Key Financials
List: Aktietorget
Market Cap: 629 MSEK
Industry: Betting/Entertainment
CEO: Fredrik Burvall
Chairman: Rolf Åkerlind
8.5 points 8.5 points 7.0 points 4.0 points 8.0 points
Share information
Share price (SEK) 44.9
Number of shares (m) 14.0
Market Cap (MSEK) 629
Net debt (MSEK) -29
Free float (%) 30 %
Daily turnover (’000) 7
Analysts: Philip Skogby [email protected]
The Beginning of a New Era
Cherry reported a Q2 which delivered above expectation of 107 million kronor (estimate 98 million kronor). EBIT resulted in a loss of -5.2 million kronor (estimate: loss of -4.5 million). The negative EBIT was burdened by other expenses primarily.
The online casino, achieved excellent performance both by growth of 65.5 million kronor (expected 60.6) and improved profitability. Likewise did Yggdrasil continue to perform well on a business level with the fundamental components to improve revenues significantly going forward, indicating the potential intrinsic value of this segment. It reported revenues of SEK 1.6 (expectation 3.0 MSEK). The restaurant casino continued to act as a strong cash-flow generator which reported 39.6 MSEK (estimated 34.8 MSEK). Changes in primarily the durable competitive standing as an entity, the short
and long term underlying growth rate, and profitability causes us to change the intrinsic value. Consequently, the new intrinsic DCF and SOTP value is now increased substantially to SEK 120 per share (Previously: SEK 50). Our bear and bull case are changed to SEK 60 and 200 per share (Previously SEK 30 and 60 per share). The company continues to position itself for strong growth as a relatively small player in the Nordic pond along with solid prerequisites to achieve profitable growth throughout Europe in a highly competitive environment. The company trades at a significant margin of safety relative to our intrinsic value with several catalysts to close the gap.
0 10 20 30 40 50 60
27-Aug 25-Nov 23-Feb 24-May 22-Aug OMXS 30 Cherry
Management Ownership Growth prospect Profitability Financial strength
Summary
Cherry
(Cherb.st)
Redeye Rating (0 – 10 points)
2013 2014 2015E 2016E 2017E
Revenue, MSEK 266 340 501 712 890 Growth 15% 28% 48% 42% 25% EBITDA -24 -18 17 79 137 EBITDA margin -9% -5% 3% 11% 15% EBIT -34 -33 -2 57 134 EBIT margin -13% -10% 0% 8% 15% Pre-tax earnings -32 -37 -5 57 136 Net earnings -34 -39 -9 48 120 Net margin -13% -12% -2% 7% 13%
2013 2014 2015E 2016E 2017E
P/E adj. -9.1 -13.4 -69.7 13.2 5.3
EV/S 0.9 1.4 1.2 0.8 0.5
EV/EBITDA -10.0 -26.4 35.2 7.1 3.5
2013 2014 2015E 2016E 2017E
Dividend/Share 4.00 0.00 0.00 1.00 1.00
Redeye Rating: Background and definitions
The aim of a Redeye Rating is to help investors identify high-quality companies with attractive valuation.
Company Qualities
The aim of Company Qualities is to provide a well-structured and clear profile of a company’s qualities (or operating risk) – its chances of surviving and its potential for achieving long-term stable profit growth.
We categorize a company’s qualities on a ten-point scale based on five valuation keys; 1 – Management, 2 – Ownership, 3 – Growth Outlook, 4 – Profitability and 5 – Financial Strength.
Each valuation key is assessed based a number of quantitative and qualitative key factors that are weighted differently according to how important they are deemed to be. Each key factor is allocated a number of points based on its rating. The assessment of each valuation key is based on the total number of points for these individual factors. The rating scale ranges from 0 to +10 points.
The overall rating for each valuation key is indicated by the size of the bar shown in the chart. The relative size of the bars therefore reflects the rating distribution between the different valuation keys.
Management
Our Management rating represents an assessment of the ability of the board of directors and management to manage the company in the best interests of the shareholders. A good board and management can make a mediocre business concept profitable, while a poor board and management can even lead a strong company into crisis. The factors used to assess a company’s management are: 1 – Execution, 2 – Capital allocation, 3 – Communication, 4 – Experience, 5 – Leadership and 6 – Integrity.
Ownership
Our Ownership rating represents an assessment of the ownership exercised for longer-term value creation. Owner commitment and expertise are key to a company’s stability and the board’s ability to take action. Companies with a dispersed ownership structure without a clear controlling shareholder have historically performed worse than the market index over time. The factors used to assess Ownership are: 1 – Ownership structure, 2 – Owner commitment, 3 – Institutional ownership, 4 – Abuse of power, 5 – Reputation, and 6 – Financial sustainability.
Growth Outlook
Our Growth Outlook rating represents an assessment of a company’s potential to achieve long-term stable profit growth. Over the long-term, the share price roughly mirrors the company’s earnings trend. A company that does not grow may be a good short-term investment, but is usually unwise in the long term. The factors used to assess Growth Outlook are: 1 – Strategies and business model, 2 – Sale potential, 3 – Market growth, 4 – Market position, and 5 – Competitiveness.
Profitability
Our Profitability rating represents an assessment of how effective a company has historically utilised its capital to generate profit. Companies cannot survive if they are not profitable. The assessment of how profitable a company has been is based on a number of key ratios and criteria over a period of up to the past five years: 1 – Return on total assets (ROA), 2 – Return on equity (ROE), 3 – Net profit margin, 4 – Free cash flow, and 5 – Operating profit margin or EBIT.
Financial Strength
Our Financial Strength rating represents an assessment of a company’s ability to pay in the short and long term. The core of a company’s financial strength is its balance sheet and cash flow. Even the greatest potential is of no benefit unless the balance sheet can cope with funding growth. The assessment of a company’s financial strength is based on a number of key ratios and criteria: 1 – Times-interest-coverage ratio, 2 – Debt-to-equity ratio, 3 – Quick ratio, 4 – Current ratio, 5 – Sales turnover, 6 – Capital needs, 7 – Cyclicality, and 8 – Forthcoming binary events.
