11 okt. 2015


Cherry 5 år, vs. omx.

Söker man relativ styrka och ett bolag frånkopplat från omx så kan cherry vara ett svar.

3 månader

Alexander Petterson, the new CFO, has commenced a buying spree in Cherry owning now approximately 10000 shares, buying 5000 two days ago (three days before the 30-day buying halt for insiders). Fredrik Burvall previously sold some of its shares (approx. 25 percent) for personal reasons where executives themselves within Cherry bought his shares. The strong insider buying along what is currently happening with the company is likely well-connected. In this text we want to highlight the significant performance of Yggdrasil.
Generally, we asses that the market has significantly underestimated the signficantly unexpected development of Yggdrasil single slot "Joker millions" which most likely has contributed in the range of 3-3.5 MSEK. We will not go in details in the other approximately 10x slots but one should be aware of that before the quarter end we saw an extremely rapid rise in Holmes Jackpot slot led most likely by Betsson's client base which provides a decent cushion to our estimates. Our estimate was 4.0 MSEK in total for Yggdrasil and thus we now comfortably expect that the company can surpass these. Perhaps the market is now rational enough to consider the high-quality of games that Yggdrasil is able to produce. Yggdrasil is and will not be a follower; there is a decent likelihood of it being the followed. Not to say the least that is breaking ground in creativity - in-game dynamics - features and game-experience wise.                                
By Q2 2016 the company could produce 10 MSEK per quarter(with risk of significantly underestimating this estimate) by its slot or even more meaning this segment alone should be traded at approximately 240 MSEK(sustainable earnings multiple of 30X(Expect Growth rate +100 YOY)). The market at that point should however discount the future potential and accurately develops an intrinsic value range of 500-1B sek for Yggdrasil alone - though one must be aware that the market is highly irrational especially in the short term but over-time it should converge to its intrinsic value. Thus, the market accounts for the online casino but not the substantial potential in Yggdrasil at an market cap of 800 MSEK. We think the market will start discounting this potential when it becomes obvious for the general market that the growth is real and only beginning. Cherry is quickly evolving to become a large scale-operator with a highly agile platform, the fragrance of adaptation is distinct to other operators. It is clearly a operator which stands out of the crowd at the current market place and still deeply misunderstood by the market.

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Prognoser av Redeye:

Bear case – 60 SEK 

Cherry experiences weak profitability for the online venture due to increased competition and a reduced ability to retain existing customers. A problem in this scenario will be the loyalty amongst customers where Cherry’s bonus payouts only provides a temporary increase in the number of customers. Cherry experiences issues with the overseas establishments and the company’s penetration into the mobile market fails, which leads to investment losses as well as declining sales. Yggdrasil is expected to contribute to the margin as well as the growth in relation to the more competitive online casino segment. The company succeeds in sustaining an average operating margin of 15 percent from 2018, and the growth rate is more or less in line with market growth of 10 percent. There is a 25 percent chance of this scenario occurring. 

Base case – 120 SEK 

Cherry continues to build upon its online casino operations across all its current and upcoming brands. The dynamic DNA of Cherry supports the innovation and constant strive to withhold the best experience and service to the customer. The case also assumes high marketing expenses which we believe will continue for an extended period, to later be able to take part of the high growth rate in the mobile segment as well as the general online segment. We assume that the company enters into a partnership or makes acquisitions to sustain its growing turnover in the pace they believe Scandinavia reflects a more saturated market, which we believe will occur already in late 2016-17. Technical development of the sites is well placed even at the entity level. The high growth rate presupposes that the mobile integration with customers is improved in the way that it can capitalize on the high growth rate within the mobile casino, which supports the effect of the declining marketing expenses. Some growth and margin impact from Yggdrasil is expected in the long term. We assume that Cherry is enabled to sustain long term operating margins of 20 percent from 2018, as well as a growth rate of about 20 percent. There is a 50 percent likelihood of this scenario occurring. 

Bull case – 200 SEK 

Cherry succeeds beyond our expectations with the launch of the new gaming services in a number of markets and the subsidiary Yggdrasil (game development) begins to provide strong net cash inflow. The company succeeds, through recruitments and existing expertise, in optimizing the mobile operations which makes a greater growth for the online casino division possible. In this scenario we assume that Yggdrasil grows strong representing an increasingly larger part of the entity’s total turnover. The online casino acts as the value driver and is guided by both the initial high growth rate and the margin expansion in the maturity stage. Together, it provides an obviously stronger average growth of about 70 percent between the periods 2014 and 2018. The operating margin is calculated progressively from a negative margin during 2014 which is increased to 20 percent in 2018. There is a 25 percent likelihood of this scenario occurring. 

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