BlueBet Holdings: Differentiation will drive a re-rating
About the author:
- Author name:
- By Kurt Gelsomino
- Job title:
- Former Analyst
- Date posted:
- 28 February 2022, 9:00 AM
- Sectors Covered:
- Building Materials, Industrials, Gaming
- BlueBet (ASX:BBT) has made strong operational progress over the past ~6 months, with solid momentum in its core Australian operations and US activity to ramp up in CY22.
- We remain confident that BBT will retain a disciplined investment approach and think this differentiated model will support a re-rating as a track record is established. However, this could take time and the stock will likely remain volatile in the near-term.
- With net cash of ~24cps and an active customer base of 45.1k, we think the market is ascribing minimal value to BBT's growth prospects and maintain an Add rating.
Strong operational performance over the 1H22
BBT’s key operational metrics were pre-released with its recent 2Q22 update, which saw 1H22 active customers at 45,087 (+77% yoy), turnover +61% and net win +68% (margin 10.8%). As previously noted, all key metrics materially exceeded CY21 prospectus (active customers +13%, turnover +14% and net win +19%).
1H22 gross profit was A$14.6m (+64% yoy) and largely in line with our forecast of A$15.0m (GP margin solid at 56.3%, -150bp). An underlying EBITDA loss of A$0.3m (vs. +A$4.7m in 1H21) was reported and below our forecast of +A$3.1m. However, A$1.3m of the difference was share based payments.
The balance was due to higher Advertising & Marketing (+224% to A$6.8m, 26.2% of revenue), Employee costs (A$3.7m, +177%) and Admin & Other (+390% to A$3.0m), with BBT effectively reinvesting its stronger top-line performance back into the business in a disciplined manner. US start-up costs were A$0.6m.
Operating cashflow was A$2.5m (A$5.1m in 1H21), illustrating the cash generation of the core Australian business despite the acceleration in opex spend. With a new website, iOS and Android Apps all launched in the 1H22 and forming the foundation of its US product, investment in website/app development was A$1.7m.
Net client cash was A$52.4m (steady on A$53.5m in FY21) and sees BBT well-funded to execute its dual track growth strategy across Australia and the US.
Momentum continuing into the 2H22
BBT highlighted that its Australian business momentum will continue into the 2H22 as it looks to increase market share and deliver customer and revenue growth. Management emphasised that it will maintain a disciplined approach to capital deployment and will continue its targeted marketing spend.
We expect 2H marketing spend will be similar to the 1H (MorgansF A$7.3m) and note PointsBet (PBH) has guided to its 2H Australian marketing investment moderating to ~A$16m following its significant 1H investment (A$45m), increasing BBT’s relative investment (vs. PBH) in the upcoming period from ~15% to ~45%.
While strong 3Q22 yoy growth is expected, turnover could contract on the seasonally strong 2Q22. However, an easing of the fierce promotional intensity across the industry over the 2Q22 and BBT’s likely increase in turnover from mobile Apps (66% of turnover in 1H22; higher NW margins at ~11.5-12.0%) post its new iOS and Android launches, could mitigate the extent of the seasonal impact.
BBT reiterated its differentiated, capital light approach to its US market entry with its initial target to operate in 3-5 select states (CY22 target reiterated) as a B2C provider aimed at proving the capability of the team and product offering to then leverage into Sportsbook-as-a-Solution partnerships (CY23 target).
A soft launch in Iowa is expected in April (slightly behind its March target) and marketing activity will ramp up with its launch in Colorado, which will coincide with the start of the NFL season (Sep; 1Q23). An updated list of targeted B2C states was provided, with Indiana, Louisiana and Missouri new potential opportunities, Tennessee still an option and Maryland dropping out of its near-term focus.
Investment view: maintain Add rating, market sentiment driving the near-term
BBT has materially de-rated (FY22 EV/Revenue of 1.6x) in recent months as online sports betting (OSB) peers have come under significant valuation pressure. We remain confident that BBT will retain a disciplined approach in its dual track growth strategy and think this differentiated model will support a re-rating as a track record is established.
However, this could take time and the stock will likely remain volatile in the near-term. With net cash of ~24cps (A$52.4m) and an existing active customer base of 45.1k (generating ACV of ~A$1,044k), we think the market is ascribing very little value to BBT's growth prospects and maintain an Add rating.
Catalysts: industry consolidation, more rational promotional environment in the US and Australia, recognition of BBT's differentiated business model (vs. larger peers) and change in general market sentiment towards growth stocks.
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