GVC Holdings — Bigger and bolder

GVC Holdings — Bigger and bolder

Our updated pro-forma GVC forecasts reflect the increased LCL synergy targets (from £100m to £130m), as well as the new £2 FOBT stake limit. Overall, the investment thesis remains unchanged: GVC’s enlarged business benefits from a highly scalable technology, strong brands and diversified revenue streams. We expect strong FCF to simultaneously drive down debt and return cash to shareholders. Additional upside should come from the opening of the US market, where we anticipate opportunistic expansion. The stock trades appropriately towards the top end of its peer group, at 10.8x EV/EBITDA and 14.2x P/E for FY18e.

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Written by

GVC Holdings

Bigger and bolder

Trading update and historical pro-forma figures

Travel & leisure

8 June 2018

Price

1,056p

Market cap

£6,103m

Net debt (£m) at March 2018

£1,860m

Shares in issue

578m

Free float

99%

Code

GVC

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

21.2

17.9

34.2

Rel (local)

18.8

9.8

29.2

52-week high/low

1056.0p

748.0p

Business description

GVC Holdings is a leading e-gaming operator in both the B2C and B2B markets. Following the acquisition of Ladbrokes Coral in 2018, it now has a market-leading position in UK retail betting. About 90% of revenues are derived from regulated and/or taxed markets.

Next events

Q2 trading update

July 2018

H2 results

September 2018

Analysts

Victoria Pease

+44 (0)20 3077 5740

Katherine Thompson

+44 (0)20 3077 5730

GVC Holdings is a research client of Edison Investment Research Limited

Our updated pro-forma GVC forecasts reflect the increased LCL synergy targets (from £100m to £130m), as well as the new £2 FOBT stake limit. Overall, the investment thesis remains unchanged: GVC’s enlarged business benefits from a highly scalable technology, strong brands and diversified revenue streams. We expect strong FCF to simultaneously drive down debt and return cash to shareholders. Additional upside should come from the opening of the US market, where we anticipate opportunistic expansion. The stock trades appropriately towards the top end of its peer group, at 10.8x EV/EBITDA and 14.2x P/E for FY18e.

Year
end

Revenue (£m)

EBITDA
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/16p

2,998.8

523.4

257.7

N/M

N/M

N/A

N/A

12/17p**

3,291.5

666.5

462.8

N/M

N/M

N/A

N/A

12/18e

3,435.1

734.9

518.2

74.6

30.0

14.2

2.8

12/19e

3,535.9

804.3

589.4

84.8

32.0

12.5

3.0

12/20e

3,454.0

739.9

534.6

76.7

34.0

13.8

3.2

Note: Pro forma results include LCL as if it has been included from 2016. *Normalised and diluted (EPS) excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Continuing operations, excluding Turkey in 2017.

Strong Online trading and increased synergies

For the first 20 weeks into FY18, GVC reported 7% growth in net gaming revenues (NGR), driven by an impressive 17% increase in Online NGR. As expected, UK Retail declined by 5%, as a result of a 9% drop in sports wagers. GVC also increased its synergy targets from the LCL acquisition from £100m to £130m. As indicated previously, the vast majority of these synergies are technology-based and are expected to come to fruition in FY20 and FY21. Management will provide further details at the H118 results presentation in September.

£2 FOBT: Impact shifted to FY20

In addition to the new synergy targets, we have updated our forecasts to reflect the UK regulator’s decision to reduce FOBT stakes to £2 (vs our previous £20 estimate). We now forecast c 1,000 shop closures at c £100k per shop and GVC has guided to an immediate EBITDA hit of £160m, eventually reducing to £120m post-mitigation. While the timing of implementation remains unclear, we expect the impact to begin in FY20 (rather than FY19). Altogether, we raise our FY19 EBITDA forecast from £743m to £804m, while our FY20 EBITDA forecast goes from £810m to £740m. Over this period, the steady growth in Online is therefore expected to fully offset the FOBT hit, with FY20 EBITDA broadly in line with our FY18 forecast.