Cherry – Delivers with Style
Cherry’s Q2 report surpassed our expectations concerning turnover on an entity level at 107 (expected 98) million kronor. To put in this perspective that’s almost 12 percent on growth on an organic basis since the last quarter. This should also be seen in light of that deposits grew 26 percent showcasing the potential. The growth rate became on an entity level 40 percent (expected 29 percent). Continued high outgoing bonus payments (which can to some extent be considered as a recurring item) affected revenues negatively. Marketing expenses declined quarter on quarter to 38 percent with 45 percent for the previous quarter. This should be seen in light of strong gamewin development. Other expenses and higher depreciation than expected resulted in EBIT being slightly worse than expected -5.2 MSEK relative to expected -4.5 MSEK. This indicates
efficiency in its marketing and increased brand awareness. The company is turning its business significantly within the next quarter due to more several value-accretive acquisitions on the affiliate and online casino side with an expected profitability momentum for current brands.
The online casino division delivered a turnover of 65.5 million kronor during the first quarter (expected: 60.5 million kronor) surpassing the estimates heavily. This development should also be seen in light from that Q1 was also a strong quarter in revenue development. Moreover this was likely still affected by high outgoing bonus payments.
The restaurant casino announced a turnover roughly in line with expectations of 39.6 million kronor (expected: 34.8) which was a
combination of the seasonally strong quarter along with efficient use of cash registers.
Estimate vs actual
MSEK Q1'15 Q2'15E Actual Dif.
Revenues 95.2 98.3 106.7 9% Restaurant Casino 35.2 34.8 39.6 14% Growth 7% 0% 7% Online casino 58.3 60.6 65.5 8% Growth 0.6 49% 60% Yggdrasil 1.8 3.0 1.6 -47%
Growth n.a 275% n.a
EBIT -8.9 -4.5 -5.2 -16%
Revenue growth rate 31% 29% 40% -38%
EBIT-margin -9.3% -4.6% -4.9% -6%
Yggdrasil figures: Exclusio n o f Internal Revenues So urce: Redeye Research, Cherry
Cherry’s report surpassed expectations of the online casino
Finally, Yggdrasil showed considerable progress with a reported turnover of 1.6 million kronor (before internal revenues) which were close to our expectations of 3 million SEK. This figure is estimated to be largely free of setup-fees which indicates that the majority of revenues originate from actual operations amongst the operators. Despite the not so enticing figures of Yggdrasil this quarter financially, the operational development is
significant to say the least. For example game win is up 41 percent the first month of Q3 on a month-to-month basis, the number of people working is 25 and increasing on a step-by-step basis. Significant development can be adhered on its Jackpot slots across operators and the development process of its games. We are expecting more top-quality games releases that will now progressively take larger shares of promotional campaigns. In the beginning of 2016 the HTML5 framework is set to be implemented for all its old games producing another increment of revenues. The company is set to conquer UK operators with likely better initial royalty rates in 2016.
On all accounts, the report in general and with developments in late has surprised positively with the underlying fundamentals improved. Even exclusive Almor the company showed strong growth and even EBIT contribution in July. Another note is that the company has historically had problems with the mobile platform, that seems now fixed with almost 30 percent of its customers playing through mobile in Q2.
Solid Balance Sheet
Cash and equivalents was 25 million kronor by the end of the second quarter, which will be affected in Q3 initially by approximately SEK 20 million. Another 700000 euro are expected to contribute to the cash and cash equivalents along with the cash flow during Q3. This would mean a cash position of somewhere in the range of 10 million in Q3. The company has an overdraft facility of 25 MSEK is expected to cover investment needs before reaching profitability.
The New Cherry Emerging
Cherry has a long track-record of successful acquisitions and Game Lounge and Almor is no exception according to us. The former will enable Cherry to continue to channel customers to its brands and generate revenue also through other brands. Almor will create a stronghold of profitable growth within the German markets. Almor itself will contribute to 55k active customers thus equivalent to twice Cherry’s existing active customer base. Two of its sites still has no mobile/tablet support with a strong brand and a market poised for growth there exists large potential for future strong growth for this brand. Game Lounge also increased its presence for the Finnish market possibly preparing a strong launch for another Finnish casino to concentrate its affiliate efforts on. The Swedish equivalent startup casino is Sveacasino.com where we are excited and following closely and where we expect to see some results soon. The recognition of these efforts now and in the future along with its current brands reaching critical mass
The balance sheet continues to be strong
volumes will make the market appreciate more of the underlying earnings power of the company. Thus, forming a new depiction of Cherry as a profitable and high-growth company. Nonetheless, the company has significant competition and can likely increase in the future but with Cherry’s innovative DNA it is likely that the company can avoid being significantly hurt. Please review the section starting from P.11 carefully of how and why we asses that Cherry is undervalued.
We believe that the company has acted wisely in betting on a balance of the two elements profitability and growth. High growth will help them
preparing for a re-regulation on the fast growing online casino market via the mobile and organic segments, as well as with the transition away from the physical casino. When the new regulation comes into effect in the Nordic countries, the company will need to be in a position either as a consolidator, or as a potential acquisition object, which will require a sustained greater growth rate in Scandinavia and Europe. From the sole perspective of profitability, it will become essential to obtain a high growth rate to keep a strong profitable position in the market which is experiencing a climate of re-regulation, increased taxation as well as competition – (which is partially compensated by the increased turnover).
Brand Awareness Reflected by Fundamental Improvement
In the table below, it can be observed that the company is allocating significant resources on marketing as it has historically provided an acceptable yield. Now, the trend is clear the company is achieving better return on investment – with scale and efficiency of its market budget the awareness of its brand increases.
Source: Redeye research
The company is showing strong signs of an improving MAE-Ratio trend (Marketing Efficiency Ratio – Onlinecasino revenues divided by marketing expenses) which reflects the former deduction.
The company has continued to invest in marketing endeavors for CherryCasino and Spilleautomater during the quarter. It should also be mentioned that the company invested considerably more than other gaming operators such as Betsson, Unibet with a total of 38 percent in marketing expenses in relation to revenue during the quarter, which explains the significant growth rate. We think the company should establish itself by investing some resources on the ranking of Casinomeister.com with the experience, platform and trustworthiness.
We also believe that the company will reduce COGS in relation to revenue to the same levels of the competition – about 20 percent as the online casino division progressively expands beyond that of the restaurant casino in sheer size (which is the primary driver of COGS). As of now the royalty rates are likely higher on some its brands due to its relatively low volumes with tier-1 gambling developers.
Continued efforts in player management
The company increased the number of active customers from 23347 to 26185 players during the quarter. It is highly likely that the increase in active customers as well as turnover is due to Cherry’s continued efforts and use of CRM/VIP to manage its customers. Although 40288 new customers were registered during the period which represents a large chunk of the marketing expenses. It is essential for the company to make people return
Marketing costs relative to revenues (%) / MAE-Ratio
Continued substantial marketing expenses – improvement in the MAE-ratio
CRM and VIP
management continues to implemented
and play more frequently to retain low customer acquisition costs, which we believe the company has potential in improving and to lower the frequency of bonus utilizing players.
