- Revenue excl. ooR Jan-Dec: +14.7%
- EBITDA excl. ooR Jan-Dec: +11.3%
- EBITADA margin excl. ooR Jan-Dec: 68.4% -210bps
What are the current problems?
Margin compression
slower sales growth
Asia
ESG
1. margins
Why is the margin falling?
$EVO (+0,36 %) The company is expanding into the American market, and to do this they have to open a studio in every state in which they offer their services. It is much more expensive to build and maintain studios in the USA, and the cost of staff is higher than in the usual Eastern European studios. In the course of expansion, this will ensure that margins will fall for the time being.
When will the margin rise again?
The expansion into the USA has the same reason for Evolution as for all other companies: the US consumer simply spends the most money. This also applies to games of chance. Although the expansion is initially associated with higher costs, the higher stakes should ensure that margins improve significantly in the long term. I am assuming a maximum time frame of 30 months until the expansion is fully completed. The margin will probably fall to around 60% before rising again in the long term.
2. sales growth
The most important scaling element for Evolution is new gaming tables. The markets outside the USA are almost completely developed, which means that hardly any new tables are being added. If fewer new tables are added, Evolution is dependent on the market itself growing. The market is expected to grow by around 6-12% annually, meaning that Evolution is growing even faster than the market. The explosive growth in turnover in recent years has resulted from the rapid expansion of Evolution. Like the margin, sales should improve strongly with the US expansion. I expect this to take about 8-12 months.
3 The Asian market
Since April, cyber attacks on video production have meant that sales (in what is currently the largest market) have stagnated. In my opinion, it is not really clear when this problem will be solved. A weakening Asian market will also put pressure on margins. The fact that Evolution is taking so long to resolve the problem exudes enormous uncertainty, which the market is known to dislike.
4TH ESG
Like tobacco, gambling is a sense sector that is screened out by ESG criteria, which means that institutions largely ignore no matter how cheap the company appears to be. The situation only changes when there is enough momentum that the potential return can no longer be ignored. Anyone involved in the tobacco sector knows this only too well. If ESG is (hopefully finally) abolished, this will be one of the biggest long-term catalysts for $EVO (+0,36 %) .
Conclusion
I think it is self-explanatory that a company that grows about 10-15% annually, has no debt, buys back shares, is the absolute market leader and has fantastic margins does not deserve a P/E ratio of 13.
Expectations that Evolution will grow by 30% a year forever are absolutely unrealistic and that the company will be punished for the unrealistic expectations of investors always proves to be nonsensical.
The focus on medium-term margin compression rather than the extremely important expansion into the USA is also more than irrational. If Evolution expands into the US, they practically have a monopoly and the high barriers to entry (as openly explained) create a wonderful moat.
