Catena Media Stock Analysis November 2018

During the last couple of years, Catena Media PLC (CTM) has transformed from being a small lead-generating company within the gambling business to one of the most professional and world-leading companies in lead-generating for the gambling and the financial service sector. A lead-generating company or affiliate company that many people call it is a company that sends high-value internet traffic (leads) to its partners and in return get a commission of the customers referred. In a typical manner, it is made by creating websites with quality content where visitors can get information, get recommendations and choose where to play or make an investment. The traditional revenue stream in search, but the company also have paid (for example AdWords) and subscription. Catena Media is listed on the Nasdaq Stockholm Mid Cap and has more than 300 employees.

From the 22nd of May 2018 to the 8th of October 2018 the stock dropped more than 50%. We believe that the main reason for this huge drop in the stock price is that the owners Optimizer Invest (from 13% to 5,2%) and one of the founders Erik Bergman (from 8,2% to 6,5%) sold some of their stocks. Also, the Swedish bank Handelsbanken sold all of its stocks (3,82% of the company) due to ethical and moral reasons. All this happened in a short period of time. The timing was not perfect and it happened just a couple of months after Henrik Ekdahl (co-founder of Optimizer Invest) resigned from the role of CEO at Catena Media. Optimizer Invest had 60% of its capital in Catena Media and wanted to lower the risk a little. Henrik also recently invested in new projects and according to a recent article in Breakit he says that Catena Media is doing good and has great potential going forward.

The company grows at a rapid pace both organically and through acquisitions. It is a highly profitable company and with the US-market opening up the growth can hopefully continue for a long time. At least that is what Ruane, Cunniff & Goldfarb thinks that bought the stocks from Optimizer Invest and they might also be the ones that bought the stocks from Erik Bergman. Ruane, Cunniff & Goldfarb are famous for the Sequoia Fund which is one of the most successful and most famous funds in the world. To have them as strong owners can be very useful when entering and expanding into the US market. Continue learning about this company and read the full Catena Media stock analysis below.

First, we will quickly mention some of the acquisitions that happen between 2017 and 2018. If you are already aware of these acquisitions you can move on to the chapter about The USA Potential.

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Acquisitions 2017

In 2017 Catena Media acquired many companies. Here are some of the major acquisitions:

• Slotsia – A Swedish casino affiliate site. Has since then expanded to UK, Germany, Finland and Japan. Have great rankings in especially Sweden and UK and has probably grown by more than 100% since the acquisition when looking at the rankings.
• NewCasinos – Casino affiliate websites in UK, Sweden, Norway and Denmark.
• MrGamez and Spielekista and more – German casino affiliates websites.
• Bettingpro – Sports betting affiliate with a focus on the UK and Australien market.
• PokerScout – Poker tracker website with a long history.
• Aktiendepot.com and Qomparo.de – Financial service affiliate focused on the German market.
• Baybets Limited – Leading sports betting affiliate in, especially Germany.
• Online Media – Sports bettings affiliate in the UK.

Acquisitions 2018

In 2018 Catena Media acquired many companies. Here are some of the major acquisitions:

• ASAP ITALIA – Sports betting affiliate in Italy.
• Hammerstone Inc – Financial service affiliate.
• TheBull.com.au – Premium stock markets news and analysis in Australia.
• ForexTraders.com – Global forex
• gg.co.uk – Horse betting racing site in the UK.
• ParisSportifs.com – Sports betting affiliate France.
• BrokerDeal.de – Finacial service affiliate.
• LeapRate.com – Fincial service affilaite.
• BonusSeeker – US gambling affiliate
• Dreamworx Online Ltd – Sports betting and finance services affiliate in Germany.

The USA Potential

Even without the potential in the US, Catena Media is a great company and has fast growth and high profitability. We will try to explain why the US market can be a complete game changer that many investors are not fully aware of or that they underestimate. Ruane, Cunniff & Goldfarb has probably understood the potential and has therefore taken a position in the company with more than 6% of the shares. During the release of the Q3 report on the 6th of November the General Manager for US, Michael Daly, will be there to answers specific questions about the US market and the expansion. We believe that if the US market is not developing strongly they would not let the US General Manager be there to answers questions for the presentation of the Q3 interim report. Below is a short background to the assets that Catena Media owns in the US today and the potential for the future.

