Q4/16: Waiting on margin improvement Lowering Target Price ...

NYX Gaming Group

Gaming Technology

Canadian Equity Research 26 April 2017

Kevin Wright | Analyst | Canaccord Genuity Corp. (Canada) | kfwright@ | 1.416.869.7294 Taylor Arnold | Associate | Canaccord Genuity Corp. (Canada) | tarnold@ | 1.416.687.6359

BUY unchanged

PRICE TARGET from C$4.00 Price (25-Apr) Ticker

C$3.00

C$1.11 NYX-TSXV

52-Week Range (C$):

0.97 - 2.98

Avg Daily Vol (000s) :

277.9

Market Cap (C$M):

120

Shares Out. (M) :

108.2

Total Return to Target (%) :

170.3

Net Debt (Cash) (C$M):

296.8

Enterprise Value (C$M):

417

Last Reported Quarter:

Q4/16

Note: Net debt and EV above are based on the most recent financial results. Valuation metrics are based on CG 2017E.

FYE Dec Sales (C$M) Previous EBITDA Adj (C$M) Previous EPS Adj (C$) Previous EV/Sales (x) EV/EBITDA (x) P/E (x)

3.5

2016A 163.7

165.0

42.7

44.5 (0.18)

2.4 9.0 NM

2017E 244.0

235.2

75.4

84.0 0.04

0.14 1.6 5.1 27.8

2018E 269.1

-

91.8

0.23

1.4 4.2 4.9

3

2.5

2

1.5

1

0.5

May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17

NYX S&P/TSXVentureComposite(rebased) Source:FactSet

Priced as of close of business 25 April 2017

NYX Gaming is a long tenured B2B online gaming software and content supplier that has grown into one of the leaders in content ownership following the $150 million acquisition of Cryptologic and Chartwell from Amaya and B2B sports upon the acquisition of OpenBet.

Lowering Target Price

Q4/16: Waiting on margin improvement

NYX Gaming released its Q4/16 results with revenue a bit soft and adjusted EBITDA shy of consensus as margin pressure continues amid some gross margin compression in content and currency impacts. The company had previously communicated ongoing margin weakness so this is not a complete surprise, though the extent of sequential margin erosion was unexpected. We were encouraged by management commentary relating to Q1/17E which ended more than three weeks ago and supports our view that the stock could re-rate later in 2017 if management executes. We would characterize the quarter as somewhat underwhelming with a cautiously optimistic outlook as the company exits a tough 2016.

We have maintained our BUY rating on the stock. However, we have reduced our 2017E EBITDA assumptions to $75.4m (from $84.0m) on lower margin expectations. In addition, due to peer group multiple compression we have reduced our target multiple to 10.5x (from 11.0x). These changes reduce our target to C$3.00 (from C$4.00).

Investment highlights

? Growthy core; margin pressure persists; changes to estimates. NYX Gaming

delivered good revenue growth just shy of consensus expectations. We expected that adjusted EBITDA margin would remain under pressure, as in Q3/16, though a 300bp erosion was worse than we expected. Management allayed concerns that sub-30% margins are the new normal as it highlighted that Q1/17E results have started to see margin expansion and that improvement is expected throughout 2017E. We have reduced our 2017E adjusted EBITDA estimates as margins remain weak but are expected to climb back modestly in 2017E. We now expect adjusted EBITDA of $75.4 million (30.9% margin) from $84.0 million (35.7%).

? Early results are encouraging. Q4/16 reporting pushed to late-April enabled

communication of sequential margin improvement in Q1/17E. Management pointed to strength in the core business, progress on the OpenBet and more record-setting performance at The Grand National. Q1/17E margins have rebounded sequentially but remain below the 30% level with positive commentary on expansion through the year. We are cautiously optimistic on continued margin improvement in the coming year.

