On Friday, Redburn-Atlantic issued a downgrade for Evolution AB (EVO:SS) (OTC: EVGGF), shifting its stock rating from Neutral to Sell and significantly reducing the price target from SEK1,125.00 to SEK720.00. The adjustment follows concerns regarding the sustainability of the company's market exposures.
Analysts at Redburn-Atlantic highlighted the challenges Evolution faces with its dual exposure to regulated and unregulated markets. The firm has moved away from its previous discounted cash flow (DCF) valuation methodology, opting instead for a multiple-based approach. The new analysis suggests that the market is valuing Evolution's regulated business at an implicit multiple of 29x to 36x EV/EBITDA for the year 2025.
The report also noted that Evolution's involvement in unregulated markets has been consistent, with exposures near or above 60% since 2018. Despite a slight decline to approximately 61% in the nine months leading up to September 2024, the level of exposure remains high. Evolution's growth in Asia, a largely unregulated market, has been increasing as a percentage of the company's total revenue, further accentuating the issue.
Evolution has maintained that it only deals with licensed operators and carries out due diligence on its customers and, in some cases, the customers of its customers. However, the company acknowledges that its supply chain can be extensive and complex at times.
The downgrade and revised price target reflect Redburn-Atlantic's assessment of the risks associated with Evolution's market exposures and the firm's valuation under a new analytical framework. The change in rating and target price marks a significant shift in the firm's outlook on Evolution's stock performance.
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