While we all love the thought of finding the next multi bagger, few companies have the right mix of business model, IP advantage, management team, balance sheet capacity and importantly, large potential market opportunity to achieve it. We believe the recently listed Pointsbet Holdings ASX:PBH is beginning to demonstrate its potential to be such a multi bagger.
ASX:PBH is an Australian corporate bookmaker which launched operations in February 2017. While its marketing pitch is its “Pointsbetting” form of spread betting we believe its fixed odds betting is still the core of its operations. Following detailed research into the technology and bookmaking capability behind the platform we came away confident that the online product has both a leading user experience and a strong technology stack behind it to grow revenues substantially. This was reinforced recently with the appointment of Manjit Gombra Singh as President, Product and Technology. Manjit is a highly experienced technology executive who was most recently the Chief Technology Officer and Executive Vice President of Aristocrat Leisure Limited ASX:ALL.
What excites us most about ASX:PBH is its focus on the United States Corporate bookmaking market. In May 2018 the US Supreme Court Overturned the Professional and Amateur Sports Protection Act (PASPA) providing individual States the opportunity to permit online wagering and sports betting. As States gradually open up, PBH as an early mover is well positioned to capture market share.
As it currently stands ASX:PBH has been awarded a commercial license and has the legislated capacity to operate in both New Jersey (launched January 19) and Illinois (recently awarded). New Jersey has a population of 9.5m people while Illinois has 12.7m residents highlighting how large the total US market can become as each State opens up. While there are “estimates” out there of market size, we believe these are far too conservative, seeing the US market as potentially many, many multiples of the size of the Australian market. We have not yet allowed for the Mexican market in our forecasts where PBH has a license but is still awaiting regulatory approval.
ASX:PBH are already proving they are wasting no time in seizing on this and signing up users:
In this context we are surprised that Tabcorp ASX:TAH wasted so much time and shareholder funds attempting to break into the highly competitive UK market as opposed to focussing on the United States.
We are under no delusions that the competition will be fierce. However, it is not a winner takes all market. In fact, much like large pharmaceutical companies such as ASX:CSL use small biotechnology companies almost as R&D facilities, buying out the business if their technology proves successful, we believe ASX:PBH will likely be acquired by a major player looking to consolidate the market after PBH builds its user base and further proves out its technology.
Wagering turnover is currently annualising at $400m+ before any material marketing by the company. If we assume a gradual build up in turnover to $3bn over a 10-year DCF while moderating Gross Profit Margins and Win rates for competition we come up with a valuation well in excess of $5 per share. However, much like the issues experienced in trying to accurately forecast a discounted cashflow for Afterpay ASX:APT in its very early days, we accept this DCF carries many unknowns given the difficulty in predicting how much market share the company can win and what will happen to margins to win that share.
In summary, with hurricane force industry tailwinds in the United States and a board and management team with significant ownership in the business Surrey Asset Management are comfortable owning ASX:PBH as it attempts to take on the massive US online bookmaking market.
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