Source: Redeye research
It is vital that the company continues to transform deposits to net gaming gains by gaining a higher degree of active customers for example, which they historically have succeeded with. As observed in the previous quarter the reason that the quarter’s high deposit amount was not fully converted to net gaming gains to the same degree is due to the higher outgoing bonus payments. This indicates potential for an increase in turnover, if properly handled, and assuming existing deposited amounts continue for the coming quarters. Nevertheless, adjusting bonus amounts in general can be
dangerous as it can detract the one’s who actually enjoy playing. In turn a player whom enjoys playing will in the end unfortunately mean the loss of the invested capital if the session period is far stretched in time. As Cherry has affiliate owned business the company is making money on other sites as well however the distribution between direct and affiliate revenues is unknown although we believe the amount of affiliate is in par with other operators.
Development of deposited amounts is positive, but a greater amount must be converted
Source: Redeye research
Yggdrasil – The Rise of a Titan
The games have continued to receive good reception at Mr. Green,
Vera&John, LeoVegas as well as Unibet – where amongst others, free-spins’ marketing has been executed with the operators during the quarter. This is also shown by continued traction that the revenues indicated. Of the reported gamewin we expect that GGR is about SEK 20-25 million for the operators. Increased volume (gamewin) likely means increased royalty rates initially until a certain point in time where the volumes progressively declines. In July alone the game win increased by 41 percent if comparing month-on-month (July being a weak quarter) reflecting successful performance of its slots. The jackpot slot alone will in Q3 probably
contribute in the range of SEK 2-2.5 million with a 7.5 percent payout ratio of game win assuming an accumulated jackpot of 2.5 – 3 million estimated during Q3. The analogy here that is important to remember is that one single high-quality game can be worth many times more than a dozen of half-decent games. Furthermore, if the reputation is lost it could be devastating. With increased quality of its games we are determined that Yggdrasil with high-quality approach will take part of the marketing budget for games which are important to gain recognition of its games. The quality factor relates to dynamics of the games itself in terms of variance, modes, mechanics, graphics and depiction of experience. These neat characteristics we believe that the company has and can leverage over time. We will follow
closely the development of these slots across tier-1 operators. We interpret the critique and ratings the games have received as evidence of
further momentum and Yggdrasil competence within this sector. With an increasing amount of highly innovative slots the company is set to find the jackpot of slots in due course. Currently, Yggdrasil employs 25 people with more to come to be able to scale up development further in the future. We have seen so far that the company will only scale up development under the prerequisite of not reducing quality. Quoting the CEO of Yggdrasil himself illustrates the strategy going forward:
“We’re not aiming to be the biggest supplier by the end of the year, but we’re certainly planning to be the best.”
Another interesting point from its press release statement is that the company will make an application for UK license by Q4, thus reaching all
Fundamentals pointing towards exceptionally strong growth the coming years
major UK operators at some point 2016. With Yggdrasil games being in demand increased initial royalty rates cannot be neglected in the future.
As revenues increase incrementally from its slots it’s likely that the royalty rate will incrementally increase. 5 percent of increased royalty
compensation can suggest that Yggdrasil will double to quadruple its turnover, dependent on negotiation parameters which are often determined by the size/reputation of the operators.
The advantage of the low number of competitors in the game development industry is reflected in the barriers to entry in the form of experience and game design. It should be mentioned that the company is still experiencing a considerable challenge in its efforts to increase the quantity and at the same time being the most imperative factor: to constantly improve the quality of games. This will be a constant struggle for Yggdrasil and we expect that Yggdrasil will act as a challenger to the games developing industry in the future. We believe that the game interface is being improved, depth in the slot and the sample of low-variance and high-variance to manage the differing gaming types will improve continuously.
Yggdrasil is not dragging its feet with the multi-platform as they achieved this with its latest game and is expected to be delivered solely though the HTML5 (iSENSE 2.0) platform going forward. Historically, the company has not had complete support for its mobile games, but it is now expected that turnover will increase even in this segment, which we see as an imperative factor for Yggdrasil’s growth going forward. The old games platform is also expected to be gradually activated for mobile phones by Q1 2016. This of course increase the overall revenue as the iSENSE effect means both that the user experience and downloading is significantly better than porting a solution for each platform.
From a game perspective alone, we believe that the next step for the company within a year or two, after the company has established a stable customer base, is to customize the games specifically for the gaming operators. This is a trend which will and is emerging for the gambling operators in the industry, one which they would do well to partake in. We believe that this can provide a significant turnover growth, if it occurs earlier than we expect.
Cherry currently owns 89 percent of Yggdrasil; however, if Yggdrasil’s management members choose to utilize their options, the ownership level will decrease to 86 percent.
The Restaurant Casino Continues to Deliver
The restaurant casino experienced another strong quarter due to continued use of the new cash register terminals. With Cherry’s new cash registers which provide the customers with more payment options we see a tendency
The balance between quality and quantity will become increasingly important in the future.
High turnover due to seasonal effects
that the company can continue to capitalize on quicker payments from the customers. There were a total of 3 new agreements entered with gaming locations and six agreements were amended. The company currently enjoys a significant market share of 65 percent compared to 64 percent one
quarter before. A negative development is the payroll taxes (increasing from 16 to 22 percent effective by July 1st) which is expected to be shared the
restaurant itself mitigating the earnings effect along with further
consolidation. It can be quite a hazzle for a restaurant to change operator efficiently with fewer organizations involved in the industry. This is necessary for the industry to work efficiently.
The division can likely grow by 2-3 percent per year with the help of
acquisitions on the market. According to the company the contraction in the restaurant casino industry is lower than previously and has stabilized at about 2 percent per year.
At the same time, it is possible that a positive outcome of the incoming regulations of the gaming industry will contribute to a doubling of the turnover as well as profits. The cause is that the maximum bet would increase from 70 to 200 kronor in 2016 or later, which may now occur earlier depending on EU’s impact upon the Swedish gaming regulations. Another opportunity is that customers on physical location can register its accounts on Cherry’s online platforms which if executed well can act as an additional revenue pillar.
The Emerging Fundamental Components of The
Investment Case Cherry:
Before this analysis goes any further we would like to evaluate some critical factors going forward the upcoming years for the readers to quickly grasp. In the following paragraphs we want to list some of the most important value-driving characteristics that the market will progressively appreciate for Cherry in the future.