? Pick away while waiting for evidence of a trend. We have highlighted in prior notes

that we believe investors want to see at least two quarters to support a trend. We think that Q1/17E will be the start of the trend with Q2/17E and Q3/17E acting as the potential catalysts for a re-rating of NYX stock. For investors with a long investment horizon we think that this is a good level to pick away ahead of Q2 and Q3 reporting; management sounds confident that adjusted EBITDA margins are turning a corner.

Valuation

We consider NYX Gaming to be an undervalued stock and we would be unsurprised if potential buyers are kicking the tires. We have reduced our adjusted EBITDA outlook on weaker margins; we remain BUY rated with a C$3.00 target (from C$4.00) based on a multiple of 10.5x 2017E EV/EBITDA, a discount to peers at 11.4x. The stock trades at 5.1x 2017E EV/EBITDA. We view the steep discount to peers as unwarranted given its growthy content business, long-tenured (and sticky) OpenBet customers, and a management team with a high proportion of ownership.

Canaccord Genuity is the global capital markets group of Canaccord Genuity Group Inc. (CF : TSX) The recommendations and opinions expressed in this research report accurately reflect the research analyst's personal, independent and objective views about any and all the companies and securities that are the subject of this report discussed herein.

For important information, please see the Important Disclosures beginning on page 5 of this document.

NYX Gaming Group

Lowering Target Price

Q4/16: Waiting for margin improvement

NYX Gaming financial results were somewhat underwhelming against consensus, though it is worth highlighting that the company again posted strong growth in its core business and reported a healthy sales backlog for OGS deployments and to a lesser degree its OPS product. Revenue in Q4/16 and 2016 showed strong YoY organic growth rates of 31.2% and 46.8%, respectively, which is impressive in our view. However, adjusted EBITDA margin was under pressure for a second consecutive quarter as gross margin compression in casino content and a weakened GBP at OpenBet contributed to 300bps of margin compression. In the context of a somewhat underwhelming quarter financially and a steep run-up in the stock price the day prior to reported results, we are unsurprised that the stock gave back the +10% gain seen on April 24.

Figure 1: NYX Gaming Q4/16 results

Q4/16A

QoQ %

Cons Est

CG Est

QoQ %

Revenue (000's)

54,508

Gross Profit

48,142

Gross Margin (%)

88.3%

Adjusted EBITDA

12,920

Adjusted EBITDA margin

23.7%

Adjusted EPS - Diluted

(0.02)

Source: Company Reports, Canaccord Genuity Research

0.3% (1.9%) (1.9%) (10.9%) (3.0%) NMF

55,500 49,395

89.0% 14,300

25.8% (0.01)

(992) (1,253)

(0.7%) (1,380)

(2.1%) (0.01)

55,817 49,119

88.0% 14,729

26.4% (0.02)

2.7% 0.1% (2.3%) 1.6% (0.3%) NMF

(1,309) (977) 0.3%

(1,809) (2.7%) 0.00

Though Q4/16 results were underwhelming, it is worth highlighting that preliminary Q1/17E results indicate that management is starting to claw back some of the margin erosion observed in Q3/16 and Q4/16. At the midpoint of Q1/17E guidance the company sits at an adjusted EBITDA margin of ~27%, better than a 3% improvement over Q4/16 amid 4.5% to 11.9% topline sequential revenue growth, based on the guidance goalposts provided by NYX management. The company also indicated that its sales pipeline is active with 22 OGS and 2 OPS deployments in the hopper with 16 new deals signed in the quarter and it launched 14 OGS new sites.

We believe that upcoming potential catalysts for the stock largely focus on the financial performance of the company. Investors have already had a peek at Q1/17E performance and full results are likely to be released within a month; the next event following Q1/17E results that investors can use to glean whether management is executing is Q2/17E which is likely an August 2017 event. The investor deck that accompanied the conference call pointed to an effort to simplify the capital structure which could be a modestly positive event. We would be remiss if we did not point to the low valuation of NYX and the large number of reportedly interested parties in OpenBet, so another potential catalyst could be an approach for NYX and its B2B assets; at 5.1x 2017E EV/EBITDA the stock trades at a steep discount to peers.

