Super Group: Super Discount Has Arrived

Summary

  • Super Group reported a mixed Q1'22 earnings report back in May, but the company pulled strong guidance for 2022.
  • The company is still working on closing an attractive deal to enter the U.S. online gambling market.
  • The stock only trades at 5.5x '22 EBITDA numbers, but the '23 metrics are unknown now.
  • This idea was discussed in more depth with members of my private investing community, Out Fox The Street. Learn More »

online casino and gambling concept, hand touching shining sign 777 and dollars symbols, blue horizontal neon banner

Sergey Shulgin/iStock via Getty Images

As with most SPAC transactions, Super Group Limited (NYSE:SGHC) has collapsed following the closing of the deal. The online gambling company is actually profitable, questioning whether the stock has dropped 60% from the SPAC deal for any logical reason. My investment thesis is far more Bullish on the gambling stock here at $4 after the major discount has finally arrived.

Diversified Growth

Unlike a lot of the other online gambling stocks going public via SPACs during the boom last year, Super Group already had a strong business outside the U.S. The company operates the Betway, online sports book, and Spin, online casino, brands with nearly 50% net gaming revenue from both units.

The company has about 50% of revenues from the Americas, but unlike other online gambling players entering the U.S. half of revenue comes from areas such as Africa and RoW. The recent regulatory issues in Germany and The Netherlands have shifted business away from Europe and more into areas such as Africa.

Geographical slide

Source: Super Group Q1'22 presentation

The company is still a play on online gambling growth in the U.S., but the deal with Digital Gaming Corporation won't close until later this year. DGC will offer access to operations in 6 U.S. states with market access to another 6 states providing the next major growth avenue for Super Group. In addition, the company recently entered Bulgaria.

While the Q1'22 results provided over 7% revenue growth to reach ~$350 million, the numbers are below where Super Group hoped to be when doing the SPAC deal. The company discussed a tough hold during March and pulled guidance for the year in part due to tough currency conversions with the Euro.

Super Bargain

With the dip to $4, the stock only has a market cap of ~$2 billion with 490 million shares outstanding. Similar to other SPACs, Super Group has a substantial amount of additional securities outstanding that may or may not be executed with the stock at $4. All of the warrants and earnout shares require a price of at least $11.50 to trigger the exercise of those shares.

Outstanding Share slide

Source: Super Group Q1'22 presentation

In a fully diluted case, Super Group would have ~575 million shares outstanding for a market cap of $2.3 billion. Of course, the stock would have to hit $14 for 20 trading days for the last 25.5 million shares to be paid out. The stock valuation would top $8 billion in such a scenario, but Super Group would obtain nearly $350 million in cash for the warrants.

The company generated $1.5 billion in NGR in 2021 and is on pace to top this figure. Super Group is cheap considering the company generated $358 million in adjusted EBITDA and strong free cash flow last year.

The company had forecast some aggressive growth in 2022 with adjusted EBITDA growth of 14% to reach €345 million, but the online gaming market has hit a soft patch and the DGC deal hasn't closed yet. The stock only trades at ~5.5x trailing EBITDA (based on the lower Euro price), though the stock does get tough to value knowing the share count will quickly rise.

The original guidance for the year had adjusted EBITDA converts to $360 million now, which would be substantially cheap. Unfortunately, Super Group pulled guidance and the actual number could be far lower with Q1'22 EBITDA of €61.5. Yes, the number was up 14% YoY, but the annualized number is far below the original target for 2022.

Takeaway

The key investor takeaway is that Super Group has hit a rough patch like the rest of the online gambling market as consumers spend more time out and about. Ultimately though, the company plays in an attractive market with long-term growth opportunities in the U.S. and the RoW online gambling markets not apparent in the stock valuation.

Investors should use the weakness to build a position in Super Group before the market turns around and the DGC deal closes in the 2H providing the gateway to the attractive U.S. markets.

If you'd like to learn more about how to best position yourself in under valued stocks mispriced by the market during 2022, consider joining Out Fox The Street

The service offers model portfolios, daily updates, trade alerts and real-time chat. Sign up now for a risk-free, 2-week trial to start finding the next stock with the potential to generate excessive returns in the next few years without taking on the out sized risk of high flying stocks. 

This article was written by

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Stone Fox Capital Advisors, LLC is a registered investment advisor founded in 2010. Mark Holder graduated from the University of Tulsa with a double major in accounting & finance. Mark has his Series 65 and is also a CPA.


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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in SGHC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

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