BlueBet Holdings: FY22 Earnings - Patience is required

About the author:

Author name:

By Alexander Mees

Job title:

Co-Head of Research and Senior Analyst

Date posted:

31 August 2022, 7:00 AM

Sectors Covered:

Gaming and Retail

• BlueBet Holdings' (ASX:BBT) reported a group EBITDA loss of $5.5m in FY22. Excluding an investment of $2.6m ahead of launch in the US and $2.6m in non-cash share-based payments, EBITDA from the Australian operations was approximately breakeven. There was very strong growth in turnover in Australia (+48.5%) and the net win margin was maintained above 10%.
• BBT took its very first bet in the US today. The company has secured market access in four US states (Iowa, Colorado, Louisiana and Indiana) as Stage 1 of its ‘capital lite’ strategy for entry into the rapidly liberalising US sports betting market. Its launch today in Iowa will see it step up its investment in marketing during FY23 to allow it to build share of the market in that state. We expect it to go live in other states in the second half of the year. At the same time, we expect BBT to lay the groundwork for Stage 2 by talking with potential partners for a SaaS model.
• We forecast the EBITDA loss to increase to $10.5m in FY23 as BBT continues to deploy IPO funds into building its share of the competitive Australian market and establishing itself as a serious contender in the US. While we concede that patience is required for the investor to see results, we believe the opportunity remains and we retain an ADD rating. Our target price is (login to view).

Event

FY22 earnings

Analysis

Getting serious in the US. BBT reported a group EBITDA loss of $5.5m, which included $2.6m in costs ahead of the launch of operations in the US. The company took its first bet in the US this morning following regulatory approval and the launch of the ClutchBet brand.

BBT invested in the development of its US headquarters and personnel during 2H22 and we expect this ‘base’ expenditure to annualise in FY23. On top of this, we forecast $3.8m of marketing expenses in the US, including a full year in Iowa and around six months in other states. We forecast modest initial revenues in the US in FY23.

Still winning in Australia despite competitive pressures. Online wagering in Australia is an intensely competitive market.

BBT is a small player compared to competitors including Sportsbet (owned by Dublin-based Flutter Entertainment), ASX-listed Tabcorp, Ladbrokes and Neds (both owned by London-listed Entain) and UK-based Bet365. BBT took share in FY22 from a low base, however, growing turnover by nearly 50%.

Well capitalised to invest in growth at this stage. BBT ended FY22 with $47.2m in net cash. In our opinion, it can continue to ramp its investment in the development of its brand in Australia and the establishment of a presence in the US with its current funds over the next few years.

BBT believes there is a ‘path to profitability’ in each of the four US states in which it has secured market access on account of their tax and regulatory regimes.

Forecast and valuation update

We have increased the forecast EBITDA loss in FY23 from $1.4m to $10.5m. We now forecast an EBITDA loss in FY24 of $5.8m. The changes primarily reflect higher forecast costs in the US.

Our target price is (login to view). This comprises 80c for Australia and a risk-weighted 50c for the US.

Investment view

We believe there is good upside to medium-term earnings in Australia as BBT’s larger marketing budget allows it to increase consumer awareness and take further market share.

We also believe there is significant potential upside in the US over the longer term from BBT’s ‘capital lite’ strategy to establish itself in that market. We do not think the longer-term opportunity is reflected in the share price.

Risks

BBT may be unsuccessful in extending its share of a competitive Australian online sports betting market.

BBT may not develop its early footholds in the US into a profitable business there.

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