StockOpine's avatar
$42.5m follower assets
High level Thoughts on $EVVTY
1) What is the bear case for Evolution AB?

2) We noticed that Return on Equity fell significantly from c. 68% in 2019 to c.19% in 2020, 20.5% in 2021 and 24% LTM. This is justified by the acquisition of Netent in 2020, which resulted to a higher total equity balance of EU2.76B as of 2020 compared to EU281M in 2019.

Profitability margins have improved and are getting better but asset turnover fell from 1.1x to 0.3x levels. Did they overpay?

Tagging few investors who might have some thoughts on this. @from100kto1m @investinassets @mavix @karan10489
Yegor's avatar
Their purchase of the slot machine company (NetEnt) is seemed like a poor choice and they need to focus on their online segment more the problem is how much can you really regurgitate poker and other famous games?

Maybe they are unable to keep executing on new awesome and capturing games?

Regulatory risks are always there but I think not as big more of a drag on I gaming industry
StockOpine's avatar
@from100kto1m thank you Yegor. So effectively the key risks are innovation and regulation.
Karan Malhotra's avatar
There are a few:
  1. Asia is a black box so there remains a risk of regulatory sanctions if something changes or is deemed not above board
  1. Being online has its own challenges, for example a year ago they got in trouble because someone fooled their systems into thinking they were a valid player when allegedly they were from Iran and Managed to evade sanctions
  1. Valuation - it's still quite expensive even with the drawdown
  1. They do have an acquisitive history so non zero chance they could buy something poorly and get distracted
Innovation is not a major concern given their track record nor is major competition from any one casino chain, they have established a monopoly position and do enjoy scale benefits
StockOpine's avatar
@karan10489 thank you Karan for sharing your thoughts. Regarding 1 & 2 seem to be industry wide risks but for 2 they have to identify such flaws and resolve them the soonest.

  1. What is your estimated fair value?

  1. You are right for this but the most significant risk is the NetEnt acquisition.
Karan Malhotra's avatar
I'd say less than 800 sek is reasonable given the moat/growth rate of the business. Below 700 would start to get quite cheap.

As for netent, digital slot machines is certainly an unusual buy but I'm willing to give management time to develop the assets
StockOpine's avatar
@karan10489 thank you Karan.
Brett Schafer's avatar
I feel like the key is that, even though growth is impressive, investors want to assign discounted earnings multiples to sin stock
Karan Malhotra's avatar
@ccm_brett Anti ESG overhang is a sad reality
StockOpine's avatar
@ccm_brett you are right on this. The ESG trend penalizes such stocks. But let's take a rather contrarian look as well. Isn't that an entertainment activity? Isn't that just a discretionary expenditure? The answer could be yes. But there are tricks used which makes gamblers addicted and that's where the ESG comes in.

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