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Bragg Gaming Group

Bragg Gaming is through its wholly owned subsidiary, Oryx Gaming, a B2B online gaming solution provider. Bragg offers solutions for retail, online and mobile gaming via their proprietary iGaming platform, which includes a casino content aggregator, sportsbook, lottery, marketing and operational services. 

Summary

  • Pure-play B2B iGaming software provider

  • Rapidly expanding TAM with U.S States passing new gambling legislation

  • Secular Industry Growth

  • High-growth business growing 74% y/y (9 months ended 2020)

  • Well diversified with 90+ clients in different geographies

  • High switching costs, Bragg has not lost a single customer in 5+ years

  • Heavily discounted to US and European peers

  • Near term catalyst with NASDAQ relisting 


Multiple states in the US have legalized online gambling with multiple other states expected to follow and the total U.S Online Gaming Market is expected to have a compounded annual growth rate of 19% during the next seven years. The growth of such a large market has not gone unnoticed by investors which has led to frothy multiples for iGaming companies. While I myself am bullish on the fundamentals of the US iGaming market the high valuations of US pure-plays do not leave a margin of safety. The reason why I am quite excited about Bragg however, apart from being a high quality business with a skilled management team, is that it gives the same exposure to the fast growing U.S market but at a significantly lower price. 


As new legislation is driving the growth in the U.S market one might wonder why governments are increasingly accepting online gambling and why they would want to pass new legislation in favor of it. With the economic downfall as a result from the Covid-19 pandemic, governments find their treasury coffers dwindling and tax revenue from online gambling is a great source of income. Furthermore, online gambling is already being conducted by illegal operators and governments lose revenue to them if they do not legalize online gambling. Governments also want to protect citizens as illegal operators often don’t fulfill appropriate KYC and responsible gambling requirements. As Bragg only works with licensed operators this regulatory development will benefit their business and open up a greater total addressable market. 


The iGaming industry is also facing secular industry growth as in a digital world, online gambling is far more convenient for gamblers than live gambling. Users also receive a better and more immersive gambling experience with digital effects - something that can’t be provided by traditional casinos. 


Competitive advantages

  • Large, growing and sticky customer base

  • High switching costs

  • Excellent reputation in the industry

Providing B2B online gaming solutions is not only a high margin business but a capital light one. This raises the question about the competitive advantages and economic moat of Bragg’s business as new entrants likely want to enter this attractive industry. Despite this, the company has a very sticky customer base and I would argue that the business has high switching costs. Bragg’s clients B2C websites and casinos operate more or less entirely using Bragg’s proprietary platform. Replacing this technology is not only difficult and costly but comes at great risk. Replacing a system could result in down time of the websites, issues with deposits and other bugs which could result in significant loss of revenue. Because Bragg’s proprietary iGaming platform is so core to the business of the B2C operators and such risks are associated with switching to another platform, the company has an economic moat. I would also argue that Bragg has an economic moat in the form of intangible assets because of their reputation in the industry and existing high profile customer base (Jackpotjoy, Unibet, Mr Green, Optibet etc). In entering new markets, B2C operators look for reliable partners with an excellent track record and Bragg has been shown to fit this profile as their customer base has grown 300% to a total of 90+ clients in the past 2 years. That being said, it is difficult to assess the strength of the company’s moat as it operates in a competitive, rapidly changing industry and thus the economic moat can be eroded over time.

However, it can be determined that the company does have competitive advantages as Bragg has not lost a single customer in 5+ years.


The narrative of Bragg's story, both in regards to the core business and the coming relisting, is very similar to that of Gan Ltd - another B2B online gaming solution provider. Gan was originally listed on the London AIM Exchange, where it was illiquid and difficult to access for investors, but then decided to relist on the NASDAQ. While listed on the AIM Exchange Gan traded for a P/S ratio of up to 3, IPOed at 4 times sales and now trades over 15x sales. Similar to what Gan did, Bragg’s management has formulated a vision of relisting on the NASDAQ. This event is expected to take place before 31 March 2021 and I believe that the relisting will serve as a catalyst for the stock price. 




