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BetMakers (ASX: BET) 12.08.21
CHRIS JUDD Invest

By Thomas Galanti.

Some of the most exciting events in equities arise from the creation of new markets, be it from a change in fashion trends, new technologies, deregulation, or even regulation, highly asymmetric opportunities present themselves to investors. The U.S. racing and sport gambling industry is one of those unique opportunities, where a potentially huge market has been kept on a very short leash. The gradual deregulation expected over the coming decade thus presents itself as one of those rare instances where a multi-billion-dollar industry is finally revealed from behind the shadows of regulation.

Investors looking for exposure to the U.S. gambling market might consider BetMakers. As an already well-established backend wagering tool in Australia – used by every racing authority countrywide – and with an exclusive agreement with the State of New Jersey for fixed odds horse racing, investors get the security of the lucrative Australian market, with front-seat exposure to the U.S. A key point of difference between BetMakers and other entrants to the U.S. market, such as PointsBet, is the little need for advertising and marketing. BET’s B2B model means investors will get exposure to the U.S. market, without the intense and costly advertising costs associated with building a brand in a new market.

New Jersey recently became the first U.S. State to legalise fixed odds betting on horse racing, passing both the Senate and General Assembly unanimously, “setting a precedent legal framework” that BetMakers’ CEO Todd Buckingham believes will be very important as more States consider doing the same. The key lobbyist behind the NJ fixed odds legalisation, William Pascrell, said they are currently working on another 13 states, adding “once this [New Jersey] bill goes, it’s going to go through the country like wildfire.”

BetMakers’ exclusive agreement with the New Jersey Thoroughbred Horseman Association and Darby Development, means every bookmaker in NJ must reach an agreement with BetMakers before they’ve been given access to fixed odds betting. Management will likely seek to replicate the deal with other States, and with their presence in New Jersey, they’re well positioned to execute on that plan. In July 2020, PointsBet USA became the first wagering operator to partner with BET in New Jersey and will become the first online bookmaker allowing fixed odds betting on horse racing in the country.

It should come with no surprise that the potential asymmetry behind BET comes from the size of a deregulated U.S. market. Whilst there are many hurdles in the way of deregulation that might pose substantial risk to shareholders, the estimated size of the target market leaves plenty of room for error. Morgan Stanley predicts 38 states will have legalised sports betting by 2023 and see Covid-19 as a potential tailwind, as States look for alternative ways to fund deficits. On a broader level, the U.S. sports betting market is expected to grow exponentially, with TAM growing from $249m in 2017 to an estimated $8.55bn in 2025. Whilst cultural differences and access to betting means the U.S. will struggle to reach Australia’s level of betting per capita, their total turnover on horse racing will likely triple our own by the end of the decade.

Sportstech Acquisition

BET’s recently completed $56m acquisition of Sportstech’s (LON: SPO) Racing, Tote and Digital assets in the United States, the United Kingdom, and Europe should now fast track their global strategy. The American Tote business provides the back end and hardware to 200+ racetracks and casinos across North America and a “meaningful presence” in 36 U.S states. Sportstech’s grasp on the U.S. is substantial and a key reason for BET’s acquisition, holding 30% market share of the US$12.4bn pari-mutual handle. The acquisition was transformational, establishing BetMakers as a global leader in the B2B software for the wagering and racing industries. For FY20 the combined Sportstech and BET business would have delivered pro-forma revenue of $56.1m and EBITDA of $7.7m, implying a relatively cheap transactional EV/EBITDA of 8.1x.

Comps

Company

Listing

EV/EBITDA

Sportstech (Bus. Units)

UK

8.1x

Scientific Games Corporation

USA

17.5x

Penn National Gaming

USA

15.58x

Entain

UK

20.07x

Flutter Entertainment

Germany

22.8x

Waterhouse Deal & Matt Tripp Partnership

BetMakers and the Waterhouse Group entered an agreement in January 2020, which would see Waterhouse Group receive performance rights for a split in revenue over two Waterhouse products. BET would develop an application for the tomwaterhouse.com 80,000 members and develop a B2B Managed Trading Services (MTS) solution for wagering operators looking to outsource operations. The maximum number of options which might be issued to Waterhouse on the conversion of all its performance rights is 94,741,686 options. On the 16th of July, BetMakers announced revenues received from the deal reached $6.2m, with Waterhouse electing to exercise 34,564,921 options, receiving 34,564,921 shares.

Bookmaker Matthew Tripp took $25m in the BetMakers’ $75m strategic placement, giving him ~5% stake in the business. With his extensive experience in the space, helping build Sportsbet into the nation’s second largest bookmaker and his BetEasy venture, management believe his insights will help drive growth both domestically and offshore. Separate to his placement, Tripp is contracted as a strategic advisor for potential deals, with exclusivity to BetMakers. In exchange for his services, Tripp will receive performance rights for any “strategic” or “transformational” deal.

BetMakers’ fourth quarter of FY21 was a highlight for the year, recording its strongest numbers to date. It received $8.91m in cash receipts from customers, a 71% increase to Q3 and a 272% increase on Q4FY20. Most of the revenue growth came from an increase in activity in the Australian market, with the recent Sportstech acquisition only accounting for two-weeks of cashflow. Investors should keep their eyes out for the Q1FY22 numbers, where we will finally get to see the impact of the Sportstech business units’ acquisition. The increase in revenue saw BetMakers reach cash flow from operations positive, registering $0.64m net cash from operating activities. It ended the quarter with $120.6m in cash and no debt and is currently trading on a $1bn market cap, ~$879m EV.

Those investors looking for exposure to multiple high growth betting markets, without the associated risks of investing in a bookmaker directly, might consider adding BetMakers to their watchlist. Whilst the $1bn valuation might unsettle some of the small cap hunters, there’s still plenty of exciting catalysts in the short term, primarily from the tremendous room for upside in the U.S. market and their push into the U.K. and the rest of Europe.

Disclaimer: This article should not be construed as investment advice and is for information purposes only. It does not take into account your investment objectives, particular needs or financial situation. Before making an investment in anything, do your own research and contact your investment advisor.

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