Changes to estimates. While Q4/16 revenue was moderately below our expectations we have broadly increased our 2017E and 2018E top line estimates. This reflects growth in the underlying OpenBet segment, which was consistent with our forecast, and the company's Q1/17E guidance range that equates to sequential growth of +8% at the mid-point. Adjusted EBITDA margin in Q4/16 of 23.7% was well below our estimate of 26.4%; therefore, we have lowered our adjusted EBITDA estimate in 2017E to reflect a slower margin rebound throughout the year. Our Q1/17E revenue and adjusted EBITDA estimates are now just below the mid-point of management guidance which expects Q1/17E revenue of $57.0-$61.0 million and adjusted EBITDA of $15.0-17.0 million.

2 Buy unchanged Target Price C$3.00 from C$4.00 | 26 April 2017

Gaming Technology 2

NYX Gaming Group

Lowering Target Price

Figure 2: Changes to estimates

CG forecast Revenues (000's) Revenue growth YoY Gross margins Adjusted EBITDA Adjusted EBITDA margin Adjusted EPS

Q1/17E Q1/17E (New) (Previous)

58,711 198.8%

88.6% 15,920 27.1%

(0.02)

54,843 179.1%

88.3% 16,879 30.8%

(0.01)

2017E (New)

2017E (Previous)

243,986 49.0% 89.2% 75,351 30.9% 0.04

235,177 42.5% 88.9% 83,998 35.7% 0.14

2018E (New)

269,135 10.3% 89.5% 91,821 34.1% 0.23

Consensus forecast

Revenues (000's)

55,900

Revenue growth YoY

184%

Gross margins

N/A

Adjusted EBITDA

15,600

Adjusted EBITDA margin

27.9%

Adjusted EPS

0.02

Source: Company Reports, Bloomberg, Canaccord Genuity Estimates

233,200 42.4% 89.5% 78,360 33.6% 0.11

247,750 6.2%

90.0% 91,300 36.9%

0.18

Valuation. We consider NYX Gaming to be an undervalued stock and we would be unsurprised if potential buyers are kicking the tires. We have reduced our adjusted EBITDA outlook on weaker margins; we remain BUY rated with a C$3.00 target (from C$4.00) based on a multiple of 10.5x 2017E EV/EBITDA, a discount to peers at 11.4x. The stock trades at 5.1x 2017E EV/EBITDA. We view the steep discount to peers as unwarranted given its growthy content business, long-tenured (and sticky) OpenBet customers, and a management team with a high proportion of ownership.

3 Buy unchanged Target Price C$3.00 from C$4.00 | 26 April 2017

Gaming Technology 3

NYX Gaming Group

Lowering Target Price

Figure 3: Comparable valuation analysis

Company

TICKER

Market Cap Price

($ mm)

