Analysis: What next for Kindred Group?

Some things in the world of egaming never change, and record revenues and profits from Kindred Group being met with a muted round of applause is one of them. A sensational sports betting performance (more of that later) in Q4 helped push end-of-year revenues to £751.4m, up 38% year-on-year, while EBITDA was up nearly 50% to £180.3m. By any metrics that’s a pretty good year. But yet it raised little more than a collective nod of the head from the egaming sector.

Kindred has a market cap of around £2.6bn at the time of writing, which is equivalent to roughly 14 x 2017 EBITDA, so it’s hard to say its undervalued, but under appreciated may be a more suitable word. In a period where some of its UK rivals have struggled to break 10% growth at times and its old rival Betsson finished the year with EBITDA going backwards it continues to impress.

Kindred was undoubtedly flattered both by acquisitions and unusually strong sportsbook margins in the fourth quarter, with sports margins up 50% on long-term averages. It reported 42% growth on an organic and CC basis, with EBITDA up 80% on the same basis for the period with additional revenues coming through 32Red and continued poor performance of its reporting currency, sterling. But this was a layer of polish on an otherwise very shiny set of results.

Revenue growth for the group over the 12 months was 38%, with 41% growth in sports and 36% growth in casino. Partly this growth is due to acquisitions, but it’s undeniable Kindred continues to take market share from its rivals in core markets such as the Nordics and is a dominant player in some major European markets most operators have not tried to or are not able to enter. While others have concerned themselves with being a major player in Spain or Italy it has focused its attentions elsewhere and is arguably reaping the benefits.

The secret of success

So just what is Kindred doing right? The most obvious aspect to point to is its acquisition strategy, which has radically altered the outlook of the group over the past couple of years. It has gone from being Unibet, a group dominated by its own core sports betting-led brand, to a multi-territory multi-brand gaming group. The change is more than nominal too. Unibet was very much an operator in the single-brand mould and Kindred is one that embraces the more fractured and complex nature of online gambling in 2018.

This was perhaps best exemplified by the launch of its new brand Vlad Casino, targeting the emerging Romanian market, in February. Rather than use one of its now myriad in-house brands to expand into the region its chosen to adopt a locally focused strategy, while in the UK it has opted to go with Unibet over the existing Stan James brand it acquired. In Sweden meanwhile it operates both Unibet and Maria as well as the new Storspiller high-roller brand.

In short there is no “right” answer to the single versus multi-brand question, just what suits each specific market best. This approach has allowed it to be very flexible in its approach to acquisitions, with no overriding corporate strategy forcing premature integrations of either brand or technology. And it will likely guide future M&A activity with bolt-on targets likely to continue to present opportunities in both its core markets and those it has so far shied away from entering.

Kindred is one of the more acquisitive firms in the sector and has famously done roughly one deal a year over the past decade and its latest results were announced 355 days after the last acquisition. A deal in the next 12 months seems almost inevitable. What is perhaps more intriguing is if they look to focus once again on bolt-on deals in key markets or if this is the time for it to take on one of its larger rivals.

Kindred has always followed its own path and has had huge success in acquiring and absorbing small to mid-tier firms so there is no reason to suspect a sudden shift in strategy, but these are changing times in the sector. And Kindred has arguably changed less than some.

Changes in the wind

Kindred Group made much of its “transformation” from dot.com to dot.country during the year, but regulated revenues were just 42% of the total in Q4 and more importantly there remain a lot of unanswered questions about the markets they operate in. France is a major market for Kindred but it’s hard to see it moving towards profitability in the short term with the tax remaining so onerous and Belgium, another big territory, a market constantly at risk of the whims of the regulators there.

While profits were at a record level it should be noted marketing costs were lower as a percentage of revenue than some of the UK firms for example, and a hike in marketing spend in 2018 will have an impact on bottom line. One interesting area is betting duties with Kindred paying a high price in some of its markets such as France. For the full year, betting duties were £113.6m, up some 68% year-on-year, at around 15% of total revenue despite its large dot.com business and this is an area that could really put a squeeze on profitability once a higher proportion of its markets become locally taxed.

Two of the largest markets for Kindred, the Netherlands and Sweden, are moving towards regulation and while it would be a shock for the group to not receive a licence in both, it’s not at all clear if regulation will be a short-term positive for them. Kindred undoubtedly benefits from the lack of competition in the Netherlands at the current time while Sweden will be on every major operator’s radar as a key market to target post-regulation. That said it’s not up for debate that Kindred will begin on a very firm footing in terms of brand recognition and reputation and existing user base.

Kindred’s total active users in the fourth quarter was another record number, at 1.3 million, up from 1.15 million the previous year and 1.2 million the previous quarter. Bearing in mind it has taken on 32Red since Q4 16 this is not a hugely surprising statistic, but it was interesting to note Tjärnström comment that actives has risen at a far higher rate than average revenue per user in the period. He pointed to this as a measure of the growth being sustainable and in the current climate, with more pressure heaped on operators to limit excessive spending and promote responsible gambling, it is a very timely observation to make.

The size of the number of actives is also a guide to the scale of the Kindred business going into 2018 and shows just how much of a land grab it needs to make to continue growth at near its current rates. It’s perhaps not surprising then that management discussed ramping up marketing spend in the next 12 months to “a couple of percentage points below 30%”. With the World Cup approaching in the summer we should expect Kindred to really open the taps on the marketing front as we enter Q2 and place some real pressure on operators in the markets where it is most active.

But the markets where it is looking to expand hold the most interest. And the final unanswered question is just how big can Kindred get in the UK market where it has invested heavily both in acquisitions and marketing? One note of concern here though is its muted performance with Unibet in the UK so far and a seemingly weak Q4 from 32Red, with revenues only marginally up on Q3 and EBITDA down, although management said it was happy with performance in the period. It will be hoping 2018 will be a breakthrough year, following major investment in its horseracing product, and any significant success here would firmly establish the group as a true industry leader.