JPJ Group plc — Farewell to Mandalay

JPJ Group plc — Farewell to Mandalay

JPJ has announced a definitive agreement to sell its Mandalay subsidiary to 888 Holdings for £18m cash. During FY18, Mandalay reported revenues of c £11m and PBT of c £3.7m, which represents a deal value of c 5.0x EV/EBITDA. This subsidiary has significantly underperformed the rest of JPJ’s business and was particularly affected by the additional bonus tax in 2017. We therefore believe this asset sale is a net positive and should enable the company to better focus on its market-leading brands. The stock continues to trade at the low end of the peer group, at only 8.7x EV/EBITDA, 7.2x P/E and 11.9% free cash flow yield for FY19e.

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JPJ Group plc

Farewell to Mandalay

Disposal of Mandalay

Travel & leisure

19 February 2019

Price

720p

Market cap

£535m

Net debt (£m) at September 2018

298.8

Shares in issue

74.3m

Free float

95%

Code

JPJ

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

11.8

18.0

(8.3)

Rel (local)

8.3

14.8

(6.9)

52-week high/low

1,036p

590p

Business description

JPJ Group plc is a leading online gaming operator mainly focused on bingo-led gaming targeted towards female audiences. At September 2018, 56% of revenues were generated in the UK.

Next events

FY18 results

19 March 2019

Analysts

Victoria Pease

+44 (0)20 3077 5700

Richard Williamson

+44 (0)20 3077 5700

JPJ Group plc is a research client of Edison Investment Research Limited

JPJ has announced a definitive agreement to sell its Mandalay subsidiary to 888 Holdings for £18m cash. During FY18, Mandalay reported revenues of c £11m and PBT of c £3.7m, which represents a deal value of c 5.0x EV/EBITDA. This subsidiary has significantly underperformed the rest of JPJ’s business and was particularly affected by the additional bonus tax in 2017. We therefore believe this asset sale is a net positive and should enable the company to better focus on its market-leading brands. The stock continues to trade at the low end of the peer group, at only 8.7x EV/EBITDA, 7.2x P/E and 11.9% free cash flow yield for FY19e.

Year end

Revenue (£m)

EBITDA
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/16

269.0

102.2

112.6

0.0

6.4

N/A

12/17

304.7

108.6

103.9

0.0

6.9

N/A

12/18e

317.9

108.8

114.0

0.0

6.3

N/A

12/19e

318.6

95.6

100.6

40.0

7.2

5.6

Note: EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

A bonus-reliant business

The Mandalay subsidiary comprises a number of online bingo brands, including Costa Bingo, which all operate on 888’s Dragonfish platform. These bingo brands have historically been heavily reliant on bonusing and were particularly affected by the introduction of bonuses into the point of consumption tax in 2017. We note that 2018 revenues of c £11.0m and PBT of c £3.7m were in line with our estimates, but materially below FY17 levels. Our forecasts had assumed a modest decline going forward, although performance was expected to stabilise as the business lapped easier comps in H219. Completion is expected by end Q119, following the conclusion of an employee consultation process. The deal value of £18m equates to c 5.0x EV/EBITDA, with £12m to be paid on completion and £6m by end Q319.

Mandalay equates to c 3.5% of revenues and EBITDA

Mandalay currently represents c 3.5% of total revenues and EBITDA and we have adjusted our forecasts to completely exclude Mandalay from our FY19 estimates. We have also raised our cash balance by £18m, which is helpful for the continued debt reduction programme. Following the pre-close trading update in January, we are also increasing our FY18 revenue and EBITDA forecasts by c 2.5%. The increase is driven by continued positive momentum in the international business and we expect further information at FY18 results in March.

Valuation: 7.2x FY19e P/E

JPJ’s shares fell by c 23% in 2018, but have since rebounded by c 13% ytd, helped by a positive trading statement in January. Nonetheless, the stock still trades at only 8.7x EV/EBITDA, 7.2x P/E and 11.9% FCF yield for FY19e. The business model remains highly cash generative and we expect annual operating cash flow of c £90m. Continual debt reduction should lead to a 2.5x net debt to EBITDA ratio during 2019 (vs 3.0x at Q318).

Exhibit 1: Financial summary

£m

2015

2016

2017

2018e

2019e

2020e

Year end 31 December

PROFIT & LOSS

Revenue

 

 

194.6

269.0

304.7

317.9

318.6

336.2

Cost of Sales

(101.4)

(130.7)

(147.5)

(160.9)

(171.9)

(179.3)

Gross Profit

93.3

138.3

157.2

157.0

146.6

156.9

EBITDA

 

 

70.4

102.2

108.6

108.8

95.6

99.0

Operating Profit (before amort. and except.)