EV/S C2016 C2017E C2018E

EV/EBITDA C2016 C2017E C2018E

C2017E/C2016

P/E

YoY Growth

C2016 C2017E C2018E Revenue EBITDA EPS

Gaming and Lottery Technology Vendors

888 HOLDINGS PLC

888

? 2.78

ADESSO AG

ADN1

54.08

AINSWORTH GAME TECHNOLOGY LT AGI

A$ 1.88

ARISTOCRAT LEISURE LTD

ALL

A$ 19.30

EVOLUTION GAMING GROUP

EVO Kr 380.00

INTERNATIONAL GAME TECHNOLOG IGT

$ 21.80

INTRALOT S.A.-INTEGRATED LOT

INLOT

1.25

KAMBI GROUP PLC

KAMBI Kr 86.50

NETENT AB NYX GAMING GROUP LTD1

NETB NYX

Kr 67.50 C$ 1.11

PLAYTECH PLC

PTEC

? 9.47

SCIENTIFIC GAMES CORP-A

SGMS

$ 22.75

TATTS GROUP LTD

TTS

A$ 4.45

A v e r a ge

Online Gaming Operators 32RED PLC 888 HOLDINGS PLC AMAYA INC1 BETSSON AB GVC HOLDINGS PLC JACKPOTJOY PLC KINDRED GROUP PLC LADBROKES CORAL GROUP PLC PADDY POWER BETFAIR PLC STRIDE GAMING PLC WILLIAM HILL PLC A v e r a ge

TTR 888 AYA BETSB GVC JPJ KINDSDB LCL PPB STR WMH

? 1.96 ? 2.78 C$ 23.50 Kr 78.70 ? 7.46 ? 5.63 Kr 95.00 ? 1.29 ? 87.60 ? 2.29 ? 3.02

Land-based Gaming Operators BOYD GAMING CORP LAS VEGAS SANDS CORP MGM RESORTS INTERNATIONAL MONARCH CASINO & RESORT INC PENN NATIONAL GAMING INC PINNACLE ENTERTAINMENT INC RANK GROUP PLC WYNN RESORTS LTD A v e r a ge

