Q1 Beats: Delivering on Its Strategy

Significant Upside Potential From These Elevated Levels

Poised for Profitability

Another Beat And Raise Quarter

Michael Kupinski

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Codere Online Luxembourg S.A.

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Investment Appraisal 
The company reported strong Q1 results, having lowered its marketing spend to focus on high quality user growth and streamline the path toward profitability. Net gaming revenue (NGR) of â‚¬39.5 million and an adj. EBITDA loss of â‚¬2.3 million, compared favorably with our forecast of â‚¬33.5 million and a loss of â‚¬9.2 million, respectively. Figure #1 Q1 Results illustrates how the results compared with our estimates. Net gaming revenue was up 55% over the prior year period and up 5% sequentially, despite a difficult Q4 comp that was bolstered by the World Cup. Notably, customer quality is improving, with higher spend per active user in the quarter. 
Despite the companyâ€™s decreased marketing spend, net gaming revenue (NGR) in Mexico continued to grow in Q1. NGR of â‚¬17.6 million was up 75% while the adj. EBITDA loss of â‚¬2.0 million was a far cry from the â‚¬7.7 million loss in the prior year period. The strong results in Mexico were driven by a 42% increase in active users, coupled with an increased spend per active user. In our view, the strength of the Codere brand in the country is playing an important role in the active user growth. Note that Codereâ€™s parent, Codere Group, is an established casino brand in Mexico, with physical locations. We believe this is a noteworthy competitive advantage for the company, especially as it dials back marketing spend to focus on profitability. &nbsp;&nbsp;
Operations in Spain made a meaningful cash flow contribution in the quarter, with â‚¬6.1 million in adj. EBITDA. The 138% adj. EBITDA growth rate was well above the 40% NGR growth in the quarter, indicating robust margin expansion. Importantly, the company pays a lower gaming tax rate in Spain than in other regions. Moreover, a significant portion of its platform and technology costs are fixed, resulting in meaningful operating leverage in Spain, which contributed to the strong cash flow performance. We anticipate that Spain will continue to provide solid cash flow, helping to offset the marketing spend in the companyâ€™s expansion markets. Notably, the increasingly stringent regulatory environment in Spain does carry the silver lining of being a barrier to new competition in the country. 
Management announced that the company had withdrawn from the licensing process in the Province of Cordoba, Argentina, one of the companyâ€™s key growth markets. The withdrawal was due to high upfront licensing fees and a disadvantageous tax structure in the region, which diminished the economic viability of operating in the province. There was, however, good news in Argentina, as the company was one of 5 operators awarded a license in the Province of Mendoza. The company is planning to launch in Mendoza in the second half of the year. In our view, the withdrawal from the licensing process in Cordoba is a benign setback, especially given the companyâ€™s plans to launch in Mendoza later this year. Importantly, the Province of Buenos Aires is the largest opportunity in Argentina, which is where management is prioritizing the companyâ€™s licensing efforts. In the meantime, launching in surrounding provinces, such as Mendoza, will help to build the brand in the country. &nbsp;&nbsp;
Management reiterated full year 2023 guidance of net gaming revenue (NGR) of â‚¬140-â‚¬150 million and an adj. EBITDA loss of â‚¬20-â‚¬30 million, stipulating that results are now expected to be on the high end of the ranges. Management also reiterated that the company is expected to be adj. EBITDA positive for the full year 2024. We are maintaining our forecast for NGR and adj. EBITDA for the balance of the quarters of 2023 and flowing through the strong Q1 results to our full year forecast. As such, we are raising our NGR estimate from â‚¬145.5 million to â‚¬151.5 million and our adj. EBITDA forecast from a loss of â‚¬25.4 million to a loss of â‚¬18.5 million, illustrated in Figure #2 Forecast Revisions. While our forecast is slightly above managementâ€™s guided range, we believe the favorable momentum could indicate upside later in the year. We are maintaining our 2024 forecast of â‚¬166 million in NGR and adj. EBITDA of â‚¬1.5 million. We believe our 2024 forecast should be viewed as conservative, given the prospect for strong momentum building in 2023. &nbsp;&nbsp;&nbsp;
As of March 31, the company had â‚¬49.4 million in cash and no long-term debt. The company is prioritizing its core markets of Spain, Mexico, and Argentina (where expansion efforts are underway) while it builds towards its goal of positive cash flow generation in 2024. Given that we anticipate a cash burn of â‚¬18.5 million in 2023, the company appears to have ample cash until it swings toward cash flow positive.
Near current levels, the CDRO shares trade at 0.4 times enterprise value to our 2023 revenue forecast, below peers, illustrated in Figure #3 iGaming Comparables. Despite a capital restrictive environment that has posed challenges for some of the companyâ€™s peers, Codere Online does not appear to be in need of funding to execute its growth strategy. As such, we believe the company is trading at a multiple that does not reflect the its enviable liquidity position and path to profitability. Our price target of $9 reflects a target EV/2023 revenue multiple in line with peers, at roughly 2 times, which we believe is more in line with the companyâ€™s growth prospects. The shares are rated Outperform.

 
Figure #1 Q1 Results&nbsp;
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/CDRO_20230512-01.jpg" style="width: 439px;height: 460px" />
Source: Company filing &amp; Noble estimates&nbsp;
 &#8212;&#8212;&#8212;- page break &#8212;&#8212;&#8212;- 
 
Figure #2 Forecast Revisions
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/CDRO_20230512-02.jpg" style="width: 358px;height: 350px" /> 
Source: Company filings &amp; Noble estimates
 
Figure #3 iGaming Comparables&nbsp; 
 
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/CDRO_20230512-03.jpg" style="width: 650px;height: 270px" /> 

Source: Company filings &amp; Noble estimates

Codere Online Luxembourg S.A. (CDRO)

Another Quarter Of Favorable Execution

Fundamental Analysis:

Rating: Log in to view

Q1 Beats: Delivering on Its Strategy (CDRO)

Significant Upside Potential From These Elevated Levels (CDRO)

Poised for Profitability (CDRO)

Another Beat And Raise Quarter (CDRO)

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