Enlabs: Why shares are worth at least SEK60, 50% above Entain’s public offer

Disclaimer: We own 0.1% of Enlabs’ capital. You can find our initial investment case (28 July 2020) on this blog as well. 

We originally intended to use this platform to 1) share our point-by-point rebuttal to the 6 arguments laid out by Enlabs’ Independent Bid Committee’s (“IBC”) in favor of Entain’s SEK40 public offer [1] and 2) ask Enlabs’ shareholders not to tender their shares during the acceptance period (21 January – 18 February 2021). Then news came out yesterday that Hans Isoz, Enlabs’ 6^th biggest shareholder, had rallied enough shareholders to block the transaction, which is conditional to a 90% acceptance rate [2]. This is a very welcomed development, and we commend Mr. Isoz for stepping up for all Enlabs’ shareholders.

We hope with the following to provide a framework as to the extent to which Entain’s offer undervalues Enlabs. Importantly, we show why Enlabs is worth at least SEK60 per share (50% higher that Entain’s bid), even under the IBC’s flawed valuation methodology.

1. Considerations regarding bid premium

2020 has been eventful for Enlabs and its value accordingly increased throughout the year, whether it is with Global Gaming’s acquisition (high cost and sales synergies + possible relaunch of Ninjacasino in Sweden), with Ukraine and Belarus legalizing online gambling or with Enlabs’ impressive organic performance. When facts change, so does the value of a business. But sometimes the market is slow to react and therefore relying on premium to the share price of the previous 180 days or to the share price on 22 February 2020, is highly misleading (After all Q4’20 EBITDA was a whopping 30% above market expectations). The only things that matter is how the public offer price compares to the intrinsic value of the company – not to the previous day, week or even month share price.

2. Market valuation of Enlabs

In that regard, the IBC failed Enlabs’ shareholders spectacularly. Indeed, it mentions in its press release that Enlabs is “currently trading at approximately 12x 2021E EBITDA on market consensus [3]”, implying that 12x EV/EBITDA is a fair multiple. We think Enlabs’ competitive positioning in jurisdictions where marketing is heavily restrained and online penetration low deserves a far higher multiple but for the sake of the argument let us assume 12x EV/EBITDA is the right metric.

First, we are stunned that the IBC relied on market consensus rather than their own estimates during the sale process. This is highly problematic since the Q4’20 EBITDA figure was 30% above expectations and clearly imply that the market consensus is some 15% to 20% below what the company can realistically achieve in 2021. We believe market consensus will likely need to raise its EUR23.0m EBITDA estimate for 2021 to at least EUR27.0m (see below).

Another way to look at 2021E EBITDA is to annualize the Q4’20 EBITDA (which includes both Enlabs and Global Gaming for the entire period), adjust it 20% downward for some Q4 revenue cyclicality (highly conservative), add the synergies from the Global Gaming’s acquisition which should kick in in 2021 (deducted from our conversations with the management) and lastly add 2021E’s organic growth of c.15% (assumes 0% at Global Gaming and 25% at Enlabs and no operating leverage). This leads to an EBITDA figure of EUR28.1m for 2021, roughly in line with what we think the newly adjusted market expectations should be (see below).

Taking both new estimates and keeping the IBC’s 12x EV/EBITDA multiple would lead to a fair value of Enlabs of SEK49–51 per share, 23 to 28% above Entain’s offer (see below).

And there is more. Enlabs is in prime position to expand into adjacent markets worth several times its core markets. The company indeed has plans to enter Ukraine and Sweden during 2021.

·    1/ Ukraine’s online market is estimated to be c.EUR300m, or 5.5 times the size of the Latvian market and 2.5 times the size of the entire core markets of Enlabs [4]. We believe that the company, thanks to its proprietary technological platform (lauded by none other than Entain’s CEO on his call to shareholders), should command a high market share in the online casino market. Assuming casino accounts for 40% of the online market and that Enlabs reaches a 7.5% market share by 2023, this would mean EUR9.0m of additional revenue.

·    2/ In Sweden, Enlabs is looking to relaunch the Ninjacasino brand after it was banned by the regulator under the Global Gaming umbrella [5]. Ninjacasino did at its peak in 2018 EUR79.0m in revenue [6] and given its strong brand name, we would expect the company to get back 30% to 35% of its historical customer base in the case of a successful relaunch by 2023, implying some EUR26.0m additional revenue at the mid-point.

     Put together these new markets would add 37% to Enlabs’ 2021E sales [7]. Alas, while these new revenue streams will materially increase the long-term intrinsic value of Enlabs, they do not show up in the market consensus EBITDA for 2021 [8]. The significant optionality from these new countries should be reflected in Entain’s offer given Enlabs’ clear path to market leadership. Assuming a 20% EBITDA margin, EBITDA from Sweden and Ukraine should reach c.EUR7.0m by 2023, or a EUR84m Enterprise Value at the IBC’s 12x EV/EBITDA. We discount this back 2 years at 10%, add it to Enlabs’ “core market” EV and find that Enlabs intrinsic value rises to SEK59–61 per share, or 47.9% to 52.7% above the current offer.