BYD LVS MGM MCRI PENN PNK RNK WYNN

$ 22.72 $ 58.47 $ 29.35 $ 29.25 $ 18.75 $ 20.60

? 2.13 $ 118.22

Overall Average

1 - Based on CG estimates Source: Company Reports, Canaccord Genuity Estimates

? 1,000 334

A$ 621 A$ 12,324 Kr 13,669

$ 4,413 199

Kr 2,578 Kr 13,937

C$ 120 ? 3,004 $ 2,005 A$ 6,535

? 167 ? 1,000 C$ 4,867 Kr 9,614 ? 2,210

? 415 Kr 21,862

? 2,466 ? 7,369

? 154 ? 2,592

$ 2,572 $ 46,324 $ 16,861

$ 512 $ 1,711 $ 1,162

? 834 $ 12,049

2.1x 1.3x 2.3x 6.3x 12.4x 2.4x 0.5x 4.3x 10.7x 2.4x 4.5x 3.5x 2.7x 4.3x

2.5x 2.1x 5.0x 3.0x 3.0x 2.4x 3.5x 2.0x 4.8x 3.0x 1.9x 3.0x

2.6x 4.8x 3.4x 2.4x 2.1x 2.2x 1.1x 4.5x 2.9x

3.2x

2.0x 1.1x 2.0x 5.5x 8.3x 2.5x 0.4x 3.8x 9.2x 1.6x 3.7x 3.3x 2.5x 3.5x

2.1x 2.0x 4.7x 2.6x 2.8x 2.1x 2.9x 1.4x 4.3x 1.6x 1.8x 2.6x

2.3x 4.5x 2.9x 2.3x 2.1x 2.0x 1.1x 3.5x 2.6x

2.8x

1.9x 1.0x 1.9x 5.1x 6.7x 2.4x 0.5x 3.2x 8.0x 1.4x 3.4x 3.2x 2.5x 3.2x

1.8x 1.9x 4.5x 2.4x 2.7x 2.0x 2.5x 1.4x 3.9x 1.4x 1.7x 2.4x

2.3x 4.3x 2.7x 2.2x 2.1x 1.9x 1.1x 3.4x 2.5x

2.6x

12.6x 14.9x 8.0x 17.4x 32.0x 7.1x 4.3x 14.9x 23.6x 9.0x 10.8x 9.0x 15.9x 13.8x

11.7x 12.4x 6.7x 14.0x 20.7x 7.4x 4.0x 14.6x 19.8x 5.1x 9.0x 8.4x 14.9x 11.4x

10.6x 10.9x 6.1x 12.9x 17.0x 7.1x 3.9x 10.2x 16.9x 4.2x 8.2x 8.1x 14.4x 10.0x

13.7x 31.4x 14.8x 32.2x NMF 10.9x NMF 30.6x 33.4x NMF 12.0x NMF 26.8x 22.9x

12.0x 22.5x 12.2x 24.3x NMF 10.2x NMF 35.4x 27.9x 27.8x 9.7x NMF 25.9x 20.8x

10.7x 19.4x 10.5x 21.8x NMF 9.4x NMF 20.5x 23.9x 4.9x 8.8x NMF 24.7x 15.5x

15.2x 12.6x 11.1x 10.7x 13.1x 6.2x 16.7x 8.4x 18.7x 12.2x 9.1x 12.2x

10.0x 11.7x 10.3x 9.8x 10.3x 6.0x 12.4x 8.1x 15.7x 7.2x 8.6x 10.0x

8.6x 10.6x 9.5x 10.0x 8.9x 5.6x 12.3x 7.1x 13.9x 6.7x 8.1x 9.2x

20.8x 13.7x 9.2x 12.6x 19.5x 8.9x 22.6x 14.5x 19.5x 12.3x 14.2x 15.3x

13.3x 12.0x 8.6x 12.3x 11.1x 10.0x 17.3x 11.5x 16.3x 9.8x 12.5x 12.2x

11.2x 10.7x 7.3x 12.8x 9.0x 9.0x 17.6x 9.1x 14.4x 9.6x 11.5x 11.1x

10.3x 14.2x 13.2x 9.4x 7.7x 7.9x 6.8x 17.4x 10.9x

12.1x

9.3x 13.1x 11.5x 8.7x 7.6x 7.3x 6.4x 14.5x 9.8x

10.3x

8.9x 12.6x 10.2x 8.0x 7.3x 7.2x 6.1x 13.3x 9.2x

9.2x

27.4x 24.8x 25.3x 21.3x 19.2x 18.6x 13.9x 31.3x 22.7x

20.4x

19.9x 22.9x 24.1x 20.0x 29.7x 26.5x 12.9x 28.2x 23.0x

18.4x

16.4x 21.3x 19.0x 18.7x 18.4x 25.3x 11.9x 23.8x 19.4x

14.9x

6% 15% 12% 15% 50% -4% 4% 12% 17% 49% 20% 3% 4% 16%

22% 6% 6% 15% 8% 11% 23% 36% 11% 88% 4% 21%

10% 7% 16% 4% 1% 9% 3% 27% 10%

15%

8% 20% 19% 25% 55% -4% 6% 2% 19% 76% 20% 7% 6% 20%

14% 40% 21% 33% 57% 7% 37% -14% 20% 122% 24% 45% 4% 31%

51% 8% 7% 8% 27% 3% 35% 4% 19% 68% 6% 21%

56% 14% 7% 2% 76% -11% 31% 26% 20% 25% 14% 24%

10% 9% 15% 9% 1% 8% 5% 20% 10%

18%

38% 8% 5% 7% -35% -30% 8% 11% 2%

21%

from 52wk

Hi gh

Low

-3% -9% -29% -1% -3% -32% -10% -43% -29% -63% -1% -6% -6% -18%

52% 143% 17% 99% 68% 31% 53% 17%

7% 16% 33% 188% 26% 58%

-3% -3% -3% -30% -1% -15% -5% -22% -13% -20% -15% -12%

102% 52% 52% 25% 48% 7% 30% 22% 34% 6% 28% 37%

0% -8% -4% -3% -1% -1% -17% -1% -4%

-13%

35% 41% 39% 58% 57% 112% 18% 43% 50%

48%

Price Change (%) YTD 3 Month 6 Month 1 Year

32% 18% -11% 25% 46% -15% 24% -35% -4% -11% 15% 63% -1% 11%

32% -8% 1% 26% 32% -22% 9% -16% -7% 1% 17% 34% 4% 8%

31% 25%

4% 27% 43% -24% -1% -35% -6% -33%

8% 76% 10% 10%

34% 132% -17%

97% 26% 20% 23% -42% -19% -58% 23% 123% 18% 28%

36% 32% 24% -10% 20% N/A 11% 11%

0% 1% 4% 13%

43% 32% 29% -1% 28% -9% 24%

4% 10%

3% 14% 16%

47% 31% 31% -13% 14% N/A 20% -4%

3% -12%

4% 12%

62% 34% 38% -27% 41% N/A

2% 7% 5% -4% -7% 15%

13% 9% 2%

13% 36% 42%

9% 37% 20%

13%

11% 3% -1%