Catena Media assets in the US

On the 4th of December 2016, Catena Media acquired a US affiliate with 1 MEUR revenue per quarter from regulated markets in New Jersey and Nevada. In additions to the sites that target New Jersey and Nevada, Catena Media also mention in the press release: “Catena Media is acquiring a range of assets which are expected to generate significant revenues if, and when, other US states re-regulate iGaming.”. By this acquisition, Catena Media became the largest regulated casino affiliate in the US. Catena Media also got into business areas of Poker, eSports and Daily Fantasy Sports with this acquisition.

According to a press lease on 19th of October, the earnout for this deal has been renegotiated with the result that Catena Media will have full control of the US business from the 1st of November 2019. Before the sellers would get 50% of the net profit from revenues if, and when, other US states re-regulate iGaming. With this change, Catena Media can fully capitalise from the fast deregulation of the US-market. This earnout that was successfully renegotiated puts a cap on the earnout from revenues from the US states re-regulated the gambling business on 45 MUSD. Going forward we will probably see that Catena Media roll out brands such as AskGamblers and JohnSlots on the US market and intensify the expansion. In August 2018 Catena Media had around 20 employees in the US according to this YouTube-video. This is probably increasing at a rapid past. It could, of course, cost a bit in the short term but we believe that most of the leadership positions and high salaries positions are filled up. It is also important to take full advantage of the first mover advantage that they have.

On the 28 of March 2018, BonusSeeker was acquired. They have revenue of 0,45 MUSD per quarter. Pokerscout was also acquired which is a poker tracker tool that has been available for many years.

As you can see on the print screens below Catena Medias websites are ranking extremely well in New Jersey. On many of the keywords with high search volumes, they rank 1st, 2nd, 3rd, 4th and 5th position on Google. If you want to gamble online and are from New Jersey there is a big chance that you will go through one of Catena Medias websites. The search volumes are great, showing that New Jersey could potentially be a bigger market than for example Scandinavian countries. Catena Media are top ranked in many other states and they are by far the best-positioned affiliate in the US.

Click the images to see details

We have to remember that each state in the US could sizewise be a country in Europe. So the potential is enormous. New Jersey alone took 184 MUSD in wagers in Sports Betting in September. That is more than double the amount bet since NJ legalized sports betting in June.

Delaware, Mississippi, New Jersey, New Mexico, New York, Pennsylvania, and West Virginia have or is about to legalise sports gambling this year. Sports betting could also be legalised in at least 15 other states in 2019 were a Betting Bill has already been submitted. Let that sink in. What will happen with Catena Medias value if more states re-regulate? We believe that the company value and stock price will skyrocket. Catena Media is the number one gambling affiliate and lead-generating company in the US with so far very little competition.

Click the image to see details

Organic Growth

Many people have criticised Catena Media for being all acquisitions because historically they have not reported organic growth. Last quarter the organic growth were great. Year over Year in Q2 2017 to Q2 2018 Catena Media grow 30% organically when it comes to search revenues which is the majority of the revenue. Going forward and seeing statistics of European sites the growth from Q3 2017 to Q3 2018 should be similar or better. Sites like AskGamblers, JohnSlots, Slotsia and others have been growing at a fast pace according to different ranking and tracking tools. The websites have also expanded into new markets.

It is important to remember that Catena Media is building up a huge customer base. 54% of the revenue in Q2 came from revenue share and these players will keep generating income for a lifetime. That means that Catena Media would have 50% of their revenue for some time even if they would close down all of their websites today. Of course, players will eventually stop playing but as it is now this customer base is growing at a rapid pace with more than 140 K new first time depositors (FTDs) per quarter.

Catena Media has also said to Dagens Industri (a Swedish financial newspaper) that they will start reporting organic growth from Q3 2018. We believe that Catena Media wouldn’t start showing these numbers if they were not satisfactory.