Valuation: 10.8x EV/EBITDA for FY18

The LCL acquisition has cemented GVC’s leading global position and the £130m+ cost savings are expected to contribute to significant EPS accretion. With net debt peaking at 2.45x in FY18, strong FCF should rapidly drive down leverage. There is additional potential upside from the US, which is not currently in our figures. The group trades at 10.8x EV/EBITDA and 14.2x P/E for FY18e, appropriately towards the top end of the peer group, in our view.

Online growth offsets FOBT hit

Adjusting pro-forma forecasts for synergies and £2 FOBT

As detailed in our April 2018 update, GVC’s acquisition of Ladbrokes Coral has created a global, multi-brand gaming business. The company has now provided FY17 headline pro-forma figures, with total FY17 pro-forma NGR of £3.29bn and EBITDA of £667m. Approximately 75% of total NGR was derived from the original LCL business and UK Retail comprised 42%.

We have updated our forecasts, which notably include new synergy targets (increased from £100m to £130m) as well as a £2 FOBT stake limit (vs our previous estimate of £20). Implementation of the stake limit is now expected in FY20, rather than FY19, and management expects the first full-year EBITDA to be reduced by approximately £160m (split roughly as a £180m hit to UK Retail and a £20m uplift in Online).

Altogether, we forecast 4.4% NGR growth in FY18 and 2.9% in FY19, driven by continued momentum in Online. Reflecting the impact of FOBT implementation, we forecast NGR decline of 2.3% in FY20. At this point, UK Retail is expected to comprise 30% of revenue and 10% of EBITDA, vs 42% and 38% in FY17.

As shown in Exhibit 2, we believe that the steady growth in Online NGR, combined with integration synergies, will fully offset the negative impact from the recent FOBT regulatory changes.

Exhibit 1: Geographical revenue* split

Source: GVC. Note: * Reported revenues include VAT and internal revenues ie slightly different from NGR.

Online: 49% of NGR

Pro-forma FY17 Online NGR grew 24% to £1.60bn and for the first 20 weeks of 2018, GVC reported pro-forma NGR growth of 17% (18% in constant currency). Sports Brands increased by 16%, with a sports margin of 10.4%, in line with the group’s long-term margin target of 10%. Games Brands also increased by 16%, helped by a 41% increase in partypoker’s NGR.

Geographically, highlights in this division included a 23% NGR increase in Germany (bwin) and a 75% increase in the newly acquired Crystalbet in Georgia. The Italian and Australian businesses are also gaining market share, delivering 18% and 44% NGR growth, respectively. In the UK, Gala and Coral grew above their peers at 8% and 15%, respectively, although Ladbrokes.com grew by only 6%, which is marginally below the market. Management’s goal is to return Ladbrokes.com to market growth, which is estimated at high single-digit.

Looking forward, we forecast continued momentum in Online, with FY18 NGR increasing 12% to £1.80bn and FY19 NGR increasing 8% to £1.94bn. As this division continues to scale its proprietary technology and efficiently manage its cost base, management has reiterated that growth in Online EBITDA will ultimately offset the anticipated reduction in UK Retail.

PASPA: significant upside possibilities in USA

Following the repealing of PASPA in the US and the gradual state-by-state opening of sports-betting, there is significant upside potential in the US. GVC believes it has a substantial technological advantage (proprietary technology in gaming and sports), helped by an existing B2B platform in Nevada (Stadium Technology Group) and a casino partnership in New Jersey. Management has stated that it remains open to pursuing expansion opportunities but, while we expect further news over the next year, we have not included any significant upside into our forecasts.