Maturity phase and Critical Volumes – Margin Expansion
Cherry will be able to cut costs as royalty decrease caused by that volumes are incrementally lifted. Furthermore, as brand awareness increase the marketing budget will become more efficient thus expanding margins. Scale of marketing will also help the company to expand its margins. The personnel expenses base is set to handle higher volumes, thus
personnel expenses relative to revenues will become incrementally more distant. Cutting middlemen such as affiliates are another way to improve revenues in the future. All of these factors Cherry is poised to nurture carefully including that of letting the player to enjoy the playing time to its maximum, thus increasing the retention rate.
The online casino industry is growing but there is also rapid expansion of newcomers that are quickly taking market share. Standing out of the crowd will become gradually more important whether it’s the best and/or
exclusive games, customer service or any convenient or fun feature that makes customers more inclined to play on a certain platform will become more and more imperative to withhold a competitive edge. With the earnings perception of the company changing due to reaching maturity for its brands because of the previous factors a subsequent value appreciation will likely follow.
Essentially, the bottom-line is that we can expect EBIT margins of around 20 percent with a market growth of around 15 percent in a maturity phase.
The Name of The Game is Evolution
The company has recently began to expand to the sportsbook arena which can create a significant revenue and profitability boost in the future.
Furthermore, its strategy of waiting for the right acquisition works well, this could be a further catalyst in the future. But more importantly, the
company’s internal willingness to search and try out new things is in its DNA. It is no surprise that Cherry has produced both Betsson and Netent. At the same time it has failed many times as well but if you are willing to learn by your mistakes then success is a natural consequence. With its own games developer Yggdrasil it is set to expand in a large market.
In essence, the online casino industry is growing but there is also rapid expansion of newcomers that are quickly taking market share. Innovation and excellence is therefore imperative to success. Nevertheless, many markets are its infant stage for regulatory reasons. In the future standing out of the crowd will become gradually more important whether it’s the best and/or exclusive games, customer service or any convenient or fun feature
that makes customers more inclined to play on a certain platform like faster payouts will become more and more imperative to withhold a competitive edge. Cherry has the proper operational prerequisites to satisfy these needs.
Continued Strategic Internal Investments and Acquistions
Historically, the company has performed several value-accretive
acquisitions such as Web resorts and Automatgruppen. Net Entertainment and Betsson is two other well-known internally created brands which has been spun off. Now, Yggdrasil is such an internally created potential for future value growth. Almor is what we deems is a value accretive acquisition over the long-term helping to support further growth in Europe. We can expect more of these acquisitions only if the potential far exceeds the cost even in a negative scenario. This strategy has helped the company to survive over the years and we do not see these fundamentals to transition to the negative for the shareholders in the future.
New Frontier Arenas – Sports Betting and B2B
The SBTech’s betting platform has now launched Q2 bringing Cherry upon the door step for the sportsbetting arena. First, the loyalty amongst existing casino customers may improve as it would provide a choice for betting, but may also improve customer acquisitions of casino customers as new betting players commence playing online. Cherry with a strong brand in the background may likely take advantage of this to create a solid brand for its new betting operations. Now, by Q3 many of its other brands will also go live with this product. This is of course a long-term investment that needs time to yield significant results and resources must be spent on this to achieve results.
Another area of interest is its platform systems which it could sell as a B2B model as both an operator and affiliate systems that in the longer term can be supplied for startups or established operators.
Small Cap Listing
Historically, the management of Cherry has been shareholder friendly. A natural step to realize values of this company is to list itself on small cap, thus attracting institutions. Institutions will naturally appreciate the “risk” diversification of Cherry’s three current primary segments, history, impressive growth rate and the strong ownership.
Yggdrasil Surpasses Expectations
Yggdrasil consists of people with passion of developing fun games. With the increased number of operators and the gradual increase of employees the likelihood of an AAA-slot does not seem implausible. An AAA-slot can stand overwhelm the revenues during a significant period of time due to
continued high-ratings. We deem that the company will eventually produce one of these. Operationally the company has surpassed our expectations as of yet.
Regulatory Positioning
If the company succeeds in avoiding margin contractions due to
competition, it will result in a strong position in the case of a re-regulated market. It is possible that the company can achieve a multiple expansion as the company then succeeds in sustaining a large market share in
Scandinavia, which would then even be perceived as lower risk generally than a company with smaller market share.
Aligned For Strong Growth
This chapter will present the market dynamics of the three segments that Cherry have operations in.
The Online Casino Industry – Large Potential For
Growth
Cherry can utilize some promising opportunities to obtain a part of the projected growth in the online casino market, which is expected to grow with a CAGR of 5.4 percent in net gaming profits until 2018. The company has a small share of the European market which accounts for 23 billion kronor in net gaming profits, which should make it possible for Cherry to take part of the projected growth due to a greater investment rate than the average market rate.
In addition, it is also expected that the mobile market will become a decent catalyst for Cherry’s future growth which is on average growing by 32% per year in Europe. This would make it possible for a higher growth rate for the company, which we now expect for 2015. We should also mention that it is not certain that the growth in this mobile segment will cannibalize the growth in the PC segment, nor how large this segment will become; we expect that cannibalization will not be an issue for Cherry. There is however a possibility of an increase in the Swedish turnover growth rate in relation to the competition, without international establishment, strengthened by the ongoing transition from physical to online casino (at present only 9 percent of games are conducted online).
We also expect that the company can and should achieve growth in Scandinavia to be able to act aggressively in the market when (less if) the regulations are altered. The company may be able to acquire an additional market share of 10-15 percent in Scandinavia, which according to our calculations represents approximately 500-800 million kronor, which enables the company to position itself for further growth in existing markets.
It will also be strategically important to achieve a greater turnover relative to both minimize the staff expense levels and marketing level without significantly impacting the operating margins. An important question concerning the effects of the impending regulation changes, is in regards to eventuality of decreased sales and lower margins in its wake, where larger competitors gradually enter the market and acquire market share. Most of the gaming operators appear to agree that it is not the case. Rather the the key factor is taxation. A low taxation provides for greater penetration of the online casino market and sustains a highly competitive industry. The regulations will lead to lower margins regardless, but it is likely that it will be compensated by a higher turnover level.
