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Is PointsBet Holdings Worth a Bet? "ROGER MONTGOMERY : INVESTMENT

03122019_PBH

Is PointsBet Holdings Worth a Bet?

Finding long-term growth companies that can grow independently of the business cycle feels a bit like finding a needle in a haystack. However, we believe that PointsBet Holdings (ASX: PBH) is one of these companies. PointsBet Holdings is located on the ground floor of marketing legal online sports betting in the US. The share price has doubled since June, and we expect it to grow even more.

Let's examine the background, a framework for evaluating the potential market economy, and some early-stage assessment scenarios that could apply to PointsBet Holdings over time.

PointsBet Holdings offers online betting products for sports and racing through its cloud-based betting platform in Australia and New Jersey. It offers traditional fixed odds bets for races and sports. and spread bets, a form of betting in which the weather wins or loses money, based on the deviation of the outcome from the spread of expected values ​​given by the bookmaker.

US sports betting – the background

In May 2018, the US Supreme Court overturned the Professional and Amateur Sports Protection Act of 1992, which until then had resulted in the banning of sports betting in all but a few states in the United States.

Now, every US state can enact laws that allow sports betting, and open the market for legitimate operators in a regulated manner by offering consumer protection, while royalties on sports leagues are paid and government coffers are taxed.

New Jersey is the figurehead of the US sports betting market and has created a regulatory and tax regime that has proven attractive to the online sports betting business such as PointsBet Holdings. And the results are spectacular.

The following chart shows the rapid market development and the impact of the introduction of online betting.

Screenshot 03.12.2019 at 11:24:07 am "width =" 770 "height =" 396 "

Source: New Jersey Office of Attorney General

In the 17 months since sports betting commenced, $ 4.7 billion has been transacted in New Jersey with US $ 293 million, or 6.3 percent, according to regulatory filings.

The latest data available for the month of October 2019 show that $ 508 million has been transacted, with 86% online. Again, here's a state with 2.7 percent of the US population, which spent more than half a billion dollars in one month. Enormously. The market is developing into a big market and not a normal market but a unique market.

An assessment of the long-term profitability of the stationary industry – what is the price?

At an early stage of assessing market potential, using the data we have and some reasonable assumptions, there are many factors that are likely to affect the overall size of the market.

A key factor is the number and size of states that enact laws for playing sports and open up to commercial establishments that allow online / mobile services and are limited to physical businesses with acceptable tax regimes (license costs and taxes).

These are the conditions under which gambling moves from the black market to the regulated market and offers a better outcome to all existing participants. This provides consumer protection, the sports leagues the opportunity to monetize gambling and pay taxes to the treasury. Win, Win, Win. And the sports bookmakers are making money at the expense of the current illegal black market operators.

The introduction of legal gambling in the US varies from state to state. In the 18 months since the repeal of the law, about 20 states plus Washington DC have passed laws that allow sports betting to some extent. In our estimation, 8 out of the 20 states allow commercial operators online or mobile gaming in unrestricted locations within the state.

Of the remaining 30 states, 19 have laws before the state legislature, 11 have no laws for debate (or have rejected laws). Over the next three to five years, there will likely be a steadily growing pool of states open to gambling.

Screenshot from 03.12.2019 at 11.24.53 "width =" 770 "height =" 87 "

* In this example, Washington D.C is included in the number of states.

The case study of New Jersey and its largest operator – Fland, majority owned by Flutter, provides insight into market size as regulatory and fiscal conditions converge over time.

In March of this year, Fanduel issued a disclosure suggesting that gross cash (GGR) end-market size (excluding handle / bet) would range between $ 500 million and $ 600 million per year. for New Jersey, which is $ 56-67 per capita.

Fanduels parent company, Flutter, operates a leading online sports betting store in Europe and assumes that a rule of thumb for sports betting is that around 40 percent of gross profits are used for marketing contributions, incentives and fees Sports Authorities and Taxes and suggest that similar market economy in the US.

On this basis, if all 51 states allow online, the profit pool available to the industry could reach $ 8.1 billion a year. Great potential, but based on the observed progress, a more realistic scenario is to assume that between 25 and 50 percent of the potential US market is open to full online status.