Potential rise in UK remote gaming duty would affect Online EBITDA by c 5%

The UK regulator has stated its intention to raise the remote gaming duty (RGD) at the next Budget, in order to offset the loss of other gaming taxes (specifically from the fixed-odds betting terminals). Currently, industry views are that the RGD will be increased from 15% to 20%, which we believe would affect EBITDA by £20–25m (c 5% of total Online EBITDA). Given the high degree of uncertainty, the possible duty increase is not currently in our forecasts.

UK Retail: 42% of NGR

The structural decline in UK Retail is well documented, with lower footfall contributing to a 9% decline in FY17 UK Retail NGR. Continuing this trend, the trading update into FY18 showed a 5% like-for-like NGR decline, with OTC net revenue 8% behind. During this period, a 9% decline in sports wagers was partially attributed to poor weather, which resulted in a 12% cancellation of all planned horse racing fixtures. Machine revenues were down 2%, which is likely to have been caused by the negative press surrounding FOBTs.

FOBT impact moved to FY20

The Triennial Review has now concluded, with B2 machine stakes cut to £2 (from £100 previously) and GVC has guided to an immediate EBITDA hit of £160m (c 20% of FY18e EBITDA). The timing for implementation remains unclear, although industry speculation suggests end-FY19 or the beginning of FY20. In our model, we assume a full impact in FY20, with FOBT-related shop closures commencing that year. In this scenario, we assume a total of 1,000 shop closures (one-third of the estate) at a cost of £100k per shop (of which £50k is cash). Our forecasts include 600 shop closures in FY20, with the remaining 400 spread over the next two years. GVC estimates that post-mitigation, the ultimate impact on EBITDA will be £120m, with an expected adverse impact of c £145m in UK Retail and positive impact of c £25m in Online.

European Retail: 7% of NGR

European Retail NGR grew 14% to £240.9m in FY17, with growth accelerating to 32% into 2018 (28% constant currency), boosted by an exceptional 53% NGR increase in Eurobet (Italy). Overall, wagers increased by 4% and the sports margin improved by 3.8bp to 18.1%, due to favourable results in Italy.

We expect growth to moderate from this point, with NGR increasing by 8% in FY18 and c 5% thereafter.

We summarise our divisional forecasts in Exhibit 2 below.

Exhibit 2: Divisional summary

Pro-forma P&L

2016

2017

2018e

2019e

2020e

Online

1,296.3

1,602.8

1,799.4

1,939.8

2,090.1

UK Retail

1,431.1

1,391.1

1,331.7

1,280.5

1,033.6

European Retail

212.0

240.9

259.7

270.4

284.2

Other

59.4

56.7

44.3

45.2

46.1

Total NGR

2,998.8

3,291.5

3,435.1

3,535.9

3,454.0

Growth

0.0%

9.8%

4.4%

2.9%

(2.3%)

Online

606.8

717.9

806.1

878.1

944.3

UK Retail

1,016.3

997.6

952.2

915.5

718.3

European Retail

109.7

120.8

129.9

135.2

142.1

Other

32.2

36.5

33.2

33.9

34.6

Total contribution

1,765.0

1,872.8

1,921.4

1,962.7

1,839.3

Contribution margin

58.9%

56.9%

55.9%

55.5%

53.3%

Online

286.2

406.9

469.6

532.8

589.0

UK Retail

253.3

256.6

246.4

236.9

77.5

European Retail

41.5

48.6

51.9

54.1

56.8

Other

(12.6)

(0.3)

4.4

4.5

4.6

Corporate

(45.0)

(45.3)

(42.0)

(44.0)

(46.0)

Synergies

0.0

0.0

4.5

20.0

58.0

Total EBITDA

523.4

666.5

734.9

804.3

739.9

EBITDA margin

17.5%

20.2%

21.4%

22.7%

21.4%

Source: GVC and Edison Investment Research

Synergies update

As shown in Exhibit 3, GVC has updated its guidance relating to the synergies from the deal, from £100m to at least £130m, with improvements coming from across the company. Over time, we continue to expect management to exceed these targets, given both GVC’s and LCL’s impressive track record of managing complex integrations. The cost of achieving these synergies has also increased from £100m to £130m.

