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

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Original-Research: ZEAL Network SE - from NuWays AG

08.08.2024 / 09:01 CET/CEST

Dissemination of a Research, transmitted by EQS News - a service of EQS

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Classification of NuWays AG to ZEAL Network SE

Company Name: ZEAL Network SE

ISIN: DE000ZEAL241

Reason for the research: Update

Recommendation: BUY

from: 08.08.2024

Target price: EUR 54.00

Last rating change:

Analyst: Henry Wendisch

Strong Q2 and new product launch; chg. est.

Strong Lottery business: Lottery billings came in at EUR 261m, % yoy (eNuW:

EUR 252m), better than expected, thanks to a favorable jackpot environment (2x

peak jackpots). Lottery sales grew disproportionately to billings by 37% yoy

to EUR 36m, (eNuW: EUR 33m) on the back of an better than expanded billings

margin of 13.8%, 1.3pp yoy (eNuW: 13.0%).

Improved Games metrics, but roll-out held back by regulator: The slower than

expected roll-out of the full Games portfolio (c. 200-300 vs. currently 115

due to slow regulator's approval) has led ZEAL to focus less on MAU growth

(18k vs. eNuW: 28k). Nevertheless, user metrics have improved sequentially

thanks to a shift towards higher margin games. Thus, ARPU stood at EUR 40.5

(eNuW: EUR 35.8). Consequently sales came in at EUR 2.3m, up 5% qoq (eNuW: EUR

3.0m).

Dynamic top-line to continue: Q2 sales rose better than expected by 45% yoy

to EUR 40.7m (eNuW: EUR 37.5m) following a strong Q1. H1 thus showed a

remarkable 40% yoy top line growth thanks to lottery tailwinds and we expect

H2 sales growth to continue at c. 30% due to billings margin improvements

above 15% as of 10th June '24. Thus, even in the event of muted jackpots,

strong growth should be maintained throughout H2. Possible strong jackpot

environments should therefore serve as an additional sales boost.

Substantial EBITDA growth: Q2 EBITDA came in at EUR 10.7m, 힎% yoy (eNuW: EUR

10.2m; H1: EUR 20m, % yoy) due to lower marketing expenses of EUR 12.1m, -7%

yoy (eNuW: EUR 11.6m), but also burdened by (1) increase in personnel expenses

by 53% yoy and (2) legal, consulting and recruiting expenses (indirect

costs: % yoy). Mind you, although Q2'23 was burdened by a hefty marketing

push (EUR 13m), the operating leverage of ZEAL's business model nevertheless

shines through, as ZEAL has grown sales disproportionately to OPEX.

High marketing efficiency maintained: Despite only 2x peak jackpots in Q2,

ZEAL maintained its stellar marketing efficiency. Cost per Lead (CPL)

increased only 1% qoq to EUR 33.4 (eNuW: EUR 38.0), better than expected.

Compared to last year (exorbitantly high CPLs in Q2 and Q3) CPLs decreased

substantially by 34% yoy in Q2, showing that the improved algoritm and thus

higher conversion rates increased marketing efficiency sustainably. -

Strong user intake: ZEAL has added 272k new leads (% yoy), clearly

indicating an improvement of marketing efficiency and beating our user

intake estimate of 200k. Consequently, MAU in Lottery grew by 20% yoy (3%

qoq) to 1.37m in Q2 (eNuW: 1.37m; H1: 1.35m).

Guidance confirmed, but unambitious now: Based on increasing monetization in

Lottery (and without any negative change in user activity or churn rates

expected) for H2, the sales guidance of EUR 140-150m (eNuW: EUR 157m; eCons: EUR

150m) seems unambitious now. Moreover, we are positioned at the top-end of

the EBITDA guidance of EUR 38-42m (eNuW: EUR 42m; eCons: EUR 42m) despite expected

increasing marketing expenses of EUR 48m (from which 53% has already been

incurred in H1).

New innovative product launched: Next to the continued additon of new games,

ZEAL has also launched a new raffle-type lottery 'Traumhausverlosung', which

should yield a billings margin of 26-33% (vs. 13-16% at Lottery). Key

advantages of the raffle-type lottery, in our view, are a) a tangible price,

e.g. an existing house, increasing emotional attachment as opposed to an

intangible lottery win and more importantly b) the illusion of higher

chances as at raffles, opposed to lotteries, there is always a winner but

the chances are unknow beforehand, thus increasing the players desire to

participate as he underestimates his chances. Against this backdrop and with

ZEAL's highly experienced and strong budgeted marketing power in mind, this

product looks set to start successfully. While still being below scale, this

first of its kind lottery in Germany has not only the potential to become a

positive EBITDA contributor in the mid-term, but could also serve as a

blueprint for additional raffles to be offered by ZEAL (e.g. cars, boats,

etc.). We also like the fact about this product, that ZEAL does not to

acquire market shares but rather enlarges the market. This again highlights

the innovative power it has within Germany's regulated lottery market.

FCF positive again: Following unfavorable WC swings in Q1 (FCF: EUR -3.6m),

FCF is back to normal levels (Q2: EUR 16.2m; H1: EUR 12.6m) due to the WC swing

coming back. With rising profitability, we also expect proportionate

increases in FCF going forward (cash conversion of 6090% FCF/EBITDA).

All in all, a strong release. ZEAL shows that it unites value and growth

while also being highly resilient against macro developments. Therefore, we

reiterate our BUY recommendation and ZEAL's position in the NuWays'

AlphaList with an unchanged PT of EUR 54.00, based on DCF.

You can download the research here: http://www.more-ir.de/d/30399.pdf

For additional information visit our website: www.nuways-ag.com/research

Contact for questions:

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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1963559 08.08.2024 CET/CEST

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