Trading broadly in line

Stride Gaming 6 February 2019 Update
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Stride Gaming

Trading broadly in line

AGM update

Travel & leisure

6 February 2019

Price

102.5p

Market cap

£78m

Net cash (£m) at August 2018

22.1

Shares in issue

75.8m

Free float

35%

Code

STR

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(10.6)

(2.3)

(55.1)

Rel (local)

(13.6)

(1.2)

(52.5)

52-week high/low

232.0p

83.5p

Business description

Stride Gaming is a leading online gaming operator in the UK. It uses its proprietary and purchased software to provide online bingo and slot gaming. It was formed in 2012 and only operates in regulated real money gaming markets.

Next events

H119 results

May 2019

Analysts

Victoria Pease

+44 (0)20 3077 5740

Richard Williamson

+44 (0)20 3077 5700

Stride Gaming is a research client of Edison Investment Research Limited

Stride’s AGM confirmed that trading for the current financial year has been broadly in line, despite well documented regulatory headwinds. To counterbalance rising gaming taxes and other sector pressures, the group is implementing numerous cost-cutting initiatives, which will be key to hitting our FY19 EBITDA estimate. Looking ahead, we expect growth to resume in FY20 (once many regulatory burdens have been lapped) and we believe Stride will take market share within a disrupted industry. Cash conversion is c 90% and the new payout policy leads to a 15.0% yield in FY19 (including the special dividend). The stock continues to trade at a meaningful discount to peers, at 3.7x EV/EBITDA and 6.5x P/E for CY19e.

Year end

Revenue* (£m)

EBITDA
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

08/17

89.9

20.2

25.8

2.7

4.0

2.6

08/18

89.0

16.1

19.2

3.0

5.3

2.9

08/19e

85.0

14.5

14.9

15.4***

6.9

15.0***

08/20e

97.5

16.0

17.3

8.7

5.9

8.4

Note: *Adjusted revenue excludes social from FY18, and includes Stride’s share of Stride Together (including Aspers JV). **EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. ***Includes 8p special dividend.

Cost-cutting counterbalances regulatory burdens

Stride has confirmed that trading since the start of FY19 has been broadly in line with its expectations, despite continued regulatory challenges. As we detailed in our November update, the government is raising the point of consumption tax from 15% to 21% from April 2019 and the entire sector has been pressured by an array of regulatory burdens (social responsibility, AML, source of funds etc). To mitigate the impact, Stride is implementing numerous cost cuts (including office closures, headcount reduction), while still leveraging its proprietary technology to drive synergies. Looking ahead, we expect growth to resume in FY20 and we believe Stride will take market share within a disrupted industry. Our forecasts remain unchanged, although we note that the pace of cost-cutting will be key to hitting our FY19 EBITDA forecast. We expect more information at the H119 results in May.

High net cash and strong cash conversion

Despite the sector challenges, the online gaming business remains highly cash generative and Stride’s cash conversation rate is c 90%. Net cash at end FY18 was £22.1m and Stride has stated that it will now distribute at least 50% of adjusted net earnings in dividends. In addition, a further c 8.0p per share will be distributed as a special dividend in 2019, following the sale of QSB (YoBingo) to Rank Group.

Valuation: 15.0% dividend yield for FY19e

The stock continues to trade towards the bottom of the peer group at 3.7x EV/EBITDA and 6.5x P/E for CY19e. Given the company’s superior technology, high cash conversion and new dividend policy (leading to a 15.0% FY19e dividend yield), this seems unjustified, in our view. However, for a meaningful re-rating, we expect investors to focus on synergies, cost controls and ultimately an uptick in EBITDA, which we only anticipate in FY20.

Exhibit 1: Financial summary

£m

2015

2016

2017

2018

2019e

2020e

August

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

NGR

 

 

27.8

47.8

89.9

85.5

80.0

90.0

Adjusted Revenue (inc Stride Together)

27.8

47.8

89.9

89.0

85.0

97.5

Cost of Sales

(2.8)

(5.4)

(11.6)

(16.0)

(17.5)

(23.1)

Gross Profit

25.1

42.4

78.3

69.5

62.5

66.9

EBITDA

 

 

7.3

12.3

20.2

16.1

14.5

16.0

Operating Profit (norm)

 

 

7.3

12.0

19.4

14.8

12.2

13.7

Amortisation of acquired intangibles

(2.5)

(4.2)

(7.8)

(7.3)

(7.3)

(7.3)

Exceptionals

(3.3)

(5.1)

(36.1)

(6.6)

0.0

0.0

Share based payments

(1.0)

(1.9)

(1.8)

(0.9)

(0.9)

(0.9)

Operating Profit

0.4

0.8

(26.2)

(0.0)

4.0

5.5

Net Interest

(0.1)

(0.7)

(0.5)

(0.2)

(0.2)

(0.2)

Contribution from JVs/assocs.

