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PARIS (S&P Global Ratings) June 16, 2023--Report Novomatic demonstrated sound operating performance in 2022, exceeding pre-pandemic levels, and its credit metrics have significantly improved. Revenue, at €2.86 billion, increased by 55% compared with 2021 and 10% compared with 2019.
Meanwhile, EBITDA increased to €746 million, 30% up on last year and 12% higher than in 2019. This was driven by a full recovery in both the gaming technology (up 33% versus 2021) and gaming operations (up 72% versus 2021) segments, as the restrictions in all Novomatic's markets were lifted last year. The group also made several small acquisitions that contributed to earnings growth and formed part of its international expansion strategy.
These included the acquisition of a majority share in the Italian HBG Group. In addition, the group reduced its gross financial debt by about €120 million by partly repaying its outstanding bond before its 2023 maturity date. Adjusted leverage improved to 2.2x, from 3.0x in 2021. Free operating cash flow (FOCF) after leases also recovered to €205 million in 2022 from €11 million in 2021, while FOCF to debt reached 20% from 8% over the same period.
S&P Global Ratings anticipates further earnings growth, despite rising regulatory pressure in Europe and the group's limited online presence. We expect the group will continue to roll out its expansion strategy by making small bolt-on acquisitions and investments in its core markets and businesses, notably in the online segment, which is growing fast and highly profitable, but contributed only about 9% of revenue in 2022. This is well below the 45%-90% that peers such as Aristocrat Leisure Ltd.,
Entain PLC, or Flutter Entertainment PLC generate through their online channels. Regulatory pressure is rising throughout Europe, especially in Germany, but we anticipate that Novomatic will harness its scale and leading position to help it absorb the impact. Therefore, we forecast that revenue will rise to €3.2 billion in 2023, although EBITDA margins could contract to about 24% in 2023, from 26.1% in 2022. Increased marketing expenses and rising energy and personnel costs could affect margins via the effect on adjusted EBITDA (estimated at €765 million for 2023).
We expect adjusted leverage to decrease toward 2.0x in 2023 and cash flow to remain at least stable. This is commensurate with management's target for reported leverage of below 2x (based on company-reported net leverage); this measure stood at 1.7x at the end of 2022. We expect FOCF after leases to stay relatively stable at about €200 million in 2023, as higher taxes offset higher earnings. Although cash generation has significantly improved in 2022, it is still weaker than that of peers, largely because of the product mix and lower exposure to the online segment. FOCF to debt is likely to remain at about 20%.
Legal proceedings pose reputational risks and could constrain Novomatic's ability to do business if current investigations lead to prosecution or other legal actions. The Austrian economic and corruption authorities' investigations into Novomatic, including current and former employees, executives, and its shareholders, continues. The allegations include attempting to illegally influence gaming legislation and licensing in Austria and seeking beneficial support from the government in return for favors. The investigations are connected to broader allegations surrounding a political scandal in Austria, which began in 2019, and are likely to continue for some time. We understand that Novomatic and named parties deny any wrongdoing and are defending themselves against all allegations, and we believe the investigations have so far had a minimal impact on Novomatic's business. However, the longer the investigations continue, the more likely they are to harm the group's reputation. We particularly note the potential reputational damage that could stem from legal proceedings against the company or connected parties. To maintain their gaming licenses, gaming operators rely on their good standing with regulators, as well as their reputation and that of their key personnel. To date, Novomatic has retained its good standing and reputation, but an escalation of the current legal issues would complicate matters.
The stable outlook indicates that we expect Novomatic's operating performance to remain sound in 2023 and that it will successfully integrate its latest bolt-on acquisition and invest in its core businesses, enabling our adjusted leverage metric to drop toward 2.0x and FOCF to debt to remain about 20%.
We could downgrade the company if:
- Changes in regulatory, competitive, or economic conditions in Novomatic's key markets hampered profitability, such that adjusted debt to EBITDA deteriorates toward 3x;
- Cash flow generation underperforms our base case, such that adjusted FOCF to debt falls below 15%;
- The company pursued material debt-financed acquisitions or shareholder returns, such that the leverage ratios exceed our target ratio over a prolonged period, and the group appears to deviate from its financial policy target; or
- The investigations reveal unethical behavior, lead to prosecution or other legal actions, or trigger significant financial penalties. Although it is not our base-case scenario, we could consider lowering the rating if the investigations are prolonged enough to taint Novomatic's reputation or standing in operating or financial markets.
We view an upgrade as unlikely while the investigations remain open. Over the longer term, we could raise the rating on Novomatic, if:
- The investigation is terminated with no detrimental outcome for the group;
- The group continues to expand its earnings base, gaining operational scale, diversifying its product offering, and extending its geographic reach, such that it consolidates a significant FOCF after lease generation; and
- The company increases its S&P Global Ratings-adjusted FOCF to debt sustainably above 25% while maintaining adjusted leverage well below 2x, and commits to a company-reported net leverage ratio comfortably below this level.
ESG credit indicators: E-2, S-3, G-4
Social factors are a moderately negative consideration in our credit rating analysis of Novomatic. Like most gaming companies, Novomatic is exposed to regulatory and social risks and the associated costs related to increasing player health and safety measures, prevention of money laundering, and changes to gaming taxes and laws.
Governance factors remain a negative consideration. We note the ongoing investigation into allegations of potential corruption and bribery involving the company and certain employees. Novomatic denies involvement, is defending its position, and is cooperating with authorities. We also note that as a privately held company, the control and majority ownership of the group is held predominately by its founding owner, and we believe that the company is likely to prioritize the interests of its controlling shareholder.