The Price – Long-Term Sector Economy in Steady State

Screenshot 03.12.2019 at 11.25.34 "width =" 770 "height =" 171 "

Source: Montgomery,
* Apply the New Jersey Revenue Economics to the population in each state
** assuming a contribution rate of 40 percent
*** Application of PBH revenue per sub for 1Q20
**** The initial cost is $ 300 per subscriber

Great opportunity, but at what price?

Opportunity does not come free. The subscribers required to generate the revenue pool must first be acquired and potentially cost serious capital blocks to this extent. Here we make some assumptions again.

In fiscal year 19, PointsBet Holdings added 88,000 net subscribers to its user base, which translates to total sales and marketing costs of AUD $ 25 million – or $ 282 per sub-subscriber. Unfortunately, most of these subscribers were hired in the contested Australian market. We have no specific unit cost data for the US acquisition, but it is the best guide we currently have. We assumed $ 300 (55 percent higher than the cost of fiscal 19). On this basis, we estimate the industry would spend $ 6 billion to reach that goal if the entire US market with 20 million subscribers were opened up.

How can this be applied to PointsBet Holdings?

In just nine months after its launch in the US, PointsBet Holdings announced a 6.7 percent stake in New Jersey in the first quarter of the 20th quarter, resulting from a zero-subscriber start against well-funded competitors already using Live Databases of sports gaming customers are in the market. PointsBet Holdings seems to be competitive in this crucial phase of Land Grab market building. In the longer term, they seem to be able to target a 10 percent share. We believe that the profit potential of 5% or 10% of US market share and what it may be worth is an interesting benchmark for the company.

EBITDA potential (USD)

Screenshot 03.12.2019 at 11.26.18 "width =" 770 "height =" 125 "

Source: Montgomery, based on an overhead cost structure of USD 40-60 million

How is this to be assessed?

Tabcorp offers limited growth and is quoted at around 12x EV / EBITDA. Flutter (undoubtedly influenced by its exposure to the US gambling market) is trading at 18x ​​EV / EBITDA, and both companies offer some valuation benchmarks.

We also need to adjust the costs to acquire 5% or 10% of our EV calculation and convert the valuation scenarios into AUD.

Valuation of 5 percent / 10 percent market share at 12x EBITDA in AUD.

Screenshot 03.12.2019 at 11.27.22 "width =" 770 "height =" 162 "

A structural growth opportunity

PointsBet Holdings today ($ 4.77 per share) has an enterprise value (EV) of AUD $ 629 million, which provides significant scope for a possible upward movement of management. When more than 50 percent of the US market is eventually opened to online sports betting.

In our view, PointsBet Holdings is a challenger with a competitive product offering (technology) and marketing capabilities, bringing its experience in the competitive Australian online sports betting market to the fast-growing US online sports betting market, which has been thriving for many years ,

It is too early to judge the success of PointsBet Holdings or not. And if they are not executed in the US market, the stock price has significant drawbacks. However, as shown in the table above, the size and potential of stocks may double and more.

The Montgomery Small Companies Fund owns interest in PointsBet Holdings. This article was created on December 3rd with the information we have today and our opinion is subject to change. It is not a formal consultation or a professional investment advice. If you want to trade with PointsBet Holdings, you should seek financial help.


MORE FROM GaryINVEST WITH MONTGOMERY

Gary is the Portfolio Manager of the Montgomery Small Companies Fund.
Gary joined Montgomery in August 2019 after spending three years at MHOR Asset Management in Sydney as founder and portfolio manager. Previously, Gary spent six years as a portfolio manager at Renaissance Asset Manager in Sydney. Prior to joining Australia, Gary spent five years in London, heading Morgan Stanley's Technology Sector Equity Research team and two years as a JP Morgan technology company.

This paper was written by a representative of Montgomery Investment Management Pty Limited (AFSL # 354564). The main purpose of this paper is to provide factual information rather than advice on financial products. In addition, the information provided is not intended to make any recommendations or opinions about financial products. However, comments and opinions may only contain general advice that has been prepared without regard to your personal goals, financial circumstances or needs. Therefore, before intervening in the information provided, you should always review the appropriateness of the information in relation to your personal goals, financial circumstances and needs and, if necessary, consult an independent consultant before making any decisions. This article expressly excludes personal advice.

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