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Real Luck Group (TSX:LUCK) is an esports betting technology business listed in Canada. The company provides the technology for people to bet on esports competitions and matches, combining the huge and growing market in esports with the centuries old desire of humans to gamble.
I have been a shareholder for some time but have been hesitant to highlight the idea given the very early stages of its revenue and the need to prove progress – while you can build models using some industry metrics for users, acquisition cost per user and revenue per user from public peers in the industry such as DraftKings and XLMedia, these can generate almost any value you want without a proper grounding in company’s actual performance. However, the company has received an unsolicited and highly opportunistic takeover approach and the management and board, which are really the key to entire investment thesis, are once again acting in an exemplary manner and have forcibly rebuffed the approach. The approach may, however, catalyse the share price which is demonstrably undervalued as it has been trading below its cash balance for some time. Let me explain.
When the markets were still buoyant early in 2021 and investors were still interested in high growth technology businesses, the company raised C$17m at a price of C$1.20 under the previous CEO. This was an excellent fund raising and ensured the company was funded for its expansion, but it was after this that the situation got really interesting. As part of the push to drive growth and expand, the CEO hired Thomas Rosander (see here for brief overview of Thomas and other team members https://www.realluckgroup.com/investors) who has a very strong track record of success in the online gambling industry. Within just a few months, the board were so impressed with him and his strategic plans that they took the highly unusual step of asking the then CEO to step down and installed Thomas in his place. This was a huge display of faith, given what happened next.
Thomas, now CEO, initiated his strategic plan which essentially consisted of stopping all current revenue in order to re-build and re-purpose the platform to ensure it was clearly differentiated and ahead of the competition in providing the customer experience that he wanted to achieve. He spoke passionately about executing a vision that he had dreamed of for some time in previous roles but was now in a position to execute. The short termist market, of course, punished the company for daring to act in the long-term interest of building value and the share price cratered to under C$0.10 as there were no immediate revenues. But this is the kind of behaviour I dream of from management and is so very rare – having the conviction to do the right thing for long term value creation and ignore the market reaction.
The company completed the rebuild of the entire platform earlier this year and launched ‘standard’ casino products (in which management have long track records of success) to drive shorter term revenues and provide cash flows for long term growth, negating (hopefully) the need to raise further capital. In the meantime, Thomas has attracted an impressive senior team and the board has been bolstered by the likes of Bo Wänghammar (see team link above). The business began actively marketing and acquiring customers in August and has disclosed early success (see here https://www.realluckgroup.com/news), though very few actual numbers have yet been disclosed, hence my hesitation in highlighting the unproven opportunity.
However, the company has now disclosed that an individual (Adam Arviv of KAOS Capital) has been acquiring shares in the company (a holding that he has not disclosed) and made an opportunistic and derisory offer to acquire the company at below the value of its cash in order to simply take the cash below par value (see https://sophiccapital.com/investment-ideas/luckbox/?qmodStoryID=4541385160996144&_kx=0lUSMPHZeuzyvlEdGBGiHxWS0sNVtYF7dFU3Gmf8F-0%3D.RvxyY9). This may now highlight to the market the absurd undervaluation of the company if you believe at all that this team can make money, literally $ for $ spent, on their cash pile from gambling, in a market where the bettors of the future are going to be. Without knowing his shareholding, however, it is difficult to calculate the risk of any action succeeding to the detriment of other shareholders.
While difficult to prove externally, Thomas claims their technology and platform is now way ahead of rivals, and with new micro-transaction features coming to market – some of these rivals were previously acquired at multiples of LUCK’s valuation (see https://esportsinsider.com/2021/08/entain-unikrn). Of course, there are many large competitors out there in the already highly competitive online gambling space (e.g. DraftKings), so this a very high-risk proposition and isn’t an investment decision to make lightly. With no disclosed KPIs or financial progress as the company utilises its cash, this is a faith-based investment with a need to bet on the jockey that he can deliver the business to profitability in the next 6-10 months with the current cash available. This board and management stand among a rare breed make tough decisions to focus on maximising long-term value and I think the business’ progress is well worth following. Here’s the link to the company’s August AGM presentation for initial company review: https://static1.squarespace.com/static/5fbcd5d71156434d00d23d0f/t/62fa6891b433702f92156daa/1660577939691/LUCK+AGM+August+2022.pdf
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