Deleveraging to drive value

Jackpotjoy plc 30 March 2017 Update
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Jackpotjoy plc

Deleveraging to drive value

FY16 results

Travel & leisure

 

30 March 2017

Price

564.50p

Market cap

£416m

£/C$1.66; €/£1.15

Net debt (£m) at 31 December 2016

305.6

Shares in issue

73.7m

Free float

95%

Code

JPJ

Primary exchange

LSE

Secondary exchange

TSE

Share price performance

%

1m

3m

12m

Abs

(2.7)

N/A

N/A

Rel (local)

(4.1)

N/A

N/A

52-week high/low

645.0p

534.0p

Business description

Jackpotjoy plc (JPJ) (formerly The Intertain Group) is a leading online gaming operator mainly focused on bingo-led gaming targeted towards female audiences. About 77% of revenues are generated in regulated markets. It moved its listing from the TSX (IT:TSX) to the LSE in January 2017.

Next events

Q1 Financial Statements

Q2 Financial Statements

15 May 2017

14 August 2017

Analysts

Victoria Pease

+44 (0)20 3077 5700

Katherine Thompson

+44 (0)20 3077 5730

Jackpotjoy plc is a research client of Edison Investment Research Limited

Jackpotjoy plc’s (JPJ) maiden London-listed results demonstrated the benefits of leading market brands in a profitable and cash generative business. Pro-forma group revenues grew 15% in FY16, with industry leading EBITDA margins of 38%. The stock has suffered from unusually high net debt, a lack of dividend and a complex relationship with Gamesys. However, the revised terms of the contract, together with the end of the major earn-out period, suggest that deleveraging will be on track. 2017 trading multiples of 6.7x EV/EBITDA and 5.9x P/E are far below the sector and, as JPJ continues to demonstrate its market dominance in bingo-led gaming, the stock appears attractive as a turn-around candidate.

Year end

Revenue (£m)

EBITDA* (£m)

PBT* (£m)

EPS* (p)

DPS (p)

P/E (x)

Yield (%)

12/15

194.6

70.4

46.1

73.0

0.0

7.7

N/A

12/16

269.0

102.2

65.7

88.5

0.0

6.4

N/A

12/17e

303.1

106.0

72.3

96.0

0.0

5.9

N/A

12/18e

338.7

114.9

84.3

111.5

0.0

5.1

N/A

Note: *Normalised/adjusted, excluding amortisation of acquired intangibles, exceptional and non-operational items and share-based payments.

Maiden London results: Market-leading margins

JPJ reported robust first results as a UK-listed stock. Pro-forma revenues grew 15% to £269m in FY16, with an adjusted EBITDA of £102.2m, above our estimates of £265m and £98.6m respectively. Operating cash flow conversion was 81% (101% excluding an exceptional transaction). As a market leader in online bingo-led gaming, growth in the Jackpotjoy division was particularly strong, with an EBITDA margin of 45%. In line with JPJ expectations, Q117 revenue grew c 10%.

Increased control of Gamesys relationship

JPJ’s relationship with Gamesys has been complex and expensive, with Gamesys assuming responsibility for all aspects of the Jackpotjoy division. From this year, however, a significant change is underway, following an amendment to the original terms and the end of the major earn-out period. JPJ is increasing its control over the strategic planning and budget and, from April 2019, we expect the dedicated Jackpotjoy staff at Gamesys to move over to JPJ. Although the expiration of a non-compete clause (April 2019) remains a concern, we believe this is mitigated by growing barriers to entry and meaningful cross-shareholdings.

Valuation: Large discount for legacy and debt

JPJ continues to trade at a significant discount to its peer group, at 6.7x EV/EBITDA and 5.9x P/E for 2017, reflecting legacy concerns over its relationship with Gamesys, high net debt, the lack of dividend and low stock liquidity. To counterbalance, the investment case rests on JPJ’s strong market positioning and high FCF yield (14.4% and 18.6% in 2017e and 2018e), which should begin to drive value towards equity and further enable cash returns. Key catalysts will be the payment of the earn-out in June, as well as continued evidence of underlying growth, margin expansion and debt repayment.

FY results: Robust growth and strong margins
Overview

JPJ’s maiden UK results reflected the robust nature of its underlying business model. Group FY16 revenues grew 15% on a pro forma basis to £269m vs our estimate of £265m. The company’s EBITDA margin of 38% was 80bp ahead of our forecast.