23% 34% 37% 11% 23% 18%

12%

21% 1%

13% 26% 40% 67% 14% 24% 26%

14%

12% 28% 35% 54% 11% 87% -12% 30% 31%

24%

2 Buy unchanged Target Price C$3.00 from C$4.00 | 26 April 2017

Gaming Technology 4

NYX Gaming Group

Lowering Target Price

Appendix: Important Disclosures

Analyst Certification

Each authoring analyst of Canaccord Genuity whose name appears on the front page of this research hereby certifies that (i) the recommendations and opinions expressed in this research accurately reflect the authoring analyst's personal, independent and objective views about any and all of the designated investments or relevant issuers discussed herein that are within such authoring analyst's coverage universe and (ii) no part of the authoring analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the authoring analyst in the research.

Analysts employed outside the US are not registered as research analysts with FINRA. These analysts may not be associated persons of Canaccord Genuity Inc. and therefore may not be subject to the FINRA Rule 2241 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Sector Coverage

Individuals identified as "Sector Coverage" cover a subject company's industry in the identified jurisdiction, but are not authoring analysts of the report.

Investment Recommendation Date and time of first dissemination: April 26, 2017, 06:22 ET Date and time of production: April 26, 2017, 06:22 ET Target Price / Valuation Methodology:

NYX Gaming Group - NYX

Our target price is based on 10.5x 2017E EV/EBITDA.

Risks to achieving Target Price / Valuation:

NYX Gaming Group - NYX

Risks to our outlook include the company's ability to acquire and retain customers in the highly competitive and fragmented gambling industry. Other risks include key executives and managers could leave or retire from the firm, the macroeconomic environment could deteriorate straining end customers. Additionally, NYX Gaming Group has partnered with third parties for content and has formed a joint venture in the US. These agreements are subject to cancellation or suspension due to unforeseeable events. NYX Gaming may not be able to find a suitable replacement vendor which could be an impediment to its ongoing business. Gaming remains a regulated industry which is subject to change from time to time which could impact NYX Gaming Group's business.

Distribution of Ratings:

Global Stock Ratings (as of 04/26/17)

Rating

Coverage Universe

#

%

Buy

575

60.85%

Hold

275

29.10%

Sell

27

2.86%

Speculative Buy

68

7.20%

945*

100.0%

*Total includes stocks that are Under Review

IB Clients %

39.48% 18.18% 11.11% 69.12%

Canaccord Genuity Ratings System BUY: The stock is expected to generate risk-adjusted returns of over 10% during the next 12 months.

HOLD: The stock is expected to generate risk-adjusted returns of 0-10% during the next 12 months.

SELL: The stock is expected to generate negative risk-adjusted returns during the next 12 months.

NOT RATED: Canaccord Genuity does not provide research coverage of the relevant issuer. "Risk-adjusted return" refers to the expected return in relation to the amount of risk associated with the designated investment or the relevant issuer. Risk Qualifier SPECULATIVE: Stocks bear significantly higher risk that typically cannot be valued by normal fundamental criteria. Investments in the stock may result in material loss.

Buy unchanged Target Price C$3.00 from C$4.00 | 26 April 2017

Gaming Technology 5

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