Q&A with Michael Campbell Equity Researcher at Whitman Howard (LON:VLTY)

Veltyco Group PLC (LON:VLTY) is the topic of conversation when Whitman Howard’s Equity Researcher Michael Campbell caught up with DirectorsTalk for an exclusive interview

 

Q1: You published a note on Veltyco Group, can you tell us briefly what it is the business does?

A1: We initiated coverage on the company yesterday, we act as broker to the business but yes, in short, I guess the way to think about this business is in two ways:

Firstly, and this is really the core of the business at the moment, the business is active in marketing and promoting online gaming brands, basically, in the real money gaming industry. So, it has a very well-established affiliate network and SEO partners in place which help them to market these third-party gaming brands, if you want to call it third-party so that’s the core of the business and that’s one side one can say.

The second part of the business, and this is more of a recent development, is the Group is building its own portfolio of owned and operated gaming brands. So, these are not third-party gaming brands, but they’re actually owned and operated by the Group itself, for example, last year they acquired a business called Bet90 which they own and operate so that is the second half of the business.

 

Q2: The business produced a strong performance in 2017, what are your thoughts on the results?

A2: Yes, they had a very good year last year, very strong performance and if you look at the numbers, and management have recently confirmed these figures in a recent statement to the market, the business produced revenue in excess of €14.5 million and that’s to December 2017. If you look at it in growth terms, it’s 138% year-on-year growth so that’s €14.5 million on revenue of just over €6 million in the prior year.

Moreover, if you look at it from a profit point of view, at the profit level, when we say profit we mainly look at EBITDA and in this particular case, management confirmed that the business produced EBITDA I excess of €8 million. The growth there is more impressive than the revenue line, that’s almost 4 times growth year-on-year so to put that into context, in 2016 they produced about €2.1 million of EBITDA and in 2017, they’ve confirmed that EBITDA will be in excess of €8 million so that’s almost 4 times growth year-on-year.

So, that’s very good growth, very strong growth and I believe that’s also across the board, across the business in terms of that growth so yes, very good performance.

 

Q3: Growth rates do look impressive over your forecasted period, can you tell us more about those?

A3: As I say, Veltyco Group obviously produced a very strong year in 2017 and we believe that the growth will continue, just as background, this business operates in a very significant industry, it’s of significant size and I’ll touch on that briefly perhaps later on.

To put the growth rates into perspective, for our forecasts which we’ve got for 2017, 2018 and 2019, so 3 years of forecasts, we’re looking for revenue growth of about 58% compound annual growth rate so we’re expecting revenue to get up to over €24 million by 2019. In terms of the profit line, again that’s EBITDA, we’re looking at a compound annual growth rate of the 3 years of about 83% so we’re expecting EBITDA to grow to around €13 million by 2019. So, it’s very good growth, again strong growth that we’re expecting.

I guess the final thing to add here is historically the business has grown quickly and historically there was no dividend in place. Again, the Board have confirmed in a fairly recent statement to the market that they intend to pay a dividend and that dividend, I guess, will see some flavour in terms of that dividend in the annual results which are due in April so that’ll be the results to December 2017, is what they’re looking at in terms of paying a dividend. So, that’s further good news I think for the business and just confirms I guess the confidence that the management team have in the business so yes, good growth rates forecast.

 

Q4: Finally, what are the key investment points to take away on Veltyco Group?

A4: I guess to summarise, the key bits to take away on the business is firstly it’s exposed to very significant markets, if you look at some of the forecasts, online gaming in Europe for example produced over €20 billion in revenue, just a backdrop, so that’s a very significant market in which to operate your own business.

I guess some of the other key points to think about in terms of the business is the business is well diversified across multiple brands, I spoke a bit about the marketing side of the business so there are multiple brands in terms of agreements that they have in place in terms of driving players to those brands, so it’s well diversified from that respect.

Secondly, obviously it’s growing its own portfolio of brands which we expect to see some strong growth. I guess another way to think of the business is because it operates across different gaming verticals, so to speak, so you’re in casinos, sports betting, lottery, you’re in financial trading, there is an opportunity for the business to utilise its current cost base and you can utilise that across the different verticals. So, what that does is it helps keep your costs down, firstly, but also helps with the margins of the business for example, the business produced an EBITDA margin of about 55% in 2017 and that’s very impressive so that’s a key take away I think.

Thirdly, new areas of growth, we spoke a bit about their own gaming brands, Bet90, for example, is a business that is not only growing into new markets for growth but also within betting itself. It’s exploring new areas of betting for example, e-sports, they’re taking wagers on the e-sports market which in itself is a fast-growing industry so that provides for a competitive edge in terms of competing with other peers in the market.

Fourthly, the business is very much focussed on what actually drives revenue and the key bit for online gaming is the marketing investment, that’s the key bit, that’s what drives the business. So, there’s a real focus on marketing investment, in fact almost 70% of the cost base is marketing-related and we expect this marketing investment to continue to build over the coming years. As I say, it’s a clear driver of revenue so the business is very much focussed on that.

I guess finally, the management team, you’re dealing with individuals here who’ve got a lot of experience in the gaming industry and as a result of that, they can use that to execute on their strategy in terms of building the business.

So, those are the key bits, four or five key bits in terms of thinking about the business and as I say, we’re very positive, it’s shown fantastic growth last year in 2017 and there’s no reason, we believe, why they shouldn’t continue to show good growth going forward.

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