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

Original-Research: ZEAL Network – from NuWays AG

Classification of NuWays AG to ZEAL Network

Company Name: ZEAL Network
ISIN: DE000ZEAL241

Reason for the research: Update
Recommendation: Kaufen
Target price: 51
Target price on sight of: 12 Monaten
Last rating change:
Analyst: Henry Wendisch

New chapter of growth; added to NuWays AlphaList

ZEAL has openend a new chapter of growth stemming from rising monetization
in the Lottery business and also the Games business from FY’24e onwards. In
sum, we expect sales growth of 25% for this year and a sales CAGR 23-26e of
17%, here’s why:

Elevated lottery sales growth: ZEAL has relied on a more or less constant
lottery billings margin (sales in % of billings) over the last years
(12-13%), meaning that lottery sales grew more or less proportionate to
lottery billings. Billings continue to grow with c. 8-12% p.a. thanks to
ZEAL’s persistent user intake driven by the online transformation. Now, for
the first time, sales look set to outgrow billings (see p. 2 for details),
as ZEAL takes steps to significantly increase the billings margin, which
should lead to gross margin of more than 15% (+2pp) starting in H2’24e. In
general, we regard ZEAL’s sales as recurring, as average lottery expense
per user (APPU) grows slightly every year (+ 4% yoy in ’23), while ZEAL
also benefits from virtually no churn (below 5%).

How does ZEAL improve the lottery billings margin? First of all, by
introducing a new social lottery, next to freiheit+, where ZEAL generates
higher margins than in DLTB lottery brokerage (mix effect). Secondly, ZEAL
aims to steer customer behaviour to higher margin lottery products (e.g.,
lottery clubs & play-with-friends) by actively placing and promoting the
products on the platforms (mix effect). However, we regard the third
measure as the most important one, as it can happen overnight: selective
service fees (planned for H2’24e). As the lottery customers are extremely
loyal and hence price insensitive, it allows for ZEAL to charge some
players selectively higher services fees than other players (price effect).

Operating leverage in action: While the billings margin improvements
requires additional marketing expenses and initial set-up costs for the new
social lottery in the short-term, should lead to a flat EBITDA margin of
28% for FY’24e. However, in FY’25e and beyond, we expect the operating
leverage to kick in an lift EBITDA margins to substantialy by 5pp yoy to
33%. This also includes the complete Games portfolio rollout, which is
expected to be finished by end of H1’24e, hence also showing its full
effect on profitability in FY’25e.

During FY’23, Games contributed with € 1.3m EBITDA (25% margin), but after
being completely rolled out, we expect incremental Games EBITDA margins of
85%, showing the strong earnings potential stemming from Games.

Strong Q1’24 ahead: the first quarter of the year laid out a perfect start
with 4x peaking jackpots (vs. only 3x during all of FY’23e), which should
lead to c. 300-400k newly registered users (i.e., +75-100k of additional
MAU, assuming 25% conversion rate) for ZEAL in Q1’24 alone vs. 600k during
all of FY’23. Additionally, Q1 Lottery bilings (currently +14% above
average) and sales look set to come in strong as the high jackpots
massively elevate user activity, as the irregular players then also play
the lottery and come on top of the regular players.

Unique mix of value and growth at an attractive valuation: In a
no-user-growth and constant billings-margin-scenario and assuming only a
10y customer longevity, the CLTV of ZEAL’s current Lottery user base (eNuW:
€ 726m) reflects the current market capitalization of € 745m. However, our
CLTV estimate grows by 25% to € 910m (see below) if the Lottery billings
margin increases to 15%, still factoring in no MAU growth.

This, coupled with the strong outlook ahead, leads us to add ZEAL to our
NuWays’ AlphaList and confirm our BUY recommendation with unchanged PT of €
51.00, based on DCF.

You can download the research here:
http://www.more-ir.de/d/29283.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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