PORTFOLIO COMPOSITION – CONVICTION POSITION
One of our core, long, conviction, positions is a leisure gaming technology company named Newgioco Group Inc. (OTCQB: NWGI). Newgioco has both land-based and online gaming in sports betting and casino games. Investment Highlights: Proven operations in Italy and now expanding globally; track record of strong operating results with 3 year CAGR (compounded annual growth rate) of 92% and profitable on a non-GAAP basis; Recent U.S. Supreme Court decision (May 2018) legalizing sports betting in the United States creating a secular 15 year U.S. growth opportunity; Company is capturing increasing market share across 3 continents of this expanding global market opportunity.
The most compelling aspect of the Company is that it possesses a robust, highly scalable, sports betting engine (think operating system for wagering) with dynamic risk control. With this technology, betters can cast a very wide range of sports bets, from Formula 1 to tennis and everything in between, in real time, while protecting the casino with dynamic and powerful risk controls. This system is not only used for Newgioco’s own sports betting operations and is now being offered to other casinos as a SaaS (software-as-a-service) model. This highly disruptive technology allows casinos to capture higher margin business, at 12-15% gross margins vs. their normal 3-4% margins for casino and poker games. This is a huge improvement to casinos’ margin profile. This also translates to significantly higher margins for Newgioco.
The Company began its operations in Italy and levering its success in Italy, expanded into Mexico, Central America, South America, a few countries in Africa and Turkey, via its recent acquisition. Last week it began expanding into the U.S. with it’s publicly announced distribution deal with a distributor in Montana.
We acquired our position via participation in the Company’s convertible debenture offering. It was a compelling offering for us. The debenture yields a 10% annual dividend. It can be converted to equity at any time. The debenture also includes 20.8% stock coverage (for every unit of debenture). It also includes 108.25% warrant coverage. Additionally we possess creditor protection by holding the debenture until we convert.
From a summary valuation perspective, based upon our own internal calculations and our projections for the Company’s 2019 EV (enterprise value) and EBITDA (earnings before interest, taxes, depreciation, amortization), the
Company’s equity is currently trading at approximately 0.6X 2019 EV/Sales, with the average comparable companies in the gaming sector, trading at 2.4X 2019 EV/Sales. In terms of EV/EBITDA, our internal projections reflect that the equity is trading at 2.2X 2019 EV/EBITDA with the comparables trading at 8.6X 2019 EV/EBITDA. By all measures, the Company is worth at least 4X its current equity price and eventually much more. This is one of the most compelling companies we have identified and invested in since we started the Fund almost 12 months ago. From a return risk profile perspective, we believe we have $0.15 of downside and $3.00 of upside; an exceedingly compelling return risk profile.