Financial estimations

Financial goals were communicated by Catena Media on the 16 of November 2017. The company goals are to have an EBITDA of 100 MEUR with a net debt to EBITDA range of 1,5-2,5 in 2020. The company has no plans to pay any dividends until 2020.

Since Q3 2017 Catena Media has (as we mention above) acquired many companies. Just the acquisitions should bring in 7,4 MEUR more in Q3 2018 than in Q3 2017. The organic growth for search revenue can also be estimated to 30% (could be more). On top of that, we have the US business that is just in the beginning.

We will probably get an indication in Q3 how the US market develops but the big jump in revenue and profit will probably start next quarter or in 2019. According to Orakel O on Twitter, a reliable source said that at the end of September that Draft Kings in New Jersey had so far 30k first time depositors (FTDs). With the domination in the Google search results, we estimate that Catena Media get 10% of these FTDs with a revenue of $300 per player. If the estimates are correct Catena Media should get 0,9 MUSD in Q3 from just Draft Kings in New Jersey. With almost 10 casinos that have gone live, the revenue will continue to grow fast.

Catena Media Numbers

Moderate Estimation

Q3 2017 Revenue: 17,3MEUR
Growth (Organic) Estimation: 20% (it was 30% for search revenue from Q2 2017 to Q2 2018)
Growth (Acquisitionsions) estimation 5 MEUR (7,4MEUR according to Catena Media)
USA Growth: 1 MEUR (should be more, especially the upcoming quarters)

Q3 2018 Revenue Estimation: 26,8 MEUR
EBITDA Estimation: 13,1 MEUR
Operating Profit Estimation: 11,4 MEUR
Net Cash Generated from operating activities Estimation: 11 MEUR

These estimates are quite moderate. We believe that Catena Media is growing faster than 20% organically and the extra revenue from the US could be more than 1 MEUR. We prefer to be moderate in our estimates and instead have the chance to be positively surprised when the Q3 report is released.

Number shares after dilution: 58,4 M

Valuation of the company with PE: 20 (We calculate with the run-rate of the operating profit for Q3 which we think is fair for such a fast-growing company. The operating profit is very close to the net cash generated from operating activities. We also think a PE of 20 is fair for such a fast-growing company)

Estimated Valuation of the company
11,4*4 (run-rate Q3 estimated operating profit*4 quarters) MEUR * 20 = 912 MEUR

Estimated Stock Price: 912 MEUR / 58,4 M = 15,62 EUR = 162,4 SEK (exchange rate 1 EUR = 10,4 SEK)

We estimate the target price for the Catena Media stock to 162,4 SEK in the short term. If the development in the US continues as expected the stock price is probably going to double and we will have to revise our estimates and numbers. We think that the market is underestimating what is happening in the USA now. When investors from both Europe and USA will notice what it happening the valuation is going to be much higher. For Ruane, Cunniff & Goldfarb, Catena Media is their third ever Scandinavian stock in their portfolio, so they are very picky. We will closely follow what happens in the US market.

We also believe that investors do not fully understand the revenue model with revenue share. Catena Media get revenue from the players referred for lifetime. The customer base is already huge and growing each day. They are having some of the most qualitative gambling and financial websites in the world and work with all gambling brands in almost all countries which makes the risk lower than other gambling companies.

Some insiders also bought stocks in the last couple of months so the management believes in the company. All tracking tools for internet traffic show that Catena Media websites had a big increase in traffic in the last couple of months. We are ready for a great Q3 report and looking forward to the big US expansion. With the US as the biggest market in 2019 and if they can reach the financial goals of EBITDA of 100 MEUR in 2020 then we should see stock prices of at least 300-500 SEK. On the 6th of November, we will know a little bit more. Make sure to listen extra carefully what Catena Media has to say about the US expansion. Good luck!

Please do not hesitate to contact us regarding the analysis if you believe something is wrong or inaccurate or if you have any other comments about this Catena Media stock analysis. Thank you!

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