Description

I recommend a long in Playtech (PTEC:LN), a deeply undervalued, well capitalized (~0.6x ND / EBITDA) online gaming supplier and operator that trades at just ~4.0x ‘24 EBITDA, ~5.8x ‘24E EBITDA - CapEx, and ~13% ‘24E FCF yield to equity, with strategic takeout potential and hidden asset value from a set of unique structured agreements. I believe Playtech’s share price could potentially triple over the next 3 years. 

Playtech has undergone a portfolio transformation over the past few years divesting non-core assets (including the sale of Finalto, their financial trading business, for $250M) and gradually de-emphasizing regulatory gray and black market exposures. Today Playtech operates in two segments. They are a leading B2B software and services provider to online gaming and sports betting operators with a fast-growing live casino business that competes against Evolution Gaming. They are also a leading B2C gaming operator (retail + online) in Italy under their Snaitech brand. I believe Playtech’s Snaitech and live casino segments are crown jewels within the broader portfolio. 

Snaitech

Snaitech is one of the leading B2C gaming operators in Italy with an ~11% market share across retail and online channels. Italy is one of the most attractive gaming markets in Europe due to its size, regulated status, and growth. The aggregate Italian gaming market is €24B and forecasted to grow by ~5% over the next 5 years through 2028, with land-based gaming growing at a ~3% CAGR and online gaming expected to grow at a ~11% CAGR (H2GC estimates). 

Snaitech is the #1 Italian operator in both retail and online sports betting, and a top 3 market share operator in both online and retail casino gaming. The Company operates ~700 betting shops across Italy (primarily under a franchise model where they share in ~50% of NGR) with a large retail network of ~10k+ betting machines and ~2k+ betting points-of-sale. Snaitech is also one of the largest digital gaming operators with ~600k betting accounts on their online platform. 

Snaitech’s multi-channel model provides a significant moat within the Italian market, further catalyzed by significant regulatory change in 2019. Italian regulators implemented gambling advertising restrictions in 2019 that have effectively closed the door on new market entry. Omnichannel incumbents like Snaitech and Sisal have benefited because they can uniquely leverage the brand awareness of their retail presence to grow market share while strategically cross-selling customers across both retail and online channels. As Flutter / Sisal have noted regarding the Italian advertising ban: “Since these restrictions were introduced, large omni-channel operators have gained market share at the expense of online-only operators”. Snaitech’s large retail network provides an additional competitive advantage by acting as a cash network in a market where cash deposits and withdrawals are still highly prevalent. 

While only ~25% of Playtech’s B2C revenues come from online today, the online segment drives ~50% of EBITDA, driven by the superior margins of online vs. retail (~55-60% EBITDA margins in online vs. ~15-20% in retail). The business mix continues to evolve towards the higher-margin online segment (online EBITDA was just ~15% of total B2C EBITDA in 2016 vs. ~50% today). As online grows to ~65% mix of B2C EBITDA in five years, segment EBITDA margins should expand from ~25% to ~30%. Italy is still early in the offline-to-online penetration (~25% online share) versus more mature digital markets like the UK (~55%) providing a long runway for margin-accretive digital growth as Snaitech executes on its omnichannel strategy and digital mix shift. 

At its most recent CMD in late-2023, Snaitech laid out a mid-term target of €300-350M of EBITDA in 3-5 years vs. €260M in 2023 representing a ~6% EBITDA CAGR. For context, Snaitech has grown EBITDA by a ~7% CAGR through 2023, from €127M of EBITDA in 2016, which includes significant COVID disruption in 2020 / 2021. 

Given that Sisal, Snaitech’s primary competitor in the market, was acquired by Flutter for 7.5x EBITDA in 2021, I believe Snaitech alone could be worth €2.3B in a few years, which is greater than the entirety of Playtech’s TEV today at €1.8B. In addition, “local champion” online operators have been acquired for low-double-digit EBITDA multiples in recent years amidst a backdrop of increasing global sector consolidation (FDJ / Kindred at 10x+ EBITDA; MGM / LeoVegas at ~11x EBITDA, etc.). 

B2B / Live Casino

Playtech’s B2B business provides a full suite of backend software and services (gaming content, technical platform and operational services) to online gaming and sports betting operators globally, typically under long-term contracts and revenue share arrangement. 

The primary crown jewel within this segment is Playtech Live. Live dealer refers to the live streaming of in-person dealer casino games to thousands of concurrent online bettors out of a central broadcasting studio. Live dealer is the fastest growing product segment within gaming and is expected to grow at a ~25%+ CAGR over the next 3-5 years.  Evolution Gaming is the dominant supplier and trades at ~15x EBITDA (despite significant black market exposures) with ~70% EBITDA margins and an ~18% expected revenue CAGR through 2025. 