As detailed in our April update, we believe there are further revenue and capex synergy opportunities, although these are not factored into our estimates. Management has stated that it will be providing further details at the H118 results presentation in September.

Exhibit 3: GVC’s updated synergy timetable

Source: GVC

Estimate changes

As discussed above, we have updated our forecasts to reflect the strong trading update, the new regulatory environment, as well as increased synergy targets. The introduction of a £2 stake is expected to depress EBITDA by £160m vs our original estimate of £60m (which had been based on a £20 stake limit), but the impact will now likely occur in FY20 rather than FY19.

Exhibit 4: Estimate changes

Revenue

EBITDA

EPS

Old

New

% chg

Old

New

% chg

Old

New

% chg

2018e

3,402.0

3,435.1

1.0

747.5

734.9

(1.7)

76.2

74.6

(2.0)

2019e

3,413.6

3,535.9

3.6

743.4

804.3

8.2

73.3

84.8

15.7

2020e

3,537.6

3,454.0

(2.3)

810.9

739.9

(8.8)

84.2

76.7

(9.1)

Source: Edison Investment Research


Exhibit 5: Pro-forma financial summary

(£m)

2016

2017

2018e

2019e

2020e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue (NGR)

 

 

2,998.8

3,291.5

3,435.1

3,535.9

3,454.0

Cost of Sales

(1,233.8)

(1,418.7)

(1,513.7)

(1,573.2)

(1,614.7)

Gross Profit

1,765.0

1,872.8

1,921.4

1,962.7

1,839.3

EBITDA

 

 

523.4

666.5

734.9

804.3

739.9

Normalised operating profit

 

 

376.4

529.5

597.9

667.3

602.9

Amortisation of acquired intangibles

(200.0)

(380.0)

(380.0)

(380.0)

(380.0)

Exceptionals

(534.3)

(59.5)

(235.7)

(39.0)

(103.0)

Share-based payments

(31.8)

(20.7)

(15.0)

(15.0)

(15.0)

Reported operating profit

(389.7)

69.3

(32.8)

233.3

104.9

Net Interest

(124.6)

(72.0)

(85.0)

(84.2)

(76.0)

Joint ventures & associates (post tax)

5.9

5.3

5.3

6.4

7.6

Profit Before Tax (norm)

 

 

257.7

462.8

518.2

589.4

534.6

Profit Before Tax (reported)

 

 

(508.5)

2.5

(112.5)

155.4

36.6

Reported tax

23.6

(9.9)

(67.4)

(76.6)

(69.5)

Profit After Tax (norm)

257.7

462.8

518.2

589.4

534.6

Profit After Tax (reported)

(508.5)

2.5

(112.5)

155.4

36.6

Minority interests

0.0

0.0

(5.0)

(5.8)

(6.3)

Discontinued operations

28.4

(13.2)

0.0

0.0

0.0

Net income (normalised)

222.1

402.6

445.8

507.0

458.8

Net income (reported)

(456.5)

(20.6)

(184.9)

73.0

(39.2)

Basic average number of shares outstanding (m)

NM

NM

578

578

578

EPS - basic normalised (p)

 

 

NM

NM

77.13

87.72

79.37

EPS - diluted normalised (p)

 

 

NM

NM

74.55

84.78

76.72

EPS - basic reported (p)

 

 

NM

NM

(31.99)

12.63

(6.79)

Dividend (p)

NM

NM

30.00

32.00

34.00

Revenue growth (%)

NM

10%

4%

3%

-2%

Gross Margin (%)

58.9

56.9

55.9

55.5

53.3

EBITDA Margin (%)

17.5

20.2

21.4

22.7

21.4

Normalised Operating Margin

12.6

16.1

17.4

18.9

17.5

BALANCE SHEET

Fixed Assets

 

 

