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In Practise Investor Dialogues gathers a group of professional investors to explore the value drivers and risk factors of a specific business, moderated by In Practise. Attendees are selected on the basis of the depth of their knowledge of the security that is subject of the dialogue.
Analyst 2: I'll start with the basic thesis, which I'm sure is similar for everyone, that Evolution is an outstanding business. They just reported their highest margin in company history, a 70% EBITDA margin, with no debt. It generates a lot of cash, has a significant lead over its competition, and should be able to grow at a 20% plus rate for a long time. Currently, its valuation is extraordinary. Those are some of the main reasons why I own it.
You asked for top-of-mind issues. One that comes to mind for most investors is US expansion. How is that progressing? I think it's probably gone slower than many investors had hoped. We're now at about 12% or 13% of the business in North America. There are long-term questions about how fast it will grow, what kind of markets will come on next, and what the margins and profits of that business will look like. There are some differences between the US and Europe which we could discuss.
Another long-term issue that always comes up is regulations. People often discuss how much of the business is in regulated markets versus how much is in gray markets. The market would probably prefer to see more in regulated markets, but we could discuss some of the differences there.
A third top-of-mind question that often comes up, and that I think about too, is capital allocation. They're sitting on a lot of cash. They pay out a substantial amount of earnings in dividends. I think investors would universally love to see them do some buybacks.
One point I'll add is that they made a large acquisition of NetEnt a couple of years ago to get into the RNG business, and that's been somewhat of a drag and a disappointment so far. It certainly seems to be a business not as good as live casino. So, those are some things to consider.
Analyst 1: I would add that Pragmatic is a powerhouse, and I'm curious about what others have heard about them. In general, they have performed exceptionally well across the board. One thing that has always struck me is the management energy at Evolution, and I wonder if Pragmatic has that as well. However, it's a bit sketchy, very intriguing, and somewhat peculiar. I don't fully understand it.
Another interesting aspect of the business is Asia, which is quite the enigma. Evolution does their best not to discuss it, and I've focused most of my work on Asia. I believe it's the majority of the business over time. However, it's still uncertain what their differentiation is and how Asia actually looks. When you talk to 10 different people in Asia, they give 10 different answers. It's a really engaging topic.
The conversations I have in Asia are just astounding. It's completely unlike any other business I've ever worked on. For instance, there have been raids on unlisted or unlicensed gambling operators, and people have been arrested. You never want to hear that in the context of a listed business or when you're doing research on a listed business, but it does come up. I'm not saying that this has ever happened to Evolution, but it does happen in the industry, which is particularly interesting, if you believe that that business is going to be the core of the business going forward, as I do.
Analyst 3: That's it. Between the two of them, they've captured all the bear theses.
Yes, so perhaps we can delve into the US business first, and I'm sure we'll eventually discuss Asia. It's indeed a significant part of it. How do you view the US business in terms of growth and the potential margin profile that might look different from there?
Analyst 2: I don't really know what the margins will look like. I think that's another matter to be determined. We know that because of the way the US market operates, they have to actually build a casino in that state and they can only serve that state. So, they're going to have to build casinos in every state as they expand. This is unlike in Europe where they can cross countries and serve multiple countries from one location. We also know labor costs are going to be significantly higher than they are in, say, Georgia where their largest facility is now. Labor costs are likely to constitute two-thirds of their operating expenses for a facility.
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