Cherry has still only a fraction of the market share of the total online casino market in Scandinavia and Europe
The EU has hastened the process for licensing in Sweden by having the Swedish regulations examined at the EU-Commission. We expect that still a license will be granted in 2018/2019 as legal changes tends to take longer than expectations. Svenska spel originally applied for an online casino license, which, in hindsight suggests that Swedish games are subject to a regulatory change.
It is important for Cherry that if it is to achieve sustained high growth rates through organic growth, partnership or acquisition it needs to expand its operations to other European markets. The regulatory change trends have continued in a few markets during the quarter, such as the Netherlands,
Spain, Great Britain as well as North America.
The Restaurant Casino - Industry Challenges Ahead
The Swedish restaurant casino industry is regulated and Cherry acts under the jurisdiction of the Swedish Gambling Authority. The restaurant casino market represents approximately 1 percent of the total gaming industry, which is a contraction of almost five percent points compared with the millennium shift (before the online casino and Casino Cosmopol’s entry). The potential for Cherry lies in the opportunity to continue consolidating the market and expand the opportunity for customers to play. A catalyst for turnover growth and multiple expansion for the restaurant casino will likely occur at the time of regulatory change in 2018/2019 – which may lead to an increase of the max bet from 70 to 200 kronor. As the question concerning the increase of the maximum bet may not be of the same priority as that surrounding the change of online casino regulations, we expect that it may take additional time before that motion is passed.
The employer contribution raise is also a factor which can come to increase staff expenses, which in turn would reduce operating margins somewhat.
The Game Development Market - Promising Outlook
Yggdrasil, which is connected to the game operator Cherry, is similar to many other game developers, which have historically been linked to game operators to only be sold off later. Example of game developers (suppliers) are Net Entertainment, Playtech, Scientific Games, IGT, Bally Games, and Betsoft. The market for game developers is expected to grow alongside the online casino market. The game developer market is not as competitive as the game operator market, which can be explained by higher barriers to entry. It is important that Yggdrasil continues to remain competitive in the future in regards to both quantity and quality of games, as the gaming operators may otherwise lose confidence in the distributor. Yggdrasil is subject to positive circumstances and opportunities which will allow it to become a significant games developer, considering its experience in the game developer market.
Cherry’s restaurant casino can still grow through acquisitions as well as through easier payment solutions.
Cherry’s Yggdrasil aligned for growth
Estimates
MSEK Q1'14 Q2'14 Q3'14 Q4'14 2014 Q1'15 Q2'15 Q3'15E Q4'15E 2015E 2016E
Restaurant casinno 33.3 35.0 37.6 42.1 148.0 35.2 39.6 42.4 44.1 161.2 163.4
Growth 1.6% 4.9% 0.6% 4.3% 2.8% 2.8% 9.0% 8.7% 7.4% 9% 9.1%
Online Casino 39.1 40.6 46.6 56.8 183.1 58.3 65.5 96.9 106.9 327.7 516.7
Growth n/a n/a n/a 31% 32% 43% 38% 33% 60% 79% 58%
Yggdrasil 0.5 0.8 1.0 0.9 3.2 1.8 1.6 4.0 5.0 12.4 32.1
Growth n/a n/a n/a n/a n/a >100% >100% >100% >100% >100% 376%
Källa: Redeye Research, Cherry
Financial Estimates
We estimate that for the online casino division the growth rate will increase to approximately 30 percent during 2016 (extrapolating Q3’s revenues in to FY figures) which we expect then to incrementally decrease. The growth is sustained on a high level due to the entrance into new European markets in a more mature stage in the Nordic markets, the mobile growth and less bonus payments. Thereafter, the growth rate will decrease progressively to 20 percent in 2018. To ensure that this growth is possible, a high
investment rate and conquest of market share of the online casino market is required; we believe that the conquest of market share should be possible given the size of Cherry, market growth, experience and innovation along
with the capability of the management team.
As the table below indicate is that revenues for the online casino is expected to grow quite rapidly, but the yearly growth again is still quite conservative at around 30 percent extrapolating Q3’s into full year figures for 2016. As mentioned earlier, the accounted revenues are somewhat underestimated as Cherry has high bonus payouts, which in a mature stage should lead to a greater positive revenue change which will have a direct impact on EBIT in the longer term. Making players play longer at the site increases the amount of gamewin, we believe the company is able to stay innovative in this arena, personalizing the experience to retain players over time. We still think the company has room to surprise considering that we think that the company can further accelerate its marketing. Especially because the growth of Yggdrasil could gain significant momentum during next year with several games for this year in the pipeline. The British megalodon gambling operator’s revenue contribution by Q4 should not be underestimated. It should be noted that these figures are fully consolidated figures with Almor minority interest included.
High growth is sustained over time by the mobile venture, the Nordic market potential as well as the establishment in overseas markets.
For Q3 and Q4 respectively we expect an EBIT of SEK 3.9 and 5.8 million respectively driven by the fundamental optimization its current online casinos and its recent acquisition. These are figures post minority interest of Almor.
From a margin perspective, we expect improvements in the coming years. Of the reported EBIT above we expect around 70 percent or approximately SEK 40 million representing the online casino contribution for 2016. This is equivalent to an EBIT margin of 8 percent (Post Almor contribution 71 percent = 6 percent EBIT) under 30 percent growth which seems fair considering the effect of reaching critical mass for several of its brands. This does not seem either unreasonable in relation to other high-growth
operators growing even faster at that stage with even better margins like Mr Green, V&J and Guts casino.
Thus, it seems like we have a natural margin of safety in this estimate as the brands incrementally become more profitable and efficient. It is possible that in the near future that the margins will increase due to the fact that the fixed expenses are retained at current levels (personel expenses) which will
decrease progressively in relation over time. Although, the near-term is important, the long term case, to significantly
outgrow the market is likely considering its still low market share in its respective markets with little expansion into European markets. One ought when valuing Cherry to consider the maturity across its top contributing brands across several geographical regions to understand the value of this segment.
Explanations on important valuation parameters
We also expect that the marketing expenses relative to turnover will shrink from present levels of around 45% when the company reaches scale in its markets. Competitors such as Unibet and Betsson have marketing expenses relative to turnover of 20-30 percent. This goes through all channels affiliate and direct marketing. To be able to acquire further market share in Sweden, the company will need to intensify its marketing efforts to later be in a position to utilize the opportunities of the changed regulatory
environment, in other words to be able to consolidate or to be an attractive consolidation target. This we believe is necessary due to the fact of taxation
Detailed estimates, 2015 - 2016
SEKm Q1'15 Q2'15E Q3'15E Q4'15E 2015 2016
Revenue 95 107 143 156 501 712
EBIT -8.9 -5.2 5.2 7.1 -1.8 57.2
Net profit -11.8 -6.8 3.9 5.8 -8.9 57.2
EPS -0.88 -0.51 0.28 0.41 -0.69 3.4
Revenue growth rate 31% 40% 68% 56% 49% 46%
EBIT-Margin -9.3% -4.9% 3.6% 4.6% -1.5% 8.0%
Källa: Redeye Research
The relative part of the marketing and COGS will shrink in relation to income over time
and thereby turnover growth will become more difficult in the changed regulatory climate.
