BUY HOLD SELL – Betmakers (ASX: BET)Betmakers (ASX: BET) is a back-end technology and data platform for online wagering operations in Australia and around the world. Not a gambling company just to be clear. The stock is up more than 450% in the last year, helped by an acquisition, a growing footprint in the US and the backing of a sector heavyweight. It was added to the All Ordinaries Index in the March rebalance which is why you may have only come across it recently. A lot of the conversation around the company focuses on a man named Matt Tripp. If you’re new to the wagering space, the name probably doesn’t ring much of a bell, but he’s a major player in the online wagering space. He is the guy who turned Sportsbet into the country’s second-largest bookmaker behind Tabcorp and then founded BetEasy before selling a 66% stake to Crown Resorts. Both businesses were ultimately snapped up by large offshore gaming and wagering companies. To use the parlance, that’s good form. Articles provide several flattering introductions and you start to understand why his $25 million investment for a 5% stake in BET was seen as big deal. As a strategic advisor it is expected he will use his connections to open doors in the US, which is where the wagering gold rush is taking place. More on that below. He has also been linked to potential private equity bids for Tabcorp’s wagering division. Recent speculation suggests he hopes to head a combined Tabcorp wagering and Betmakers entity, with Fox Corporation and its FOX Bet brand also understood to be interested in being part of Tripp's plans. BET also has the support of Tom Waterhouse, who has a track record of starting and growing online wagering businesses. Whilst having Tripp as a BET advisor puts a big tick in the management box, it should be said that having such an influential personality as a key player for the business can also be a catch 22. It leaves the business open to key person risk. If he were to leave, it would likely be seen as a major headwind, with confidence and the share price to take a hit. To understand why the wagering space is so hot in the US right now, we have to go back to 2018 to when the US saw sports betting explode after legislation was passed that allowed states to make their own sports betting laws. It sparked a stampede with business big and small thirsty for market share. Flutter reportedly has about 50% of the growing market, PointsBet (PBT) raised ~$303m last year to expand its operations in the US after signing a deal with NBC Sports. There was ~US$35 billion worth of sports bets placed in the US in 2020, a ~50% jump on 2019 which doesn’t really make sense when you think of it in terms of the number of sporting events hosted in 2020. Makes a bit more sense when you think about how everyone was sitting on their couch with free time and money from the government. The pandemic has catalysed an interest in online wagering and BET is well positioned to take advantage of that appetite. A favourable environment created by the serendipitous mixing of online gambling hype colliding with the reopening of the US. According to research from Morgan Stanley the revenue from sports betting is expected to rise from US$3.1bn in 2020 to US$15bn in 2025. Macquarie even more bullish than that with their estimates. 20 US states have legalised sports betting, six are in the process of passing the bill and there are calls that 80% of the country will have some form of legal sports betting product in the near future. That is a massive market with massive opportunities and all of those bookmakers that find their way into the hostile market share land grab will need a quality platform to host their offering. Enter BET. Underlying earnings in its half results were well below expectations with EBITDA of 37k vs estimates of $1.1m. Revenue also missed estimates at $7.6m, down ~8% on the day. 75% of revenue comes out of Australia, with the US and UK set to steal more percentage in the coming periods. In its March update, BET told the market its acquisition of Sportech’s Tote and Digital businesses was on track for completion in Q4 2021. It is expected to provide BET with a ‘significant’ presence across racetracks, casinos and other venues in 36 states across the US. The graphic in the market update suggests that with the bolt on of Sportech, BET will have a combined current run rate of $62.1m. Commentary in the half year update was rather glowing for this addition to the business, labelling it ‘transformational’ for growth in the key US market. Main Observations
- ROE isn’t very attractive at -2%. Forecasts see it reaching 2.4% in FY3.
- Revenue and EPS growth not lining up the way we’d like them too. That said, it is a growth company, so fundamentals aren’t expected to be the prettiest.
- Revenue growth expected to continue at a solid pace. Although, it is coming from a relatively low base, so the percentage moves look a bit more impressive than reality.
- It is sitting on a PE of -282x which again, isn’t that appealing, but while it is expanding into the US, you’d expect most of its money to be going back into furthering that agenda.
- Only one broker with a strong buy recommendation. The stock trading ~15% above that broker’s target price.