By Richard Gill, CFA

Gaming Realms (GMR), the creator and licensor of real money and social games, has announced results for the six months to June 2019. These are the first since set of numbers since the company completed the sale of its remaining real money gaming (RMG) business in July. As discussed in our last update note, the company is now focussed on the development and licensing of games for third party real money and social gaming operators.

Numbers for the period show total group revenues from the continuing operations (excluding real money gaming and affiliates) rising by 18% to £3.2 million. Justifying the decision to focus on Licensing, revenues from this segment soared by 167% to £1.6 million, with the Social operations seeing an expected 29% fall in revenues to £1.5 million. The adjusted EBITDA loss for the continuing operations reduced to just £6,280 against a loss of £441,133 for the first half of 2018. Including the discontinued Real Money Gaming operations the EBITDA loss was £0.9 million, again justifying the decision to dispose of this business.

Growth in the Licensing business during the period was driven by increased distribution of games across partner sites and an expanded games portfolio. The company saw the 13 partners that went live through 2018 contribute to growth and also went live with tier 1 operator William Hill. It also released four new games into the market and signed worldwide distribution deals with Relax Gaming and Scientific Games.

On the balance sheet, cash at the period end was £0.28 million but as at the date of the results the cash position was said to be c.£4 million. This was following completion of the RMG deal and receipt of funds, settlement of certain liabilities connected to the B2C RMG assets and deal expenses, and further investment in operations.

Outlook

Following the period end the completion of the RMG disposal has allowed Gaming Realms to reduce headcount by 45 and reduce annual costs by £2 million. The Licensing business continues to grow very strongly, with revenues up by 88% in the 9 weeks since the period end. The company has gone live with 3 new operators since the end of June, taking the total to 37, including News International and Betsson which could add up to a further 33 new sites, covering UK and Nordics. Three new games have been released, including Monopoly Slingo, with more releases scheduled for the remainder of the year.

Overall, the 2019 full year numbers are expected to be in line with market expectations as the current pipeline of new partners go live and new integrations are completed. The Licensing division is expected to become cashflow positive by the end of 2020, with the non-core Social business said to be in the latter stages of being rationalised.

Assessment

These numbers from Gaming Realms are pretty much in line with our expectations and reflect the recent changes to the business which we discussed at length in our recent update note. What the results do highlight is that the decision to move towards the high margin licensing operations has been a good one. The division delivered an adjusted EBITDA profit of £0.723 million for the half for a margin of 44%, a figure we expect to rise as further deals go live with partners and economies of scale are realised.

With costs reduced significantly following the transaction close and the licensing model having very high margins, we believe that Gaming Realms looks well placed to grow profits significantly in the coming years, especially with the two recently signed distribution deals, with Relax Gaming and Scientific Games, providing the opportunity for a marked acceleration of growth from H2 this year and beyond.

Our discounted peer based EV/EBITDA valuation suggests a target price of 26.79p for the shares. With the current price being 7.05p our valuation implies 280% upside potential. We re-iterate our stance of Conviction Buy.

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