By Richard Gill, CFA

Gaming Realms (GMR), the developer and licensor of mobile focused gaming content, has announced a positive set of numbers for the year to December 2019. These are the first full year accounts since the company completed the disposal of its B2C Real Money Gaming operations last July.

At the top line, revenues from continuing operations for the year were up by 11.5% at £6.9 million. By division, the now core Licensing division saw revenue increase by 84% to £4.1 million, with the now non-core Social Publishing division showing revenues declining, as expected, by 30% to £2.8 million.

On a divisional basis Licensing made a £1.4 million adjusted EBITDA profit, with Social Publishing making a £0.8 million gain. While Gaming Realms has previously alluded to a sale or rationalisation of the Social division, following a cost cutting exercise the business is now making a positive cash contribution which is said to appear sustainable. EBITDA profits at divisional level were offset by £2.4 million of administrative expenses, leading to an adjusted EBITDA loss of £0.3 million at the group level. This was up from a loss of £0.1 million in the previous year but better than expectations.

On the balance sheet, Gaming Realms ended the year with cash of £2.6 million following an overall £1 million cash inflow. This was driven by a £6.1 million inflow from disposals, offset by £1.5 million of cash used in operating activities and £2.7 million of capitalised development costs. A further £1.5 million deferred consideration is due on 31^st December this year from the real money B2C assets buyer. In terms of debt, the amount owing to Gamesys Group (previously Jackpotjoy) under the December 2017 convertible loan agreement amounted to £3.4 million at the period end.

Moving to operational highlights, Gaming Realms increased its library of proprietary games by 8 to 36 games by the year end. During the year it went live with 14 new partners, all of whom have licensed the company’s flagship Slingo Originals content. Key distribution deals were signed with Relax Gaming and Scientific Games, who together have over 200 operators that they supply with content.

Into 2020 and Licensing revenues are said to have increased by 90% in Q1 2020 to £1.3 million, ahead of expectations. Games have been launched with six new partners in the period, including Sky Betting and Gaming, Draftkings in New Jersey USA and Caliente in Mexico. The rest of the year will see a number of new contracts go live with with new distribution partners. Two new Slingo games have already launched this year and the intention is to roll-out additional content as the year progresses. Commenting on effects of the Covid-19 pandemic, Gaming Realms said that it continues to experience a high level of demand for its products which supports the Board’s confidence in the future prospects of the business.

Also, the company’s dependence on the UK market will decrease this year as it goes live with more international operators. A licence has been applied for in Pennsylvania, USA, to distribute games in the state, with hopes it will be granted by the year end. Encouragingly, a number of operators in the state are said to have already agreed to take the company’s games once they are licensed and approved. This expansion in the US adds to existing operations in New Jersey, with further applications expected in the country as more states regulate online casinos.

Finally, following CEO Patrick Southon departing in February, his duties have been divided between Executive Chairman Michael Buckley and Finance Director Mark Segal. As such, the CEO position will not be replaced for the time being, resulting in further costs savings.

ASSESSMENT

It was a year of change for Gaming Realms in 2019, with the strong growth figures from the Licensing division vindicating the decision to focus on this highly profitable segment. While the market for casino games remains crowded, the company has shown that its unique Slingo branded games are attracting players and are demanded by partner sites. We are expecting a strong year of growth in 2020 as further agreements go live, with very attractive opportunities coming from the US market. Noteworthy is that in 2019, the New Jersey online casino market grew by 66.3% with Gaming Realms maintaining its percentage share of 3.5%.

For 2020 we are currently looking for maiden annual EBITDA at the group level of just under £1.5 million. However, given the strong trading in Q1 we may look to increase our expectations in due course. For 2021, as licensing revenues rise and the operational gearing kicks in, we are currently looking for EBITDA of £3.3 million, and £5 million in 2022. We point out that our current forecasts could be considered conservative as we assume no further significant distribution deals, in addition to those already announced, are signed over the forecast period.

Our peer derived target price remains at 25.37p, implying upside of 237% from the current price of 7.525p. Assuming management continue to deliver on expectations over time, we would expect a significant re-rating in the shares from current levels. Our stance remains at Conviction Buy.

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