INSE: Virtual Sports Is The Best Of eSports And Sports Betting And It’s Coming To America. Inspired Dominates Yet Trades At A 50% Discount. Initiating Coverage With BUY Rating, $12 Price Target

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Inspired Entertainment is the world’s leading Virtual Sports provider. It also provides Server Based Gaming offerings primarily in Europe. The company is recognized for innovative games, high quality offerings and an award winning graphics design team.

OUR CALL

Inspired gives investors best-in-class exposure to two premier sectors of the gaming industry.  INSE is a B2B gaming technology company with two business segments, Server Based Gaming (SBG) and Virtual Sports. In SBG, the company supplies Video Lottery Terminals (VLTs), which have grown into dominance since the early 2000’s and have become a cash cow for suppliers and operators alike. INSE is also the market leading supplier of Virtual Sports, a fast-growing favorite for instant gratification-seeking Millennials in Europe.

 Expansion into new geographies is the growth driver.  Based in the UK (65% of revenue), INSE has a growing presence in Italy (14%) and Greece (10%), but our enthusiasm centers on the enormous new opportunity in North America.

 North America is the key expansion opportunity. We estimate the Virtual Sports opportunity in North America to be >$200M in annual revenues and expect Inspired to dominate this largely untapped market. The North American opportunity for INSE’s SBG business is >$1B and dominated by the “Big 4” suppliers. Before competing with them to supply large casinos, INSE aims to first target the “route” market, which we estimate is a ~$200M annual opportunity.

 Why we believe Inspired will be successful: 

·         Inspired’s new management team has the expertise required for a successful North American roll out. After bringing the company public in 2016 via his SPAC, Lorne Weil is now Executive Chairman of Inspired. Mr. Weil was Chairman of Scientific Games for 22 years and CEO for 19 years.

 ·         Parlaying success in Greece... The Greek VLT market is one of the fastest growing in the world and INSE's VLTs have been the highest grossing since the country began rolling them out in 2017. This, plus the ability to remotely upgrade games, is why INSE has been awarded more VLTs than any other supplier and has been selected as the sole provider of Virtual Sports.

 ·         …into the US market.  Inspired has started to provide two Virtual Sports games to the PA lottery, OR is testing the offering, and NJ and MI are rolling out online games.  Based on the economics of the PA deal, we estimate the average state lottery will provide ~$4M in revenue and ~$3M in EBITDA.

 INSE currently trades at 4x EBITDA… The UK market was disrupted by a May 2018 decision from the UK parliament to substantially reduce the maximum wager on B2 machines from £100 to just £2 in an effort to address gambling addiction. We expect this to impact revenues by ~$16M and EBITDA by ~$10M beginning in 2020.  The optics of no growth has depressed valuation. 

…but we see a path to a $20+ stock.  If the company has moderate success in rolling out Virtual Sports to US state lotteries, e.g. 7-12 additional lottery partners beyond PA and OR by 2021 (vs. the 2 we have modeled), the company could generate $84 to $100 million in adjusted EBITDA for 2021. An 8.0x multiple (vs. peer average of 8.5x) would result in a $20+ stock.

 Initiating with Buy rating and $12 price target.  At half of peer valuations and with the UK disruption no longer a looming risk, we believe INSE is considerably undervalued on our conservative assumptions with investors paying virtually nothing for the large “option” on success in the US market. Our initial $12 price target is based on only ~5x our 2020 EBITDA estimate of $60.8M.

 The summary or excerpt above should be read in conjunction with the attached full report.  Please see the disclosure information that isprovided at the end of the full report.

 Mike Malouf Senior Research Analyst 617-275-5175 This email address is being protected from spambots. You need JavaScript enabled to view it.

Eric Des Lauriers Research Analyst 617-275-5177 This email address is being protected from spambots. You need JavaScript enabled to view it.

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