We look at valuation for FL Entertainment using three distinct methodologies:

• The first is a DCF-based valuation analysis based on a LT growth rate of 3% and a discount rate of 10%. This implies a fair value of €14.1 per share.
• The second is a comparative multiple analysis looking at both EV/Sales and EV/EBITDA in the context of sales growth vs. a range of content production and online gambling peers. This is slightly more complicated given the wide range implied by the EV/Sales and EV/EBITDA approaches, but we note the mid-point of this range is c.€9.0 per share.
• The third is a SOTP-based analysis that values the content production assets separately from the online gaming assets, all using peer group multiples. Our SOTP implies a fair value of €12.4 per share.

The simple average of these methodologies is €11.9 which we use as the basis for our €11.5 per share price target.

FL Entertainment screens as High Risk in our quantitative model, driven in part by its short trading history since listing. This said, for fundamental reasons we also think a High Risk rating is justified.

The following risks, listed in order of importance, could negatively impact our forecasts and the achievement of our target price:  

• Macro Uncertainty – Although the recent experience of the pandemic would suggest both Content Production and Sports Betting should be fairly resilient in the event of significant macro uncertainty, we can’t exclude the risk that reduced consumer confidence and disposable income might have a knock on effect to FL Entertainment’s operations.  

• Reliance of Key Content Brands/Talent – Although the concentration of the content production business in terms of revenue by franchise/IP is fairly low (top 20 shows represent 20% of revenue), there are certain titles where a reduction in popularity could have an impact on group growth. Likewise both at the group level but also across its businesses, FL Entertainment is heavily reliant on key talent. Higher than expected staff turnover could have a disadvantageous impact on growth/returns.  

• Competitive Risk – FL Entertainment operates in highly fragmented and competitive markets and a lot of its relationships on the content production side, in particular with broadcasters/streaming platforms, are non-exclusive in nature. An increase in competition across the landscape, or a move to more exclusive arrangements could have a negative impact on FL Entertainment’s business.   

• Regulatory Risk – Sports betting and online gambling are both areas where politicians and policymakers have been very active in terms of regulation. Although on one hand regulation can be helpful in terms of creating a barrier to entry in some of the group’s key markets, there is also the potential risk that changes in regulation could have a deleterious impact on consumer demand, margins (via increased revenue taxes), or, alternatively, impact monetization/cost efficiency  

• Currency Volatility – As a business that operates across borders and has a meaningful EM exposure, it generates revenues in a number of currencies. To the extent that EM currencies tend to exhibit more volatility, this may enhance the cyclicality of the business around macro shocks, even if, ultimately, we anticipate this risk will be translational for the main part.

• Reduced Voting Rights for Minority Shareholders – FL Entertainment has a corporate governance structure whereby the group has a ‘triple voting rights structure’ to protect the interests of the controlling shareholders. This means minority shareholders will have reduced control over management decisions.  

On the positive side, we would identify the following factors that could positively impact either forecasts or perceptions of valuation: (1) scope for faster growth in content production markets driven by inflation/geographical expansion; (2) faster than expected growth in online gambling/sports betting markets driven by greater market penetration; (3) scope for continued consolidation of both content production and online gambling markets which may drive increased returns as well as multiple upside.