Lastly, we believe that the bid should include a strategic premium since Entain plans to use Enlabs and its well-established brands as a launchpad into Northern and Eastern European markets (after all Entain’s CEO spoke at length about the expansion opportunities Enlabs would provide Entain during his call with shareholders).

3. Risk assessment

We would not agree with the board that there are “elevated risks associated with Company’s operations in only a few core markets”. While the online license suspension during COVID-19 (April-May 2020) was no doubt stressful for everybody at Enlabs (and for its shareholders), we would caution against extrapolating and react emotionally to it. These were very unusual times and since then the Constitutional Court of Latvia ruled that the country's ban on online gambling during this period was unconstitutional [9]. Furthermore, the commitment from authorities to fight against black-market operators indicate an understanding of the benefits of having a locally licensed and taxed market. The current closure of Enlabs’ land-based operations is unfortunate but very marginal in the context of the group, as they represent less than 6% of sales with low contribution margin compared to online.

We are also confused by the board’s statement that growth in Enlabs’ core markets will saturate in the mid to long term – of course it will! But by then the company will likely have tripled in size. See below the difference in online gaming penetration in core markets compared to Sweden and the UK. You can find written in red the potential increase in market size if penetration reaches Sweden’s levels.  This increase does not include the growth of the total market in the meantime.

Source: H2GC and local regulator estimates

4. Views of existing large shareholders

The fact that Enlabs’ Chairman, (i) will be employed by Entain after the acquisition to develop the group’s operations in the Baltics and Nordic regions, and (ii) will be offered a compensation package consistent with senior executives of the Entain group raises questions as to whether the offer provides a true level playing field to the remaining shareholders. Surprisingly, none of these concerns have been addressed by the IBC.

Additionally, we question how Enlabs’ Independent Bid Committee was able to review thoroughly the offer and obtain the fairness opinion from Mangold as it was appointed on 6 January 2021, the day before the offer announcement.  

5. Fairness opinion

Mangold’s fairness opinion, as published to shareholders, has little substance so it is impossible to judge what was provided to the board. We would be pleased if the IBC was willing to share Mangold’s financial forecasts (we would be interested to see how they compare to the old – and new – market consensus and to our estimates) as well as its analysis on new market developments and how it was taken into consideration when deriving the SEK40 “fair” value.

6. Impact on the Company and its employees

Nothing to add here. Entain will surely provide additional resources to Enlabs in its market expansion but the company already has the technology and the people to get there on its own and therefore these opportunities should be valued as part of the deal.

Conclusion

As we hope it is clear by now, Entain’s offer materially undervalues Enlabs and we will hold on to our shares and wait for an improved offer by Entain.

Interestingly, the current setup provides for an interesting low risk, high reward scenario and we accordingly increased our position from 30% to 40% of our portfolio: the shares trade at SEK42 (a 5% premium to the offer price) while Mr. Isoz and investors owning more than 10% of Enlabs could block the transaction and seem determined to seek a higher price from Entain (Mr. Isoz mentions in the article that the offer would at least have to start with a 5). Given how Enlabs fits into Entain’s strategic expansion in Northern and Easter European markets, we feel that the odds of an improved offer is very high.

---

[1] Link to the press release: https://enlabs.com/en/press/pressreleases/2021/3862667-statement-by-the-independent-bid-committee-of-enlabs-ab-in-relation-to-the-public-offer-from-entain  

[2] Mr. Isoz owns 2.7% of the company.  Link to the article: https://www.di.se/nyheter/budet-pa-enlabs-moter-mothugg-kan-stoppas-av-agargrupp/

[3] As per Entain press release, analyst consensus consists of Redeye (note from 22^nd November, 2020) with sales of EUR92.7m and EBITDA of EUR25.2m, and ABG Sundal Collier (note from 12^th November, 2020) with sales of EUR86.0m and EBITDA of EUR22.0m

[4] H2GC estimates – See Appendix 1

[5] NinjaCasino’s Swedish license was revoked by the regulator in June 2019 for social responsibility shortcomings and overly aggressive advertising practices by Global Gaming

[6] Global Gaming: Annual Report 2018

[7] Based on Redeye numbers

[8] 2021E EBITDA might actually be reduced by them, given the high marketing investments required to launch into new markets

[9] Ruling here (in Latvian) https://www.satv.tiesa.gov.lv/wp-content/uploads/2020/05/2020-26-0106_Spriedums.pdf

Appendix 1

Source: H2GC estimates