Topic: Yesterday, ZEAL released Q4 results and issued a strong FY'24e sales guidance, well above expectations. Here are our key takeaways:

• Blow-out sales guidance: ZEAL guides for sales of € 140-150m (eNuW old: € 135m; eCons: € 128m) and an EBITDA of € 38-42m (eNuW: € 45.3m; eCons: € 43m) with marketing expenses of € 40-45m (eNuW: € 42m). The elevated sales growth should stem from a growing billings margin (sales in % of billings) to above 15% by H2'24e (FY23: 12.8%; eNuW for FY'24e: 12.7%) thanks to 1) proactive shifting of players towards higher margin products (e.g., lottery clubs), 2) thintroduction of another high-margin social lottery next to "freiheit+" and most importantly 3) going for price discrimination of users regarding the service fees as lottery players are very price insensitive. This is a strong leverage for ZEAL, given the high amount of billings, but on the other hand requires additional indirect expenses and marketing, burdening short-term profitability.
• Q4'23 in line and FY targets reached: Lottery billings amounted to € 210m, -2% yoy (eNuW: € 208m), while sales developed accordingly to € 30m, -2% yoy (eNuW: € 28.8m; eCons: € 29.6m) and EBITDA came in at € 9.8m, +1.5% yoy (eNuW: € 11.8m; eCons: € 11.4m).  On a FY basis, ZEAL recorded Lottery billings of € 843m (guidance: € 800-830m; eNuW: € 841m), sales of € 116m (guidance: € 110-120m; eNuW: € 115m) and an EBITDA of € 32.9m (guidance: € 30-35m; eNuW: €33.4m) with marketing expenses of € 36m (guidance: € 34-39m; eNuW: € 38.8m) - see p. 2 for details.
• Upbeat Games adoption: while Q3'23 already showed a better-than-expected Games contribution, Q4 lifted the bar even higher. Games contributed with billings of € 25m (eNuW: € 19m) and sales of € 1.8m (eNuW: € 1.9m), meaning that the average Games customer (Q4: 18k) spends c. € 92 on Games (APPU) per month, generating revenues for ZEAL of € 33 per player and month (vs. € 7.80 ARPU at Lottery) and yielding a 36% pay-in margin (sales in % of pay-in). For now, this contributed with 6% of Q4 sales, but once scaled, the Games business should become a second strong pillar of growth and profitability for ZEAL, next to Lottery.

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• Squeeze-out of Lotto24 by mid'24e: ZEAL intends to squeeze-out the remaining shareholders of Lotto24 (acquired back in 2019) after having entered an agreement to acquire 0.6% of additional shares, raising the ownership to 95.45%. This should have value accretive effects due to 1) being able to form a corporate tax group allowing ZEAL to offset the high profits of Lotto24 with losses on holding level, especially as Lotto24's tax loss carry forward is used up now and 2) avoiding minority interest going forward. It should also lead to a normalization of ZEAL's elevated tax rate (FY'23e 39%, +12pp yoy) to 32% after the squeeze-out. The purchase price for the additional 0.6% of shares remained undisclosed and the squeeze-out price will be set by an independent auditor, hence uncertainty prevails regarding the total SO payment. Regarding financing, the company plans to take on additional debt, which we regard as unproblematic, given the strong net cash position (Y/E'23: € 30m).

In sum, we continue to like ZEAL's upbeat growth story and the strong operating leverage ZEAL's business provides. This, coupled with increasing contributions from Games should lead to notable margin expansions going forward. Moreover, our conservative CLTV estimate of ZEAL's total Lottery customer base (€ 726m, see below) even exceeds the company's current market capitalisation, albeit not including the expected billings margin expansion to above 15% and also not including the potential stemming from Games.

Consequently, we reiterate our BUY recommendation with an unchangend PT of € 51.00, based on DCF.

Source: NuWays

CLTVs of ZEAL's Lottery customer base

Source: Company data, NuWays