6,040.7

6,082.0

5,761.3

5,404.3

5,175.3

Intangible Assets

5,605.3

5,607.0

5,286.6

4,944.6

4,602.6

Tangible Assets

245.0

264.4

254.8

239.8

352.8

Investments & other

190.4

210.7

220.0

220.0

220.0

Current Assets

 

 

792.0

773.8

893.6

922.8

909.7

Stocks

1.6

2.0

2.0

2.0

2.0

Debtors

342.6

258.7

280.0

300.0

320.0

Cash & cash equivalents

272.2

328.8

411.6

400.8

347.7

Other

175.6

184.3

200.0

220.0

240.0

Current Liabilities

 

 

(1,583.1)

(1,121.0)

(1,095.0)

(1,095.0)

(1,095.0)

Creditors

(699.9)

(594.1)

(600.0)

(600.0)

(600.0)

Tax and social security

(67.7)

(253.8)

(250.0)

(250.0)

(250.0)

Short term borrowings

(742.4)

(200.0)

(200.0)

(200.0)

(200.0)

Other

(73.1)

(73.1)

(45.0)

(45.0)

(45.0)

Long Term Liabilities

 

 

(1,052.8)

(1,513.9)

(2,392.1)

(2,180.0)

(1,980.0)

Long term borrowings

(749.6)

(1,212.1)

(2,012.1)

(1,800.0)

(1,600.0)

Other long term liabilities

(303.2)

(301.8)

(380.0)

(380.0)

(380.0)

Net Assets

 

 

4,196.9

4,220.9

3,167.8

3,052.1

3,010.0

Minority interests

0.0

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

4,196.9

4,220.9

3,167.8

3,052.1

3,010.0

CASH FLOW

Op Cash Flow before WC and tax

558.6

701.2

734.9

804.3

739.9

Working capital

3.8

(29.1)

(25.0)

(25.0)

(25.0)

Exceptional & other

(534.3)

(59.5)

(235.7)

(39.0)

(73.0)

Tax

(6.5)

(14.9)

(52.4)

(76.6)

(69.5)

Net operating cash flow

 

 

21.7

597.7

421.8

663.6

572.4

Capex

(58.2)

(205.8)

(187.0)

(160.0)

(160.0)

Acquisitions/disposals

(1,032.4)

(6.0)

(3,157.0)

0.0

0.0

Net interest

(71.1)

(101.3)

(70.0)

(84.2)

(76.0)

Equity financing

158.8

47.0

2,497.0

0.0

0.0

Dividends

(30.4)

(200.1)

(192.0)

(178.0)

(189.6)

Other

109.3

0.0

(30.0)

(40.0)

0.0

Net Cash Flow

(902.4)

131.5

(717.2)

201.4

146.9

Opening net debt/(cash)

 

 

312.7

1,215.1

1,083.5

1,800.7

1,599.3

FX

0.0

0.0

0.0

0.0

0.0

Other non-cash movements

0.0

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

1,215.1

1,083.5

1,800.7

1,599.3

1,452.5

Source: GVC, Edison Investment Research. Note: pro-forma accounts for GVC-LCL.

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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

295 Madison Avenue, 18th Floor

10017, New York

US

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: Healthcare

Oxford BioMedica — Golden age for LentiVector as Axovant signs deal

Oxford BioMedica (OXB) has signed an out-licensing deal with Axovant for its Parkinson’s disease (PD) gene therapy AXO-Lenti-PD (previously OXB-102) worth up to $842.5m. Axovant plans to accelerate it rapidly into the clinic, with a Phase I/II dose escalation study in advanced PD patients to be initiated by year end. In addition to OXB’s numerous other partnerships, notably the recently signed Bioverativ deal and the ongoing collaboration with Novartis on its launched CAR-T Kymriah, this deal demonstrates OXB’s continuing world-leading status in lentiviral technology. We now include the Axovant deal in our model and value OXB at £614m.

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