consecutive year. As NeoGames pointed out in their annual report:
"We believe that our focus on iLottery solutions, building upon years of expertise and deep exposure to U.S. customers, has given us a superior understanding of iLottery customers and players that allows us to continue to outperform our competitors in iLottery solutions and games"
Currently, the growth potential in the US is still huge since 77% of the population doesn't have access to iLottery (because of the lack of regulations in their states). Also, most of the states that currently have iLotteries are reporting higher revenues year over year.
NeoGames growth potential (NeoGames investors presentation)
Besides this growth potential, this industry has very attractive characteristics:
A substantial upfront investment is needed to open a new lottery, but the investment needed to maintain operations is minimal.
There is only one iLottery provider for each US state. The iLottery provider selected gets a multi-year revenue-share contract with the state government and they usually don't change their supplier due to high switching costs.
Lotteries play a very important role in local governments' budgets, thus they select iLottery providers with a good reputation rather than the provider with the lowest fees.
There are economies of scale in the industry; The development of new games and platforms as a percentage of revenues is reduced as they get new contracts.
Acquisition of Aspire
Probably the most important aspect of this investment thesis is the acquisition of the parent company, Aspire. They acquired Aspire for a total consideration of approximately $480 million (SEK 111 per share), $264 million will be paid in cash, and 7.6 million with newly issued shares.
The founders of Aspire (and also founders of NeoGames) decided to accept all the equity part of the offer with an exchange ratio of 0.32 shares in NeoGames for each share of Aspire. This translates into an exchange ratio of $38 dollars per share.
Because of the sink in the share price of NeoGames, the price paid for Aspire, net of cash, is $323 million. With this price, NeoGames is acquiring a leading iGaming provider for Sports Betting and Casinos in Europe that has an ROIC of +15% and is growing revenues and earnings at double digits at a PE of 18X. Besides, the synergies that may exist between these two companies are huge.
Equity part $114 million (7.6*$15)
Cash part $264 million
Net cash position of Aspire -$55 million
Total $323 million
Author, with data from NeoGames Investor Relations news section. The equity part is calculated at a $15 per share price. Also, it is worth mentioning that the strengthening of the dollar prejudice the acquisition since their profits are reported in euros and the takeover was in USD.
The bottom line
Taking into consideration this acquisition, we will end up with 2 great businesses that have great growth potential, high returns on invested capital, and a dominant market position in their niches that can create synergies between both of them.
Making the pro forma financial statements for the year 2022 of NeoGames (even when their whole revenues will be recorded until 2023), we will end up with the following:
2021 2022
Sales 82 270
NeoGames 50 56
NeoPollard interactive 32 40
Aspire 0 174
EBITDA 29.8 97.5
EBIT 15 54
EBIT margin 18.4% 20%
Interest expense 6 20
Taxes 0.5 9
Net income 8.5 24.8
Net debt -20 244
Fully diluted number of shares 26.6 34.2
Enterprise value 390 771
Author, with data from NeoGames' 2021 annual report, Investor Relations news section, and Q1 2022 results. Total Revenues include 50% of NeoPollard Interactive revenues; Enterprise value is calculated based on a $15 per share price.