ZEAL has openend a new chapter of growth stemming from rising monetization in the Lottery business and also the Games business from FY'24e onwards. In sum, we expect sales growth of 25% for this year and a sales CAGR 23-26e of 17%, here's why:

Elevated lottery sales growth: ZEAL has relied on a more or less constant lottery billings margin (sales in % of billings) over the last years (12-13%), meaning that lottery sales grew more or less proportionate to lottery billings. Billings continue to grow with c. 8-12% p.a. thanks to ZEAL's persistent user intake driven by the online transformation. Now, for the first time, sales look set to outgrow billings (see p. 2 for details), as ZEAL takes steps to significantly increase the billings margin, which should lead to gross margin of more than 15% (+2pp) starting in H2'24e. In general, we regard ZEAL's sales as recurring, as average lottery expense per user (APPU) grows slightly every year (+ 4% yoy in '23), while  ZEAL also benefits from virtually no churn (below 5%).

How does ZEAL improve the lottery billings margin? First of all, by introducing a new social lottery, next to freiheit+, where ZEAL generates higher margins than in DLTB lottery brokerage (mix effect). Secondly, ZEAL aims to steer customer behaviour to higher margin lottery products (e.g., lottery clubs & play-with-friends) by actively placing and promoting the products on the platforms (mix effect). However, we regard the third measure as the most important one, as it can happen overnight: selective service fees (planned for H2'24e). As the lottery customers are extremely loyal and hence price insensitive, it allows for ZEAL to charge some players selectively higher services fees than other players (price effect).

Operating leverage in action: While the billings margin improvements requires additional marketing expenses and initial set-up costs for the new social lottery in the short-term, should lead to a flat EBITDA margin of 28% for FY'24e. However, in FY'25e and beyond, we expect the operating leverage to kick in an lift EBITDA margins to substantialy by 5pp  yoy to 33%. This also includes the complete Games portfolio roll-out, which is expected to be finished by end of H1'24e, hence also showing its full effect on profitability in FY'25e.

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During FY'23, Games contributed with € 1.3m EBITDA (25% margin), but after being completely rolled-out, we expect incremental Games EBITDA margins of 85%, showing the strong earnings potential stemming from Games.

Strong Q1'24 ahead: the first quarter of the year laid out a perfect start with 4x peaking jackpots (vs. only 3x during all of FY'23e), which should lead to c. 300-400k newly registered users  (i.e., +75-100k of additional MAU, assuming 25% conversion rate) for ZEAL in Q1'24 alone vs. 600k during all of FY'23. Additionally, Q1 Lottery bilings (currently +14% above average) and sales look set to come in strong as the high jackpots massively elevate user activity, as the irregular players then also play the lottery and come on top of the regular players.

Unique mix of value and growth at an attractive valuation: In a no-user-growth and constant-billings-margin-scenario and assuming only a 10y customer longevity, the CLTV of ZEAL's current Lottery user base (eNuW: € 726m) reflects the current market capitalization of € 745m. However, our CLTV estimate grows by 25% to € 910m (see below) if the Lottery billings margin increases to 15%, still factoring in no MAU growth.

This, coupled with the strong outlook ahead, leads us to add ZEAL to our NuWays' AlphaList and confirm our BUY recommendation with unchanged PT of € 51.00, based on DCF.