JPJ is organised into three divisions, of which the Jackpotjoy division is the largest, comprising 70% of revenues and 83% of EBITDA. 77% of the business is derived from regulated markets, of which the UK comprises 66%.

Customer retention rates were 90%. Average active customers grew 15% to 235.6k in Q416, with average monthly gaming revenue per active customer rising 4% to £86.

Within the context of the gaming industry, JPJ is an outlier in terms of its capital structure and lack of dividend. Adjusted net debt of £408m equates to 4x leverage and further cash outflows are due in June 2017. However, underlying operating cash flow conversion of 101% is indicative of the company’s ability to steadily restructure its balance sheet.

Jackpotjoy: Industry-leading margins

JPJ’s flagship brand is Jackpotjoy, which has a c 23% share of the UK online bingo-led market. The division includes Starspins and Botemania real money gaming (RMG) brands. Jackpotjoy and Starspins also offer social games. The UK is the biggest market, accounting for 80% of revenues.

Revenues for the Jackpotjoy division increased from £121m to £188.2m in 2016, and compares to our estimate of £183m. Jackpotjoy UK real money comprised £89.6m, with social gaming contributing c £19m.

We estimate that Starspins revenue grew from £11m in 2015 to £32m in 2016, largely due to the successful mobile launch in Q315. Botemania’s slot launch in Q216 contributed to a revenue increase of approximately £21m to £28m in 2016.

Divisional EBITDA margin grew from 39% to 45% and is significantly higher than industry norms, largely due to lower marketing spend (strong brands), as well as a favourable revenue share arrangement with Gamesys (10% rising to 12.5% in 2020).

Mandalay: Flat revenues and lower margins

Mandalay’s revenues of £21.7m were flat YoY and slightly lower than our forecast of £22.4m. EBITDA margin fell from 39.5% to 30.6% on the back of increased marketing spend, royalties paid to 888 (Dragonfish platform) and the introduction of POC tax. With the end of the earn-out period for Jackpotjoy, the group anticipates additional cross-selling opportunities for the Mandalay division.

Vera&John: Continued organic growth

Vera&John was launched in 2011 and is a global online casino operator, with its own proprietary platform. Vera&John operates largely in Scandinavian and unregulated markets.

Divisional revenues grew from £51.9m to £59.1m, due to continued organic growth in existing markets, helped by the introduction of flexible deposit limits and steady growth in revenue per customer.

EBITDA margin declined from 31% to 30%, largely due to the InterCasino brand migration. Although the casino business is a fast growing segment, we expect continued margin pressure as markets regulate.

Gamesys: Amended contract terms

JPJ’s relationship with Gamesys has been complex and expensive, with Gamesys assuming responsibility for all aspects of the Jackpotjoy division. For a detailed analysis, please see our Initiation report of January 2017.

To summarise, however, the major earn-out period is now over and JPJ will begin to take control over the strategic planning and budget from April 2017. We expect the dedicated Jackpotjoy staff at Gamesys to move over to JPJ from April 2019.

Following the amendment to the contract, the non-compete clause has been extended for another two years (April 2019). Although the expiration of this non-compete clause is a potential threat, we believe this is mitigated by growing barriers to entry and cross-shareholding between the two businesses.

Debt: Deleveraging from June 2017

As a consequence of the high acquisition cost of Jackpotjoy from Gamesys, JPJ’s net debt is relatively high, with 4x adjusted net debt/EBITDA in 2016. Although the major earn-out period is now over, a £87m payout is due in June 2017, with a further £41m remaining from Botemania,

Given the high cash flow generation within the business, JPJ expects to fund the remaining payments through its internally generated cash and from June 2017 we expect JPJ to begin the process of deleveraging.

Our forecasts indicate net debt remaining stable in 2017, with high cash flow offset by earnout payments. We forecast net debt of £279.6m in 2018, with an adjusted net leverage of 2.6x, approaching the company’s target of 2x in 2019.

Under the terms of its covenants, the group is permitted to pay dividends once net leverage reaches 2.75x and the company has stated that it intends to begin paying dividends once the balance sheet is restored to more sector average debt levels. According to our forecasts, we believe this might be achieved in 2019.

Forecast changes

Following the listing in London, JPJ now reports in sterling and we have modified our model accordingly. The income statement has been translated with an average C$/£ FX of 0.56 and 0.51, for 2016 and 2015, respectively. The balance sheet has been translated at a YE spot rate of CAD$/£ of 0.60 and 0.49 for 2016 and 2015 respectively.

