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As with most SPAC transactions, Super Group Limited (NYSE: SGHC) has collapsed after the agreement was closed. The online gambling company is really profitable, questioning whether the shares have fallen 60% of the SPAC deal for any logical reason. My investment thesis is much more optimistic about betting here at $ 4 after the big discount has finally arrived.
Diversified growth
Unlike many other online gambling stocks that went public through SPAC during last year’s boom, Super Group already had a strong business outside the United States. net game revenue from both units.
The company has about 50% of America’s revenue, but unlike other online betting players entering the U.S., half of the revenue comes from areas like Africa and RoW. Recent regulatory issues in Germany and the Netherlands have shifted the business out of Europe and further into areas such as Africa.
Source: presentation of the Super Group Q1’22
The company continues to play the growth of online gambling in the US, but the deal with Digital Gaming Corporation will not close until the end of this year. DGC will offer access to operations in 6 U.S. states with market access to another 6 states that provide the next major growth path for Super Group. In addition, the company recently entered Bulgaria.
While first-quarter 2022 results provided revenue growth of more than 7% to reach $ 350 million, the figures are below where Super Group expected to be when it made the SPAC deal. The company discussed a tough hold during March and pulled out the guidelines for the year in part due to harsh currency conversions with the euro.
Super bargain
With the $ 4 drop, the shares only have a market capitalization of ~ $ 2 billion with 490 million shares outstanding. Similar to other SPACs, Super Group has a substantial amount of outstanding securities that may or may not be executed with the $ 4 shares. All warrants and earnout shares require a price of at least $ 11.50 to activate the exercise of those shares.
Source: Super Group Q1’22 presentation
In a fully diluted case, Super Group would have ~ 575 million shares outstanding for a market capitalization of $ 2.3 billion. Of course, the shares would have to reach $ 14 over 20 trading days for the last 25.5 million shares to be paid. The valuation of the shares would exceed $ 8 billion in this scenario, but Super Group would get nearly $ 350 million in cash for the warrants.
The company generated $ 1.5 billion in NGR in 2021 and is on the verge of surpassing that figure. Super Group is cheap considering the company generated $ 358 million in adjusted EBITDA and strong free cash flow last year.
The company had forecast aggressive growth in 2022 with adjusted EBITDA growth of 14% to reach 345 million euros, but the online gaming market has hit a soft patch and the DGC agreement is not yet s ‘has closed. The shares are only quoted at ~ 5.5 times the subsequent EBITDA (depending on the lowest price of the euro), although the shares become difficult to value knowing that the number of shares will increase rapidly.
The original target for the year had adjusted EBITDA conversions to $ 360 million now, which would be substantially cheaper. Unfortunately, Super Group pulled out the target and the actual figure could be much lower with a first quarter EBITDA of 22 of € 61.5. Yes, the figure rose 14% year-on-year, but the annualized figure is well below the original target for 2022.
Take away
The key conclusion of investors is that Super Group has come across a difficult patch like the rest of the online gambling market as consumers spend more time away from home. Ultimately, however, the company is playing in an attractive market with long-term growth opportunities in the U.S. and RoW online gambling markets that are not seen in stock valuation.
Investors should take advantage of the weakness to build a position in Super Group before the market returns and the DGC deal closes at 2H providing the gateway to the attractive US markets.