ZEAL Network SE
Original-Research: ZEAL Network SE (von ZEAL Network SE): BUY

Original-Research: ZEAL Network SE – from NuWays AG

Classification of NuWays AG to ZEAL Network SE

Company Name: ZEAL Network SE
ISIN: DE000ZEAL241

Reason for the research: Update
Recommendation: BUY
from: 21.03.2024
Target price: 51.00
Target price on sight of: 12 Monaten
Last rating change:
Analyst: Henry Wendisch

Elevated sales growth & Games gaining traction; chg. est.

Topic: Yesterday, ZEAL released Q4 results and issued a strong FY’24e sales
guidance, well above expectations. Here are our key takeaways:

Blow-out sales guidance: ZEAL guides for sales of € 140-150m (eNuW old: €
135m; eCons: € 128m) and an EBITDA of € 38-42m (eNuW: € 45.3m; eCons: €
43m) with marketing expenses of € 40-45m (eNuW: € 42m). The elevated sales
growth should stem from a growing billings margin (sales in % of billings)
to above 15% by H2’24e (FY23: 12.8%; eNuW for FY’24e: 12.7%) thanks to 1)
proactive shifting of players towards higher margin products (e.g., lottery
clubs), 2) thintroduction of another highmargin social lottery next to
‘freiheit+’ and most importantly 3) going for price discrimination of users
regarding the service fees as lottery players are very price insensitive.
This is a strong leverage for ZEAL, given the high amount of billings, but
on the other hand requires additional indirect expenses and marketing,
burdening short-term profitability.

Q4’23 in line and FY targets reached: Lottery billings amounted to € 210m,
2% yoy (eNuW: € 208m), while sales developed accordingly to € 30m, -2% yoy
(eNuW: € 28.8m; eCons: € 29.6m) and EBITDA came in at € 9.8m, +1.5% yoy
(eNuW: € 11.8m; eCons: € 11.4m). On a FY basis, ZEAL recorded Lottery
billings of € 843m (guidance: € 800-830m; eNuW: € 841m), sales of € 116m
(guidance: € 110-120m; eNuW: € 115m) and an EBITDA of € 32.9m (guidance: €
30-35m; eNuW: €33.4m) with marketing expenses of € 36m (guidance: € 34-39m;
eNuW: € 38.8m) – see p. 2 for details.

Upbeat Games adoption: while Q3’23 already showed a better-than-expected
Games contribution, Q4 lifted the bar even higher. Games contributed with
billings of € 25m (eNuW: € 19m) and sales of € 1.8m (eNuW: € 1.9m), meaning
that the average Games customer (Q4: 18k) spends c. € 92 on Games (APPU)
per month, generating revenues for ZEAL of € 33 per player and month (vs. €
7.80 ARPU at Lottery) and yielding a 36% pay-in margin (sales in % of
pay-in). For now, this contributed with 6% of Q4 sales, but once scaled,
the Games business should become a second strong pillar of growth and
profitability for ZEAL, next to Lottery.

Squeeze-out of Lotto24 by mid’24e: ZEAL intends to squeeze-out the
remaining shareholders of Lotto24 (acquired back in 2019) after having
entered an agreement to acquire 0.6% of additional shares, raising the
ownership to 95.45%. This should have value accretive effects due to 1)
being able to form a corporate tax group allowing ZEAL to offset the high
profits of Lotto24 with losses on holding level, especially as Lotto24’s
tax loss carry forward is used up now and 2) avoiding minority interest
going forward. It should also lead to a normalization of ZEAL’s elevated
tax rate (FY’23e 39%, +12pp yoy) to 32% after the squeeze-out. The purchase
price for the additional 0.6% of shares remained undisclosed and the
squeeze-out price will be set by an independent auditor, hence uncertainty
prevails regarding the total SO payment. Regarding financing, the company
plans to take on additional debt, which we regard as unproblematic, given
the strong net cash position (Y/E’23: € 30m).

In sum, we continue to like ZEAL’s upbeat growth story and the strong
operating leverage ZEAL’s business provides. This, coupled with increasing
contributions from Games should lead to notable margin expansions going
forward. Moreover, our conservative CLTV estimate of ZEAL’s total Lottery
customer base (€ 726m, see below) even exceeds the company’s current market
capitalisation, albeit not including the expected billings margin expansion
to above 15% and also not including the potential stemming from Games.

Consequently, we reiterate our BUY recommendation with an unchangend PT of
€ 51.00, based on DCF.

You can download the research here:
http://www.more-ir.de/d/29211.pdf
For additional information visit our website
www.nuways-ag.com/research.

Contact for questions
Die Analyse oder weiterführende Informationen zu dieser können Sie hier downloaden: www.nuways-ag.com/research.
NuWays AG – Equity Research
Web: www.nuways-ag.com
Email: research@nuways-ag.com
LinkedIn: https://www.linkedin.com/company/nuwaysag
Adresse: Mittelweg 16-17, 20148 Hamburg, Germany
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