0.0

0.0

0.0

0.1

0.5

1.0

Profit Before Tax (norm)

 

 

6.5

11.3

18.9

14.8

12.5

14.5

Profit Before Tax (FRS 3)

 

 

0.4

0.1

(26.7)

(0.1)

4.3

6.3

Tax (reported)

0.1

(0.5)

1.1

(0.5)

(0.5)

(0.6)

Profit After Tax (norm)

6.2

10.9

18.2

14.5

12.0

13.9

Profit After Tax (FRS 3)

0.4

(0.4)

(25.6)

(0.6)

3.8

5.7

Average Number of Shares Outstanding (m)

43.8

51.5

67.3

73.3

76.0

76.0

EPS - normalised (p)

 

 

14.2

21.2

27.1

19.8

15.8

18.3

EPS - normalised fully diluted (p)

 

 

14.0

20.3

25.8

19.2

14.9

17.3

EPS - (IFRS) (p)

 

 

0.9

(0.8)

(38.1)

(6.9)

5.0

7.5

Dividend per share (p)

0.00

2.50

2.70

3.00

15.44

8.65

Gross Margin (%)

90.1

88.7

87.1

81.3

78.1

74.3

EBITDA Margin (%)

26.3

25.8

22.5

18.8

18.1

17.8

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

26.1

25.0

21.6

17.3

15.2

15.2

BALANCE SHEET

Fixed Assets

 

 

37.1

78.7

61.1

40.4

30.7

24.1

Intangible Assets

36.4

73.6

57.8

36.0

29.0

22.0

Tangible Assets

0.2

0.7

0.7

0.8

1.2

1.7

Investments

0.5

4.4

2.7

0.5

0.5

0.5

Assets Available for sale/other

0.0

0.0

0.0

3.1

0.0

0.0

Current Assets

 

 

11.7

27.1

36.5

39.5

35.6

42.1

Stocks

0.0

0.0

0.0

0.0

0.0

0.0

Debtors

4.2

5.8

9.9

10.3

7.0

8.0

Cash

7.4

21.1

26.2

28.7

28.1

33.6

Assets Available for sale/other

0.0

0.2

0.5

0.5

0.5

0.5

Current Liabilities

 

 

(7.7)

(26.1)

(35.7)

(22.4)

(14.1)

(15.1)

Creditors

(5.2)

(16.3)

(31.3)

(8.2)

(9.0)

(10.0)

Player balances

(1.4)

(1.8)

(2.4)

(2.7)

(2.7)

(2.7)

Provisions

0.0

0.0

0.0

(7.1)

0.0

0.0

Short term borrowings

(1.1)

(8.0)

(2.0)

(4.4)

(2.4)

(2.4)

Long Term Liabilities

 

 

(10.2)

(10.5)

(7.1)

(1.8)

(1.0)

(1.0)

Long term borrowings

(8.0)

0.0

(4.4)

0.0

0.0

0.0

Other long term liabilities

(2.2)

(10.5)

(2.6)

(1.8)

(1.0)

(1.0)

Net Assets

 

 

30.8

69.2

54.9

55.8

51.2

50.1

CASH FLOW

Operating Cash Flow

 

 

4.6

14.4

14.3

14.5

13.0

14.4

Net Interest

0.0

(0.6)

(0.6)

(0.1)

(0.2)

(0.2)

Tax

(0.1)

(0.7)

(1.4)

(0.5)

(0.5)

(0.6)

Capex

(0.6)

(1.9)

(2.0)

(3.1)

(3.0)

(3.0)

Acquisitions/disposals

(18.1)

(22.2)

(1.9)

(22.5)

8.3

0.0

Financing/other

10.4

25.9

(0.5)

17.9

(6.6)

1.0

Dividends

(3.0)

(0.6)

(1.8)

(2.1)

(10.1)

(6.1)

Net Cash Flow

(6.6)

14.4

6.1

4.2

0.9

5.5

Opening net debt/(cash)

 

 

0.0

3.1

(11.3)

(17.4)

(22.1)

(23.0)

Moving in player balances

1.0

0.0

0.0

0.0

0.0

0.0

Other adjustments

2.5

0.0

0.0

0.5

0.0

(0.0)

Closing net debt/(cash)

 

 

3.1

(11.3)

(17.4)

(22.1)

(23.0)

(28.5)

Source: Company accounts, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Stride Gaming and prepared and issued by Edison, in consideration of a fee payable by Stride Gaming. 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.

Australia

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

General disclaimer and copyright

This report has been commissioned by Stride Gaming and prepared and issued by Edison, in consideration of a fee payable by Stride Gaming. 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.

Australia

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

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