COGS are also expected to shrink in relation to the revenue when the net online casino revenues gradually increase over time. Royalty rates of its games is usually tied to amount of revenue. With higher amount of revenue each customer become more profitable all other assumptions being equal. It should however be added that if outgoing bonus payments decrease, turnover will not need to have a perfect positive relationship since one would lose prospective customers due to revoking bonuses. It is therefore about fine-tuning to customers whom enjoy playing and frequently at the platform without doing excessive risk arbitrage on the bonuses. Customized and personal playing experience is important.
Competitors such as Mr. Green for example incur staff costs of 20 percent against Cherry’s 30 percent. Continued development of the mobile venture is likely to impact the net cash, but it is supported by higher margins in the long term given favorable position in the regulatory changes.
We chose to focus on EBIT as we believe that depreciation will not compensate for CAPEX investments, which are estimated to be higher, which means that we can have overestimated the long-term revenue generation capability if we had focused on EBITDA. All in all, we do not see any reason as to why the company cannot sustain an EBIT margin of 20 percent, similarly to that of the competition or even higher at the maturity stage. Although it is expected to concentrate on profitable revenue growth the coming three years. We have not executed any estimate changes to revenues and EBIT the coming years and quarters.
Valuation
A discounted cash flow analysis and a sum of the parts (SOTP) valuation are used to determine the value of the company.
Discounted cash flow analysis
The turnover growth rate as well as EBIT margin will in large be changed between the periods 2015-2021, from approximately 8 and 14 percent to 15 and 16 percent respectively. Longer term EBIT margins have been increased to reflect the conviction of Cherry entering the maturity phase. The reasoning behind the changes is the fact that Cherry has experience, strategy and the market circumstances necessary to achieve our estimates. The company will also be in a decent position to consolidate or be
consolidated for the upcoming regulations in Europe.
We estimate that the turnover growth rate will decline progressively from the current 30-50 percent (previously 20-40) the next coming years to 20 percent (previously 10 percent) from 2018. The high growth rate is
supported by the higher growth rate experienced by the online casino. The growth rate is also motivated by the fact that the company is absorbing parts of the strong growth experienced by the mobile segment. It is also likely that the company will need to be prepared for further establishments in overseas markets, to be able to reach a maturity stage by the end of 2018.
The EBIT margin will converge to 20 percent on an entity level when the company begins to reach higher maturity of its marketing expenses when it reaches scale. Simultaneously, the restaurant casino’s impact upon the EBIT margin will decrease over time as the online casino’s growth rate increases, which will see COGS as well as staff expenses decrease relative to turnover. This will enable it to be possible to achieve an EBIT margin of 20 percent. Even Yggdrasil is thought to provide a positive effect, but we do not asses that it will be major in a relative short-term horizon.
We believe that the company tax will be around 5 percent after 2018 when the company reaches maturity, since the relative part, after profits, from the online casino in relation to the restaurant casino (where they cannot take part in tax advantages) will become substantially larger in the future. Consequently, the tax is expected to progressively decrease to 5 percent. The deferred tax assets will to its majority mean that the tax will be low during 2016-2017 assuming profitability. Unrecognized deferred tax assets amount to around 10 MSEK.
So what did we underestimate in relation to our previous intrinsic value? And why now? The Redeye intrinsic value have been at approximately SEK 50 per share for over a year.
The essential circumstances necessary to achieve our estimate are in force
EBIT margins are progressively nearing 20 percent (entity level) in the long term
Well, the first factor being an underestimation of the aggressive growth, reaching critical volumes and fast adoption of a profitable durable strategy for the online casino (both through acquisitions and new brands).
Furthermore, the innovation through affiliate, continuously releasing new
brand and strategies to retain customers are also factors to consider. Secondly, the Yggdrasil trajectory was barely accounted for previously,
although we covered it on a detailed level it was still an early startup but has reached far since a year. As previously explained the prerequisites,
operational development and future trajectory resembles an emerging high growth games developer. It is seldom you get to observe a company that seems to have the right prerequisites.
Our initial margin of safety, was indeed, too conservative upon reflecting on the actions performed and the expected operational leverage in the longer-term for both the online casino and Yggdrasil. Also, intrinsic value should be seen in the light of a dynamic environment, we are putting emphasis on strong growth under profitability to some extent for both the online casino and Yggdrasil as they are fulfilling the prerequisites for this trajectory. It’s important to note that this valuation is based on a long-term view of the fundamental trajectory of the company. Individual quarters can be worse than expected but as long the operational fundamentals does not change significantly an investor’s perception of the company should not change, given that the right long-term framework of fundamental development has been figured out.
Our rating is set to 10 percent after a revaluation of the growth rating from 6 to 7 points, reflecting Yggdrasil’s increased presence of Cherry.
When the online casino and Yggdrasil continuously delivers we will review the Profitability and Growth rating further. The DCF value thus now indicates 120 kronor in the base case where the scenarios can be observed as below:
Scenario summary
For more information regarding the scenario analysis, see page 25.
Bear case scenario: Our estimated value is 60 kronor per share with an estimated probability of 25 percent.
Base case scenario: Our estimated value is 120 kronor per share with an estimated probability of 50 percent.
Bull case scenario: Our estimated value is 200 kronor per share with an estimated probability of 25 percent.
Sum of the parts valuation
A Sum of the parts valuation (SOTP) is used to determine the unique segments values. The aim is to provide a realistic intrinsic value range accompanied with a margin of safety.
As the fundamental earnings power of the company is likely to change soon we are expecting significant margin expansion during intense growth the coming few years +30 percent. This is also led by Cherry’s relatively low market share which we expect is about to change. Own platform, affiliate optimization, highly experienced management team and unique segments are other factors that indicate a significant revision of the value. The company is reaching critical mass for achieving both high growth and profitability in tandem.
