Kindred Group Stock: A Volatile Long-Term Buy (OTCMKTS:KNDGF)


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I believe Related (OTC:KNDGF) a long-term buy if you can accept the volatility caused by potential ESG-related short-term headwinds. It is, I believe, the most significant headwind for the company behind it and that the return to the Dutch market along with easier comps should bring the stock back to previous prices and more.

business

Kindred was founded in 1997 and is currently headquartered in Malta is the fourth largest digital entertainment group in the world (by gross profit revenue). They make up 9 brands across the poker, casino and sportsbook categories, with the largest markets being the UK, Belgium, France and hopefully the Netherlands. To have more control over their software offering, they acquired Estonian B2B game developer Relax Gaming in 2021.

At the end of 2021, Kindred employed 2055 people in over 13 offices worldwide. It is primarily listed on the OMX Nasdaq Stockholm with a market cap of ~SEK 21 Bi.

The company has increasingly sought to change the gaming paradigm in a more sustainable way with a clear purpose 0% Harmful Gambling Revenue by 2023. Kindred estimates that 3.3% (Q1’22 dates) of its revenue comes from these “high-risk players” and wants to implement AI technology to meet its 2023 goal. This push is imperative in a morally and socially acceptable manner, but also because it halts the actions of governments that are tackling it and restricting their activities.

Kindred's Road to Zero Harmful Gambling

Kindred’s Harmful Gambling Statistics (Kinred’s website)

They recently went through a 6-month cool-off period regarding the regulation of the Dutch market, which has severely impacted the overall business. At the moment, The online gambling license has been issued to them and they are beyond expectation in terms of regaining market share.

Macro Environment and Sector

Kindred is recovering from hardships caused by the massive online shift of COVID-19 in gaming and we are beginning to see an overall slowdown in global economies due to several external factors such as the war in Ukraine and inflation. These situations present a complicated environment for businesses to operate in and while I believe online gambling will do well in a recession, it is still a cyclical business and will be affected by a downturn.

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The gambling market, especially the online market, is expected to grow at the CAGR near double digits in the next few years. The increasing transition from physical to online gambling seen in recent years should remain high, albeit to a lesser extent. That growth can be seen to a greater extent in the U.S. market, where Kindred is aiming for a decent market position overall and management hopes to be in the top 10 going forward. This broad market trend is giving the sector ‘tailwind’ and we are seeing some loss-making US companies already trading at significant valuations, showing that investors recognize the industry’s bright future.

Competition is fierce and we are seeing the impact in the US where no company can currently be profitable, European markets are more mature and established players have been active for a number of years. I see Kindred’s main competitors: Betsson (OTCPK:BTSNF), Contain (OTCPK:GMVHF), Flutter Entertainment (OTCPK:PDYPF), Kaizengaming and DraftKings (DKNG).

Economic Analysis

Over the past few years, we’ve seen Kindred grow revenue above industry growth rates (~13% CAGR since 2017), indicating the success of their business model and overall quality as well. One of the things I have to give Kindred credit for is the sustained and steady growth they have achieved over the past few years. This appears to be the opposite of what other competitors are doing who are looking for growth at any cost.

Related KPIs

Related KPIs (Kinred’s website)

With a mind to take the years of the COVID-19 boom with a grain of salt, this is a very asset-light model that offers great returns at almost every level. Your ability to generate results from your own assets and capital is fantastic. The online gambling industry operates on a negative working capital model, which allows it to fund the business with deposits from customers and suppliers. They also have low levels of debt, which I tend to agree they should be careful with leverage due to the regulatory risk involved.

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Of particular note is Kindred’s cash generating capabilities, it is a very cash generating business with profits commensurate with cash from operations even during periods of major unanticipated events as we’ve seen lately. Potential future dividends and buybacks should be attractive.

cash flow statement

Related cash flow statement (Kinred’s website)

Possible sale or merger

We’ve seen a few US funds buying large positions in Kindred recently. The most important is Corvex Management, which has quickly built a sizeable ownership position of more than 10% began to influence the board considering a merger or sale. This scenario is possible if we take a look at recent events in the industry and see that there may be more prominent players entering the space (the case of Disney) or the consolidation of existing companies such as the one that has since been discontinued merger idea between Entain and DraftKings.

Well, Kindred has a low debt record, good knowledge and experience in the industry, strategically established positions worldwide and belongs together with Betsson in a list of low multiple (cheap compared to the others) gambling operators. and before it was bought from MGMLeo Vegas (OTCQX:LEOVF).

While an investment shouldn’t be based on this possibility, I believe it should be considered when assessing Kindred’s potential benefit.

Future Outlook and Evaluation

At the recent Capital Markets Day in London, management presented clear guidance for 2025. The idea is to achieve £1.6bi in sales (organic), an EBITDA margin of between 22% and 21% and a payout of 75% at 100% have % FCF (after M&A). The release was below my expectations, especially in relation to the low EBITDA margin for 2025, which is below historical averages. Underlying EBITDA for the COVID-19 period at record levels in 2021 was £332m, fairly close to the target of £344m for 2025. I hope management has shown a very conservative view going forward and that we may see some upside going forward.

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Historical and future related finances

Historical and future values (Kinred’s website)

This forward-looking forecast considers a linear development of the EBITDA margin, with the recovery of the Dutch market and also the phased implementation of the Kindred Proprietary Platform to model the path to 2025.

DCF assumptions

Assumptions for DCF (own data)

DCF model

DCF model (Own and related data)

Using only the cash distributed to shareholders in a 4-year DCF model with a WACC of 12.4%, I arrive at a fair value of around SEK 125. This target represents potential upside of more than 30% from the current price. While this is only an approximate target, it shows the potential of the company and the (unfair) hit it has suffered from short-term headwinds.

Corporate and Industry Risks

Even if one believes in a positive outcome, there are two main risks to consider when evaluating Kindred, the first being regulatory risk, which limits its ability to operate in one or more markets, a similar situation to the Dutch case. This situation is linked to ongoing regulation across Europe, currently we are seeing examples in the UK (comment included) and Norway (recent developments). Overall, I think it’s more of an industry risk.

The second risk is more focused on the development of additional competition like we are seeing in the US market as I don’t see a clear moat for the companies (yet). The competition, which promotes better and better bonuses and more compelling odds, will consequently reduce the earnings and profitability of the operators. I think Kindred’s new sports betting platform is a good idea to mitigate this risk by differentiating their offering.

Conclusion

Kindred operates in a challenging environment driven by competition and low ESG scores, which may require an additional margin of safety for its entry-level price. Still, I see value in the characteristics of the sector, management, sustained past growth and long-term thesis. I believe it is now undervalued given the prospects for the future, although I’d rather see a recovery before committing further. The possibility of further industry consolidation in the form of a merger or sale could also provide the stock with some capital appreciation.



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