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Original-Research: ZEAL Network SE - from NuWays AG

01.08.2024 / 09:02 CET/CEST
Dissemination of a Research, transmitted by EQS News - a service of EQS
Group AG.
The issuer is solely responsible for the content of this research. The
result of this research does not constitute investment advice or an
invitation to conclude certain stock exchange transactions.

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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: 01.08.2024
Target price: EUR 54.00
Last rating change:
Analyst: Henry Wendisch

Q2 preview: Record sales thanks to lottery tailwinds

Topic: Based on another strong lottery environment in Q2'24 (see update from
09th July 2024), we expect strong Q2 results with high top-line dynamics and
strong profit growth. As a consequence, we regard the FY sales guidance as
too conservative and expect EBITDA at the upper end of the guidance.

Lottery in high demand due to strong jackpots: Thanks to the lottery
tailwinds in Q2 user activity should have increased (eNuW: +20% yoy MAU
growth to 1.37m) and should have lead to a more favorable product mix (eNuW:
13% billings margin, +0.5pp yoy). Consequently, we expect EUR 252m in Lottery
billings (+20% yoy) and Lottery sales to grow by 25% yoy to EUR 33m. - see p.2

Games roll-out still in progress: Due to delayed regulatory approvals, the
complete roll-out of the full Games portfolio (c. 200) is still in progress
(currently: 113 games). Thus, we only expect a moderate increase in monthly
active users to 28k (vs. 22k in Q1) and slightly improving user economics
qoq thanks to the addition of games with higher billings margins (eNuW: EUR
35.76 ARPU in Q2 vs. EUR 33.57 ARPU in Q1). Hence, billings from Games should
arrive at EUR 34m and sales at EUR 3m (eNuW: 9% billings margin; 44% pay-in
margin vs. eNuW: 16.2% at Lottery). - see p.2

Ongoing sales momentum: We expect continued sales momentum throughout Q2
with a 33% yoy sales increase to EUR 37.5m (73.6m in H1, +34% yoy) driven by
the factors described above.

Continued marketing efficiency: Thanks to an improved marketing algorithm as
well as higher conversion rates, ZEAL has achieved outstanding marketing
efficiency in Q1 (CPL of EUR 33.04 vs. EUR 45.52 in FY'23). For Q2, we expect
CPL to arrive slightly higher at EUR 38.00 as with only 2x peak jackpots (vs.
4x in Q1) marketing efficiency is hard to maintain at those levels.
Accordingly, marketing expense should also come in lower at EUR 11.6m (vs. EUR
13.4m in Q1) but in return should have generated c. 200k new registrations
(i.e., c. 50k additional MAUs, assuming a 25% conversion rate), in our view.

Ramp up in personnel and indirect expenses: For new and ongoing product
launches we expect an elevated headcount and thus personnel expenses of EUR
7.7m (+45% yoy), but also higher indirect costs of EUR 4m (+22% yoy),
especially in third party/freelancer services related to new product
launches as well as legal costs related to the Lotto24 squeeze-out. -
continued -

Disproportionate EBITDA growth: Accordingly, Q2 EBITDA should develop
disproportionately and arrive at EUR 10.2m, up 133% yoy (H1: EUR 19.5m, + 42%
yoy). Mind you, that Q2'23 saw a muted EBITDA due to massive marketing
expenses thus serving as an easy comparable base.

FCF back up to normal levels: After a negative FCF in Q1 due to an
unfavorable swing in WC, FCF should turn positive again (eNuW: EUR 17.2m vs. EUR
-4m in Q1) as we expect WC to swing back in Q2.

Sales guidance too conservative, upgrade likely: Per our update from 09th
July 2024, we increased our FY'24 estimates to reflect the above average
lottery environment in H1. In addition to that, we expect that (1) the steps
towards increasing the Lottery billings margin to > 15% as of 1st July 2024
(i.e. increase in service fees), (2) the addition of new games throughout H2
and (3) an all new social lottery, should lift sales above the guidance of EUR
140-150m (eNuW: EUR 155m; eCons: 148m). Therefore, an upgraded sales guidance
seems likely, in our view.

EBITDA at upper end, but depends on H2 jackpots: A bit more uncertainty
prevails around the EBITDA guidance, which is highly dependent on the
marketing spent which is in return dependent on the jackpot situation of H2.
Nevertheless, we are positioned at the top-end of the EBITDA guidance of EUR
38-42m (eNuW: EUR 42m), despite expected marketing expenses of EUR 46m
(guidance: EUR 40-45m; limited to the brokerage business).

Value-accretive Lotto24 SO imminent: In our last update from 25th July 2024
we identified an NPV of EUR 143m (EUR 6.40 per share) for the squeeze-out of the
remaining 4.55% shares of Lotto24, indicating that the deal should be highy
value-accretive, once fully executed (eNuW: Q4'24). Given that Lotto24 is
ZEAL's cash cow and has used up all its tax-loss carried forward, the gains
should stem from (1) tax savings due to the formation of a consolidated tax
group and (2) the elimination of minority interest.

All in all, ZEAL's cash-generative business model with stable, double-digit
ROCEs provides shareholders with a unique combination of value and growth.
Thus, we reiterate our BUY recommendation with an unchanged PT of EUR 54.00,
based on DCF.

You can download the research here: http://www.more-ir.de/d/30335.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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Diese Meldung ist keine Anlageberatung oder Aufforderung zum Abschluss
bestimmter Börsengeschäfte.
Offenlegung möglicher Interessenskonflikte nach § 85 WpHG beim oben
analysierten Unternehmen befinden sich in der vollständigen Analyse.
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