Moreover, previously we valued Yggdrasil today and heavily discounted the future growth. Now, we are more convinced this excessive discounting was unjustified and we believe that Yggdrasil and the team has real potential to become one of the challengers within the gambling industry within the next few years. Indeed, we could be far behind on both the online casino and Yggdrasil but this intrinsic value reflects the conviction of us having right in at least one of the two. Thus, in practice one of the segments is enough to fulfill the upside. But due to unforeseen risks, shrinking margins for one over time for operators, we must utilize a rational margin of safety. Indeed, soon the cash-flow generator will not be the original restaurant casinos but the majority will likely esteem from the online casino the coming few years and/or Yggdrasil.
The sum of the parts valuation is followed below with a chapter following detailed explanations of the reasoning behind the valuation:
Sum-of-the-parts valuation
Segment
Value
EV/EBIT'16E
OwnershipOnline casino 982 10 100% Restaurant casino 124 8X 100% Yggdrasil 560 86%** EV 1666 Net Cash* 10 Equity value 1676 Intrinsic value 120 Market value 630 Stock price 45 Upside 166%
The growth per year does indeed seem overwhelming from SEK 350 million to 520 million in 2016 for the online casino. But, one must set that in to perspective first from Q3 Cherry’s ongoing business will have a 400 MSEK revenue stream assuming no growth. Thus, the actual growth is actually in the range of around 30 percent. Secondly, Cherry has still a low market share in its markets accompanied with decent prerequistes and with an growing market the company is set to grow.
Reasoning Behind The Valuation of The Online Casino
If we assume that the company can sustain an EBIT margin of 19-20 percent at the maturity stage, at a turnover of approximately 520 million for 2016 (annual rolling basis - assuming no growth - is currently SEK 400 million), this will lead to a value of an EV/EBIT multiple base of 10 equivalent to approximately 1 billion kronor. This is still a somewhat conservative multiple when considering the company’s extensive experience in the gaming industry as well as the fact that the company has succeeded in sustaining a high growth rate. Consider that the company by 2017 will emerge to Mr Green’s revenue level of approximately 650 million, the margin of safety, in this investment becomes evident. The revenue momentum is set to expand far beyond 2017 according to our estimates establishing its brands across Europe. This is why we are certain to include even the projected share of minority interests (furthermore we expect that Cherry will also obtain the remainder of the minority interest in time). With Almor minority interest excluded the value would still be approximately 900 million.
Unibet and Betsson are traded at approximately 20x EV/EBIT for 2016E, with a significantly lower organic growth rate. A risk premium should however be supported as the company is smaller and operates in fewer markets, which raises the political risk. Undoubtedly the company trades as a struggling company but should in reality be more appreciated for its likely transition to its long-term potential.
The case is based upon a growth rate which is determined by how well the company manages to sustain the momentum within its brands, the mobile integration as well as how successful the overseas establishments are over time. The margins at the time of the maturity stage will then be appreciated by the market as the company will then take action to introduce a stable dividend payment based on the cash flow.
As mentioned earlier, the chosen EBIT margin is not only a product of the reduced marketing expenses and personnel costs, but also due to the reduced bonuses. Even at a 10 percent operating margin the highly probable growth makes the company poised for higher valuation. Thus even if the highly intense competitive climate decreases the margin the strong growth provides a safety cushion for the valuation
The net casino division for 2016E is in principle the foundation of the current MCAP today
Restaurant Casino Stable Cash Flow Generator
The restaurant casino which certainly has a lower growth rate, however, with a catalyst in the form of a hastening of the re-regulation within a not too far off future, along with the payment solutions and acquisitions impact on the turnover; we believe that this division can be valued to 105-124 million kronor or an EV/EBIT of 8 – 9 with an expected turnover of 152 million kronor and an operating margin of approximately 9 percent. One should also take into account the fact that an international player would likely appreciate the significant market share the restaurant casino
possesses, which may suggest that we have underestimated the multiple or the acquisition multiple for the division.
Yggdrasil – The Value Machine
Yggdrasil if sold on the market today, could as previously indicated likely obtain a value between 50 to 70 million kronor (assumption: 86 percent ownership of Yggdrasil). This, however, does not reflect the potential of a long-term owner’s valuation of the company. The games has already been proven to work by tier-1 operators and it is now in a stage to take their game to another level. This includes further innovative slots, taking further share of the marketing campaigns by continuously improving relations with operators. With reason to believe that the likelihood of growth as well as margin expansion is likely, based upon what has been achieved in terms of revenue performance, as well as the fact that full support for the mobile platform is expected, this makes the current valuation reasonable. In addition, we assess in the long term it is likely that the company can obtain a good yield from Yggdrasil, which can be expected to produce a similar EBIT to that of Net Entertainment of 30 percent or more, depending on if they take decisive action in the regulated or re-regulated markets. Net Entertainment is valued at about 25-30 its earnings power of the current year in which a conservative scenario should be able to motivate a multiple of 10-13 for a smaller company, but for a fast growing company such as Yggdrasil the multiple should actually be higher, given the abnormal growth rate. This will produce a multiple expansion for the company when volumes
similar to that of the online casino are achieved. It would not surprise us if the 86 percent ownership in Yggdrasil would represent a majority of the market cap value in the future for Cherry as an entity. When the company reaches a turnover of approximately 100 million, Yggdrasil will then be valued by an operating margin of 30 percent at the maturity stage; a
multiple of 20-30 implies that Yggdrasil can be valued between 600 – 1,000 million Swedish kronor in an initial maturity phase. As time surpasses the value can extend far beyond this point. If it is required, due to conflict of interest opinions, the company should be spun off or sold off which should also result in a profitable venture for existing shareholders. We believe that is unlikely that the company would choose to sell of the division to a larger organization as it is with great probability that the management/owners
High multiples for game developers support a high valuation of Yggdrasil
will see the potential for a significant value realization in the longer-term. Even to the extent that Yggdrasil becomes the primary segment of Cherry in the future.