2016 revenues were in line with our expectations and we have left our 2017 and 2018 revenue estimates broadly unchanged. Given the headwinds of POC tax in the UK, combined with increasing taxation in other territories, the EBITDA margin of 38% in 2016 falls to 35% in 2017e and 34% in 2018e. This implies an absolute EBITDA growth of 3.7% in 2017 and 8.5% in 2018.

Exhibit 1: Change in estimates

£m

Revenue (£m)

PBT (£m)

EBITDA (£m)

Old

New

% chg

Old

New

% chg

Old

New

% chg

2016

265.0

269.0

1.5%

80.6

65.7

-18.5%

98.6

102.2

3.7%

2017e

301.7

303.1

0.5%

71.0

72.3

1.9%

104.5

106.0

1.4%

2018e

334.7

338.7

1.2%

80.2

84.3

5.1%

110.8

114.9

3.7%

Source: Edison Investment Research

Valuation: Opportunity for re-rating

Online gambling companies are generally valued on a P/E and EV/EBITDA basis although we have also performed a DCF analysis. Exhibit 2 shows the main UK-listed peers, of which we consider the closest to be 888 Holdings and GVC, both of whom have sizeable online bingo and gaming operations, and the smaller Stride Gaming.

JPJ’s 2017e P/E of 5.9x is less than half the UK sector average of 12.2x and the EV/EBITDA of 6.7x compares to a sector average of 8.2x. Legacy issues have been addressed and the investment case rests upon continued cash flow generation and demonstrable deleveraging.

As an example, a 10x 2017e P/E would imply a share price of 950p and a 9.4x 2017e EV/EBITDA, still below 888 to allow for the above-average leverage and dependency on Gamesys. This compares to our DCF valuation of 1,090p (from 1,088p/share), using a WACC of 10%.

Exhibit 2: Peer group comparison

Company

Price

Mkt cap

P/E (x)

EV/EBITDA (x)

(p)

(£m)

2016

2017e

2018e

2016e

2017e

2018e

Jackpotjoy plc

560

413

6.4

5.9

5.1

6.9

6.7

6.2

32Red

195

166

90.9

13.3

11.1

33.4

10.0

8.6

888 Holdings

271

970

22.2

18.4

16.4

13.0

10.7

9.7

GVC Holdings

744

2,187

12.3

15.1

12.1

47.9

10.0

8.6

Gaming Realms

13

35

N/A

8.5

4.4

N/A

5.2

3.1

Ladbrokes

134

2,556

14.3

12.1

9.7

61.5

8.6

7.8

Paddy Power Betfair

8,690

7,304

30.1

21.9

19.4

37.7

15.3

12.1

Playtech

938

2,977

22.1

13.0

11.8

13.5

8.8

7.9

Rank Group*

215

838

13.6

14.0

12.9

6.3

6.8

6.5

Stride Gaming*

226

152

33.3

9.7

9.5

6.3

6.8

6.5

William Hill

287

2,459

13.6

11.9

11.0

9.5

8.3

7.9

Average UK listed peers **

 

25.4

12.2

10.4

22.0

8.2

7.3

Overseas listed peers

Amaya

CAD 23

3,284

18.6

8.2

7.7

11.7

8.9

8.5

Betsson

SEK 75

10,794

12.4

11.5

12.4

11.1

9.3

9.7

Cherry

SEK 298

3,999

N/A

24.2

13.7

NA

7.4

5.6

Kindred (Unibet)

SEK 86

19,894

31.4

16.1

17.2

22.8

11.8

12.2

LeoVegas

SEK 37

3,639

NA

18.8

11.3

NA

13.5

7.9

Net Entertainment

SEK 69

16,581

44.5

28.2

24.2

29.9

19.9

17.0

Overall average

26.1

14.7

12.3

22.3

9.9

8.6

Source: Bloomberg, Edison Investment Research. Note: *June year end. ** Excludes Paddy Power Betfair. Prices as at 29 March.

Exhibit 3: Financial summary

 

 

£m

2015

2016

2017e

2018e

December

 

PROFIT & LOSS

 

Revenue

 

 

194.6

269.0

303.1

338.7

Cost of Sales

(101.4)

(130.7)

(154.0)

(178.8)

Gross Profit

93.3

138.3

149.1

159.9

EBITDA

 

 

70.4

102.2

106.0

114.9

Operating Profit (before amort. and except.)