70.1

101.6

108.2

108.3

95.1

98.5

Intangible Amortisation

(50.6)

(55.5)

(62.6)

(61.3)

(61.3)

(61.3)

Exceptional and other items **

(109.7)

(80.3)

(104.9)

(20.1)

0.6

0.6

Share based payments

(2.9)

(2.3)

(1.4)

(0.6)

(0.6)

(0.6)

Operating Profit

(93.1)

(36.5)

(60.8)

26.3

33.9

37.2

Net Interest

(24.0)

(18.1)

(30.0)

(19.4)

(14.0)

(13.0)

Profit Before Tax (norm)

 

 

46.1

83.5

78.2

88.9

81.1

85.5

Profit Before Tax (FRS 3)

 

 

(114.2)

(36.7)

(65.8)

9.5

19.9

24.2

Tax

(0.5)

0.1

(0.7)

(3.0)

(5.0)

(5.0)

Profit After Tax (norm)

45.5

83.6

77.5

85.9

76.1

80.5

Profit After Tax (FRS 3)

(114.8)

(36.7)

(66.5)

6.5

14.9

19.2

Average Number of Shares Outstanding (m)

61.2

71.2

73.9

74.6

75.0

75.5

EPS - normalised (p)

74.4

117.3

104.9

115.1

101.5

106.6

EPS - normalised and fully diluted (p)

 

73.1

112.6

103.9

114.0

100.6

105.7

EPS - (IFRS) (p)

(187.6)

(51.5)

(90.0)

8.8

19.8

25.5

Dividend per share (p)

0.0

0.0

0.0

0.0

40.0

45.0

Gross Margin (%)

47.9

51.4

51.6

49.4

46.0

46.7

EBITDA Margin (%)

36.2

38.0

35.6

34.2

30.0

29.4

Operating Margin (before GW and except.) (%)

36.0

37.8

35.5

34.1

29.9

29.3

BALANCE SHEET

Fixed Assets

 

 

674.3

652.3

595.9

538.2

462.4

404.7

Intangible Assets

668.8

648.8

589.0

527.7

448.5

387.2

Tangible Assets

0.2

0.9

1.3

4.8

8.3

11.9

Other long term assets

5.3

2.6

5.6

5.6

5.6

5.6

Current Assets

 

 

63.9

139.0

93.2

125.0

147.2

132.6

Stocks

0.0

0.0

0.0

0.0

0.0

0.0

Debtors (incl swaps)

25.6

62.0

26.0

28.0

30.0

32.0

Cash

31.8

68.5

59.0

87.0

106.2

88.6

Player balances

6.5

8.6

8.2

10.0

11.0

12.0

Current Liabilities

 

 

(54.3)

(154.9)

(98.5)

(44.3)

(40.3)

(38.3)

Creditors

(23.1)

(41.3)

(46.3)

(40.0)

(38.0)

(36.0)

Short term borrowings

(25.2)

(26.7)

(0.3)

(0.3)

(0.3)

(0.3)

Contingent consideration

(6.0)

(86.9)

(51.9)

(4.0)

(2.0)

(2.0)

Long Term Liabilities

 

 

(394.8)

(397.1)

(386.7)

(373.5)

(321.5)

(271.5)

Long term borrowings

(189.3)

(347.4)

(369.5)

(369.5)

(319.5)

(269.5)

Contingent consideration

(203.6)

(33.3)

(7.7)

(2.0)

0.0

0.0

Other long term liabilities

(2.0)

(16.4)

(9.4)

(2.0)

(2.0)

(2.0)

Net Assets

 

 

289.0

239.4

204.1

245.5

247.9

227.5

CASH FLOW

Operating Cash Flow

 

 

23.3

84.2

102.0

106.8

86.6

90.0

Net Interest

(24.0)

(17.5)

(30.9)

(19.4)

(14.0)

(13.0)

Tax

(0.5)

(1.2)

(1.0)

(3.0)

(5.0)

(5.0)

Capex

(2.5)

(2.5)

(3.2)

(4.0)

(4.0)

(4.0)

Acquisitions (inc earn-outs)

(355.6)

(156.3)

(94.2)

(52.4)

13.0

(5.0)

Financing

203.7

(29.6)

22.2

0.0

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

(7.4)

(30.6)

Net Cash Flow

(155.6)

(122.9)

(5.2)

28.0

69.2

32.4

Opening net debt/(cash)

 

 

27.1

182.7

305.6

310.7

282.7

213.5

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

0.0

Other

0.0

0.0

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

182.7

305.6

310.7

282.7

213.5

181.1

NPV of outstanding earnouts/ other

 

209.5

140.8

76.6

10.0

5.0

0.0

Currency swaps

 

 

(4.7)

(38.2)

0.0

0.0

0.0

0.0

Adjusted net debt

 

 

387.5

408.1

387.3

292.7

218.5

181.2

Source: JPJ Group, Edison Investment Research

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This report has been commissioned by JPJ Group plc and prepared and issued by Edison, in consideration of a fee payable by JPJ Group plc. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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Schumannstrasse 34b

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Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by JPJ Group plc and prepared and issued by Edison, in consideration of a fee payable by JPJ Group plc. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Low and Bonar — Better funded for core strategy execution

Low & Bonar announced a fully underwritten £54m placing and open offer (c £50m net) alongside FY18 results. The new equity funding goes a long way towards resolving balance sheet net debt constraints and allows the relatively new management team to execute its updated strategic plan. Our revised estimates incorporate the funding effects, more gradual EBIT margin recovery and reset dividends in line with the stated policy.

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