Summary valuation
Our base case results in a valuation of 120 kronor per share, and in the bear and bull case scenario the valuation is 60 and 200 kronor per share
respectively. The sum of the parts valuation also resulted in a value of 120
Investment Case
Cherry is in an exciting phase of the development of its online casino as well as the game supplier segment. Cherry has driven and sold a number of online casinos in the past, the latest was the Automatgruppen to Betsson for 286 million kronor during 2013. The company has a strong balance sheet with approximately 30 MSEK in cash and equivalents, which makes it possible for a positive growth for the company’s growth project Yggdrasil. Cherry as an entity makes a net loss today which is primarily due to the online casino’s marketing expenses and outgoing bonus payments. If one adjusts the online casino’s expenses in combination with the cash, the online casino will then solely motivate today’s price for Cherry with an EBIT margin of 20 percent. As Cherry uses an active strategy to retain its customers through CRM more and bigger outgoing bonus payments, even more customers sign up. The company also has a mobile focus which we assess to be a positive catalyst for greater growth as it has also had problems in the past with the mobile strategy. We believe that the company only needs to grow in Scandinavia to be able to achieve our estimates during the coming years. This strategy in combination with decent acquisitions makes it possible to achieve a growth which exceeds that of the market. We are also looking forward to when the company will begin to prepare for new markets and eventual partnerships, to obtain a share of a strong market potential in a number of European countries.
Furthermore, the online casino operation has a profitable restaurant which is yet to be priced by the market. The restaurant operation has a turnover of approximately 150 MSEK and an EBIT of 15 MSEK and possesses a market share of 64 percent in Sweden. In terms of market share, a potential acquirer can, in the possible form of a game operator, see value in the large market share but also be able to impact on the range of games on offer. The market is not currently pricing the restaurant operations or the potential for an increased market share today. In addition, the eventual changed
regulations of the maximum bet from 70-200 kronor in 2018/2019 may double the turnover as well as the operating profit.
Cherry has a significant potential to acquire market share within the game development industry, as Yggdrasil which is driven by experienced people, is already now renowned amongst the operators and will be able to compete with Net Entertainment. The team is small, but plans to expand as more contracts with gaming operators are entered into, such as Unibet and Mr. Green, which will require the company to hire more staff to cover increased demand and to fully deliver on its capacity.
The significant risks for Cherry lie to an extent in the company’s high concentration in Scandinavia, which in the case of disadvantageous
incoming regulations could reduce the profitability of the company initially and partially due to a significant increase of competition within the online casino segment.
Bear case – 60 SEK
Cherry experiences weak profitability for the online venture due to
increased competition and a reduced ability to retain existing customers. A problem in this scenario will be the loyalty amongst customers where Cherry’s bonus payouts only provides a temporary increase in the number of customers. Cherry experiences issues with the overseas establishments and the company’s penetration into the mobile market fails, which leads to investment losses as well as declining sales. Yggdrasil is expected to contribute to the margin as well as the growth in relation to the more competitive online casino segment. The company succeeds in sustaining an average operating margin of 15 percent from 2018, and the growth rate is more or less in line with market growth of 10 percent. There is a 25 percent chance of this scenario occurring.
Base case – 120 SEK
Cherry continues to build upon its online casino operations across all its current and upcoming brands. The dynamic DNA of Cherry supports the innovation and constant strive to withhold the best experience and service to the customer. The case also assumes high marketing expenses which we believe will continue for an extended period, to later be able to take part of the high growth rate in the mobile segment as well as the general online segment. We assume that the company enters into a partnership or makes acquisitions to sustain its growing turnover in the pace they believe Scandinavia reflects a more saturated market, which we believe will occur already in late 2016-17. Technical development of the sites is well placed even at the entity level. The high growth rate presupposes that the mobile integration with customers is improved in the way that it can capitalize on the high growth rate within the mobile casino, which supports the effect of the declining marketing expenses. Some growth and margin impact from Yggdrasil is expected in the long term. We assume that Cherry is enabled to sustain long term operating margins of 20 percent from 2018, as well as a growth rate of about 20 percent. There is a 50 percent likelihood of this scenario occurring.
Bull case – 200 SEK
Cherry succeeds beyond our expectations with the launch of the new gaming services in a number of markets and the subsidiary Yggdrasil (game development) begins to provide strong net cash inflow. The company succeeds, through recruitments and existing expertise, in optimizing the mobile operations which makes a greater growth for the online casino division possible. In this scenario we assume that Yggdrasil grows strong representing an increasingly larger part of the entity’s total turnover. The online casino acts as the value driver and is guided by both the initial high growth rate and the margin expansion in the maturity stage. Together, it provides an obviously stronger average growth of about 70 percent between the periods 2014 and 2018. The operating margin is calculated
progressively from a negative margin during 2014 which is increased to 20 percent in 2018. There is a 25 percent likelihood of this scenario occurring.
Summary Redeye’s Rating
Redeye’s Rating is based upon five key valuation criteria. Each valuation criteria consists of a weighting of a number of factors which are valued on rating scale of 0 to 2p. The maximum point of valuation criteria is 10.
Rating changes in this report: Changes in Growth Prospects from 6 to
7 points.
Management 8.5p Cherry’s’ management possesses an extensive experience of the gaming
industry, as a gaming operator as well as a game developer. CEO Fredrik Burvall has obtained comprehensive experience during his many years with Cherry, and the majority shareholder Morter Klein has deep knowledge and experience in developing successful gaming companies. We asses that the company is positioned well to further its growth and profitability in the future. The management is also well aware of the issues and opportunities that the company is facing.
Ownership Structure 8.5p
Cherry obtains a high ownership rating due to the strong list of capable and likeminded owners who share a view of long term success, of which some also have a representation on the board. The company does however lack institutional owners which has a negative impact on the rating. A potential reason for the lack of interest from institutional owners is likely the low market cap as well as its listing on Aktietorget.
Growth Prospects 7.0p
Cherry is experiencing differing circumstances in its two growth areas. The underlying growth is weak in the restaurant casino division, and as Cherry is already in a dominant position in the Swedish market, any future growth will not be significant. Cherry is however placed for strong growth opportunities in the online segment as it can now make offerings through its own platform. Competition is nonetheless significant and that is where the importance of a strong balance sheet in terms of cash comes into play, to be able to compete with the larger organizations. It should also be noted that the company Yggdrasil which is a project that is beginning to take form to become a large game developer, has had a positive impact on our rating.
Profitability 4.0p The profitability has suffered since the sale of the Automatgruppen but the
restaurant casino remains profitable nevertheless. The long term potential for increased profitability has improved regardless, as the company can now offer the games through its own platform, which provides a significant impact upon the benefits of economies of scale. Cherry is currently in a growth stage and is building upon its existing operations, which will put pressure on the profitability in the coming years.
Financial Strength 8.0p
The company is in a much stronger financial position since the sale of the Automatgruppen, despite the high dividend payouts of 195 million kronor during 2013/2014. The company continues to sustain a substantial cash amount or equivalents on its balance sheet, even after the dividend payments and the earnout payments which can sustain the segments’ expected growth trajectory the coming years.