P/S (ttm)

EV/EBITDA

FY21E EV/Sales

Bragg

2.5x  

18.4x

1.95x

Kambi

11.4x 

66.5x

7.5x

Rush Street

22.46x

389x

11x

GAN

16x 

-68x

11.3x

Pointsbet

23.5x 

-63.40x

10.7x

Evolution Gaming

29.7x 

567x

21x

DraftKings

39x 

-40x

20.2x

Average (negative numbers excluded)

20.65x

260.2x

12x

Bragg vs Average

-87%

-93%

-84%



So why does the company trade at such a huge discount to similar peers? Bragg is a microcap listed on a regional exchange (TSX Venture Exchange) where it, similarly as to what Gan did on the AIM, suffers from illiquidity and being difficult to access for investors. The stock is also uncovered and it seems plausible that many institutional investors do not have the mandate to buy a microcap listed on the TSX Venture Exchange. 


Bragg has a diverse client base spread across different geographies and although this decreases exposure to the U.S gambling market, the overall risk of the business is significantly lower. Gan on the other hand, which most likely is the most comparable peer among the listed iGaming names, has a high customer concentration. The risk of customer concentration was clearly demonstrated when Fanduel, a client representing 10% of total revenues, decided to move part of the technology that Gan provided in-house. The fact that Fanduel chose to have their tech stack in-house seems to be a clear sign that large operators want to power their gambling platforms with their own proprietary technology. Developing this technology in-house may not be ideal nor may the B2C operators have the competence or capacity to do so. Therefore, it is plausible that instead of developing their own proprietary technology, these operators will try to acquire companies with such technology. As a reputable online gaming solution provider, trading at very low multiples compared with the rest of the iGaming industry, I believe this makes Bragg a strategic acquisition target for B2C operators wanting to have their tech-stack in house. 


Richard Carter, the former CEO of SBTEch which was a $1bn+ company that merged with DraftKings, recently joined the company and serves as chairman. Mr Carter will focus on developing a global strategy, ensuring continued growth and “consideration of all accretive M&A opportunities'' - which hints that Bragg is a possible acquisition target.


When looking at Bragg’s operational management, one quickly comes across the high C-suite turnover. In recent years, two CFOs left the company and just before 2020 ended - so did the CEO that has been with the company since 2017. Why did these executives leave the company? We can only speculate why this happened. Personal reasons were cited but looking at the current positions of these former executives it seems likely the choice to leave was based on career reasons. However, with 35% ownership of the company and as part of the leadership team, it is undoubtedly Mazij that is the key driving force behind Bragg. I believe having such a strong shareholder involved in the daily operations lessens the impact of the high C-suite turnover. When Bragg acquired Oryx Gaming, which Mr Mazij founded, the purchase was partly in price but also in the form of an earnout. Mr Mazij, as the single largest shareholder in Bragg, has clearly stated his conviction in the company to the market as he chose to strike his earnout at a price 40% above the current market price. But why would he pay more than he had to? The covenants of the exercising of the earnout stated the condition that Bragg be relisted on the NASDAQ before March 31, 2021. This can more or less only mean one thing - that he believes the valuation is far too low and that a relisting will serve as a catalyst for the stock price. It is also worth noting that Gan had two CFOs leave the company leading up to their relisting on the NASDAQ - something which obviously did not hinder the performance of the stock. 


In July 2021, new legislation will lead to Germany becoming fully regulated on a national level. Earlier, the German market has had no unified regulation and the industry has found itself in somewhat of a grey legal area. Bragg’s exposure to the German gambling market is quite substantial as currently, it represents roughly 25% of total revenue but this number has gone down in recent years with the business becoming more diversified geographically. Bragg has given an estimate that GGR (Gross Gaming Revenue) will decline by 50% y/y in Germany as a result of the new legislation. While it is hard to assess the consequences the new regulations will have on Bragg I would argue that this guidance is far too cautious. This number is quite far off from guidance other iGaming companies have given as they do not believe the German market will see such a large contraction. It also seems unlikely that GGR would shrink by 50% as other countries that have implemented similar regulations in recent years have not seen nearly as large contractions in GGR.


It may be possible that management gave such a cautious outlook in order to not risk missing guidance which could endanger their relisting on the NASDAQ. However, even if the German gambling market were to contract to these levels, Bragg will still grow despite this headwind and in the long term, the national regulation will probably benefit the company. More operators will want to establish a presence in the country and will want a regulatory-friendly platform in order to meet all requirements and ease the process of establishing in the country - something which Bragg is capable of providing. 


Catalyst

A relisting of the stock and continued legislation of online gambling in the US will likely serve as catalysts for the stock. In addition to this, I would not rule out the possibility of the company being acquired.


Disclaimer: I own stock in the company.


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