I believe Playtech Live is an overlooked and scaled #2 supplier within the category and should benefit from the same live dealer market tailwinds as Evolution, especially as operators are increasingly interested in diversifying their dependencies. Playtech operates a Live Dealer operation that is currently doing €170M revenues, growing at a 20-25% CAGR, with ~€70M of EBITDA at a~35-40% EBITDA margins, with very high incremental margins as revenues grow (as the marginal cost of adding a bettor or bet is very low). Operating margin expansion in recent years has been muted by US entry and investment. I estimate Playtech’s Live segment could do €125M of EBITDA in 3-5 years from ~€70M today. Applying some discount to Evolution’s valuation reflecting its inferior market position (~12x EBITDA), Playtech Live is worth an additional €1.5B of value. 

Playtech has outlined a mid-term target of €200 - 250M of EBITDA for its B2B segment. The remaining non-live B2B software business will likely do €125M of EBITDA and I estimate could be worth €0.8B at a ~6x multiple (reflecting a higher mix of unregulated market exposures, where I assign a lower multiple). 

Business and regulatory transformation 

While Playtech’s B2B business has been growing in aggregate at ~5-10% CAGR on a consolidated basis, total growth obscures the strategic shift underneath. Playtech’s regulated markets (now ~80% of revenues) are growing at ~15% per year, while high-risk, unregulated markets are gradually running off (~20% of revenues). 

Regulated revenue mix has increased to ~80% of B2B revenues in 2023 from ~44% in 2017. Playtech’s strategic shift towards regulated markets should lead to a higher quality business with accelerating revenue growth and a higher multiple over time. 

Take-out Potential

In October 2021, Aristocrat Gaming announced a cash offer for Playtech at £6.80 per share, representing an ~11x EBITDA multiple and a £3B TEV, citing Playtech’s leading digital capabilities that would help accelerate Aristocrat’s entry into the real-money gaming category. 

The deal ultimately did not receive shareholder approval as several investment groups (TTB Partners, Gopher Investments, JKO play) who were interested in acquiring Playtech for themselves accumulated a large blocking stake in the business. While I do not expect an M&A event, the prior record of historical interest highlights the unique strategic value and takeout potential of the business. 

In the period since Aristocrat’s offer, Playtech’s share price has declined ~30%+ to £4.40 per share, while at the same time net debt has declined from €550M to €250M, and EBITDA has grown from €317M in 2020 to €433M in 2023. The EBITDA multiple has compressed from ~10x to ~4x in the face of improving core fundamentals. 

Caliplay / Structured Agreements 

Playtech has taken a unique approach with a number of its B2B customers where, in addition to a traditional revenue share arrangement, Playtech has a call option to convert its revenue share into meaningful minority equity stakes of the operator customers themselves. The most meaningful of these structured agreements is its relationship with Caliente Interactive, the leading online gaming operator in regulated Mexico. 

In 2022, Caliente Interactive was pursuing a SPAC at a ~$1.8B TEV and ~$1.5B equity value, which did not complete due to “capital market conditions”. Caliente Interactive is doing $150-$200M of EBITDA and growing rapidly. Playtech’s agreement with Caliente would have converted into a ~47% shareholding worth $700M at the contemplated SPAC price. 

The relationship with Caliente has since turned acrimonious, with Caliente litigating in courts that Playtech’s call option had expired and seeking an end to its legal relationship with Playtech. 

I estimate Caliente represents ~€85M of Playtech’s total B2B revenues and ~€20M of EBITDA (or ~12% of Playtech’s B2B EBITDA). 

While the matter is still being litigated, in the worst case, I believe the downside is immaterial given both Playtech’s starting valuation and the fact that Caliente is just ~5% of Playtech’s total EBITDA. In the best case, Playtech has a potentially ~47% interest in the best online operator asset in Mexico worth ~45% of its current market cap. 

Playtech has additional structured agreements with call options in a number of promising operators in Latin America, including W.Play (the leading online operator in Colombia) and Galera.Bet (an emerging online operator in Brazil). I assume no value for those call options arrangements. 

Valuation

Putting it all together, and setting aside any potential Caliente outcome or resolution, I estimate Playtech could be worth £14-15 per share in the next 3-years vs. a share price of £4.39 today, for a ~3.3x multiple on capital and a 3-year 50% IRR.  

Catalyst

• Fundamental performance 
• Separation of B2B vs. B2C segments
• Caliente resolution
• Strategic takeout