70.1

101.6

105.3

114.3

Intangible Amortisation

(50.6)

(55.5)

(55.0)

(55.0)

Exceptional and other items **

(109.7)

(52.6)

(16.5)

0.0

Share based payments

(2.9)

(2.3)

(2.0)

(2.0)

Operating Profit

(93.1)

(8.8)

31.8

57.3

Net Interest

(24.0)

(35.9)

(33.0)

(30.0)

Profit Before Tax (norm)

 

 

46.1

65.7

72.3

84.3

Profit Before Tax (FRS 3)

 

 

(114.2)

(40.7)

3.8

27.3

Tax

(0.5)

0.1

(1.0)

(1.5)

Profit After Tax (norm)

45.5

65.7

71.3

82.8

Profit After Tax (FRS 3)

(114.8)

(40.6)

2.8

25.8

 

 

Average Number of Shares Outstanding (m)

61.2

71.2

73.0

73.0

EPS - normalised ($/p)

74.4

92.3

97.7

113.5

EPS - normalised and fully diluted (C$/p)

73.0

88.5

96.0

111.5

EPS - (IFRS) (C$/p)

(187.5)

(57.1)

3.9

35.4

Dividend per share (p)

0.0

0.0

0.0

0.0

 

 

Gross Margin (%)

47.9

51.4

49.2

47.2

EBITDA Margin (%)

36.2

38.0

35.0

33.9

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

36.0

37.8

34.8

33.8

 

 

BALANCE SHEET

 

Fixed Assets

 

 

674.3

652.3

596.8

541.9

Intangible Assets

668.8

648.8

593.8

538.8

Tangible Assets

0.2

0.9

0.4

0.5

Other long term assets

5.3

2.6

2.6

2.6

Current Assets

 

 

63.9

139.0

86.1

90.5

Stocks

0.0

0.0

0.0

0.0

Debtors (incl swaps)

25.6

62.0

35.0

37.0

Cash

31.8

68.5

42.6

44.5

Player balances

6.5

8.6

8.5

9.0

Current Liabilities

 

 

(54.3)

(154.9)

(118.7)

(64.4)

Creditors

(23.1)

(41.3)

(40.0)

(34.0)

Short term borrowings

(25.2)

(26.7)

(26.7)

(26.7)

Contingent consideration

(6.0)

(86.9)

(52.0)

(3.8)

Long Term Liabilities

 

 

(394.8)

(397.1)

(338.4)

(299.4)

Long term borrowings

(189.3)

(347.4)

(322.4)

(297.4)

Contingent consideration

(203.6)

(33.3)

0.0

0.0

Other long term liabilities

(2.0)

(16.4)

(16.0)

(2.0)

Net Assets

 

 

289.0

239.4

225.8

268.6

 

 

CASH FLOW

 

Operating Cash Flow

 

 

23.3

83.0

99.0

112.9

Net Interest

(24.0)

(35.9)

(33.0)

(30.0)

Tax

(0.5)

(1.2)

(3.0)

(3.0)

Capex

(2.5)

(2.5)

(4.0)

(4.0)

Acquisitions (inc earn-outs)

(355.6)

(156.3)

(95.4)

(49.0)

Financing

203.7

(10.0)

35.5

0.0

Dividends

0.0

0.0

0.0

0.0

Net Cash Flow

(155.6)

(122.9)

(0.9)

26.9

Opening net debt/(cash)

 

 

27.1

182.7

305.6

306.5

HP finance leases initiated

0.0

0.0

0.0

0.0

Other

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

182.7

305.6

306.5

279.6

NPV of outstanding earnouts/ other

 

209.5

140.7

70.0

18.0

Currency swaps

 

 

(4.7)

(38.2)

0.0

0.0

Adjusted net debt

 

 

387.5

408.1

376.5

297.6

Source: Company accounts, Edison Investment Research. Note: *Exceptional and other items include transaction related costs, severance costs, fair value adjustments on contingent consideration and gain on cross currency swap.

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Jackpotjoy plc and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. 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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. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. 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London +44 (0)20 3077 5700

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New York +1 646 653 7026

245 Park Avenue, 39th Floor

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Level 12, Office 1205

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NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Jackpotjoy plc and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. 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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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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