Growth through diversification

JPJ Group plc 15 May 2019 Update
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JPJ Group plc

Growth through diversification

Q119 results

Travel & leisure

15 May 2019

Price

698p

Market cap

£520m

Adjusted net debt (£m) at end March 2019

274.8

Shares in issue

74.5m

Free float

95%

Code

JPJ

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

1.2

(2.2)

(16.0)

Rel (local)

3.6

(3.2)

(10.4)

52-week high/low

1036p

590p

Business description

JPJ Group is a leading online gaming operator mainly focused on bingo-led gaming targeting towards female audiences. During Q119, 49% of revenues were generated in the UK.

Next events

H119 results

August 2019

Analysts

Victoria Pease

+44 (0)20 3077 5740

Richard Williamson

+44 (0)20 3077 5700

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

Once again, a strong performance in international markets has fully offset the well-flagged regulatory challenges in the UK. Q119 revenues increased by 13% to £83.3m, driven by a 62% growth in the Vera&John division. Operating leverage from the proprietary platform contributed to a 16% increase in adjusted EBITDA (£29.0m vs £24.9m). Net debt/EBITDA has fallen below 2.5x and management will provide an update on plans to return cash to shareholders in August. For FY20 the stock trades at 6.5x P/E, 8.0x EV/EBITDA, with an estimated dividend yield of 6.4%.

Year end

Revenue (£m)

EBITDA
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/17

304.7

108.6

103.9

0.0

6.7

N/A

12/18

319.6

112.7

118.5

0.0

5.9

N/A

12/19e**

318.8

95.8

100.5

30.0

6.9

4.3

12/20e

336.6

99.0

106.8

45.0

6.5

6.4

Note: *EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Excludes Mandalay revenues for the entire year.

Shifting the geographic mix

Given the regulatory challenges in the UK, many operators are concentrating on international diversification and JPJ now derives less than 50% of revenues from the UK. The geographic mix reflects trends prevalent in global gaming sector: Japan has grown from 12% to 25% of revenues and is a fast-growing, unregulated market (no taxes), whereas Swedish revenues fell from 8% to 5% of the total, as the newly regulated market has attracted intense competition. In Spain, revenues were flat, as quarterly revenues can be lumpy and Q119 was curtailed by a higher than typical number of VIP winners. We are leaving our headline forecasts broadly unchanged, although we believe there could be upside from the more volatile international markets.

Regulation hits the UK, with growth to resume in H2

In the core UK market, Q119 results continue to be affected by regulatory measures that were introduced during 2018; Jackpotjoy UK (c 40% of total revenues) continued single-digit decline. However, once the impact of closed accounts (from high value VIPs) begins to annualise in H219, we believe the UK business should return to single-digit revenue growth. In terms of margins, the rise in remote gaming duty from April 2019 (from 15% to 21%) will impact EBITDA by c £10m a year.

Valuation: 6.5x P/E for FY20e

JPJ is successfully concentrating on higher-growth markets and continues to deliver strong results with high cash flow. However, the stock still trades towards the bottom of its peer group, at 6.5x P/E, 8.0x EV/EBITDA and an estimated dividend yield of 6.4% for FY20. Given the international growth prospects, combined with steady net debt reduction, this seems unjustified in our view.

Q119: Growth from abroad

Summary: International boosts revenues and margins

Group revenues up 13%, driven by 62% growth in Vera&John

Q119 revenues increased by 13% to £83.3m, with a 7% decline in Jackpotjoy and a 62% growth in Vera&John. The decline in Jackpotjoy was due to the continued impact of regulatory measures (specifically the closure of high-value accounts), as well as flat revenues in Spain (Botemania) and weakness in the Swedish bingo division. Within Vera&John, Japanese revenues increased from £8.9m in Q118 to £20.8m in Q119.

In the 12 months to March 2019, average active customers per month grew 8% to 242,938 versus the prior year and average real money gaming revenue per month increased 12% to £25.7m. This equates to monthly real money gaming revenue per average active customer of £106, a y-o-y increase of 4%.

Operating leverage at Vera&John boosts adjusted EBITDA

Q119 adjusted EBITDA was £29.0m which represents a margin of 34.8% vs 33.6% in the prior year, with the improvement driven by Vera&John’s proprietary platform. While Jackpotjoy’s adjusted EBITDA declined from £23.9m to £18.8m, Vera&John’s adjusted EBITDA increased from £4.0m to £13.3m (EBITDA margin of 38.8% vs 18.7%).

Outlook: Forecasts unchanged

On the back of these results, management remains confident in its full-year outlook and we leave our headline forecasts broadly unchanged. Although we believe there could be upside from international markets, the unregulated markets (specifically including Japan) are typically far more volatile and therefore we have conservatively assumed the exceptional growth achieved in Q119 will not be matched for the rest of the year.

Jackpotjoy (59% of revenues)

UK revenues reflect well-flagged regulatory challenges

In a similar vein to previous trading updates, Q119 results were affected by regulatory measures introduced during 2018. The most meaningful was the introduction of enhanced Responsible Gaming measures (from Q218) and the closure of a small number of high-value accounts (VIPs).

For the Jackpotjoy division as a whole, Q119 revenues were down 7% vs the prior period and were also sequentially lower, which is a normal seasonal variation in Jackpotjoy UK.

Jackpotjoy UK declined by c 8% versus the prior year and now comprises 67% of divisional revenues. Management has stated the impact of closed accounts will begin to annualise during H219 and we believe that, provided there are no further regulatory challenges, the Jackpotjoy segment should return to single-digit revenue growth thereafter.

Spanish revenues (Botemania) were broadly flat in the quarter (10% of total revenues) and, in common with the wider market, the Swedish bingo component appears to have declined significantly during the quarter. Growth in Starspins (UK casino) partially offset the weakness in other areas and it comprises 14% of divisional revenues

As detailed in our February update, JPJ disposed of Mandalay during the quarter. This division previously contributed 3.5% of revenues.

EBITDA affected by Swedish taxes and higher UK costs

In terms of profit, divisional EBITDA was £18.8m, with a 38.3% margin, which compares to 45.2% in the prior year. The lower margins were due to a number of factors: (1) higher marketing costs; (2) the introduction of 18% tax in Sweden as well as increased competition in the country; (3) increasing regulatory costs and less focus on VIPs for Jackpotjoy UK.

With the increase in remote gaming duty in April from 15% to 21%, EBITDA will be affected by c £10m annually.

Vera&John (41% of revenues)

JPJ has continued its impressive growth trajectory in international markets and Vera&John’s Q119 revenues increased by 62% y-o-y to £34.2m, equating to 64% in constant currency. Adjusted EBITDA was £13.3m, with a 38.8% margin, significantly higher than the 18.8% margin in Q118.

This business benefits from a proprietary platform enabling increased scale, product differentiation and better cost control. Largely as a result of this strong performance, international revenues now comprise 51% of Group revenues (including Botemania and Swedish bingo, which are both in the Jackpoytjoy division). In terms of geographic spread, the most notable developments in the quarter were a ramp up in Japanese revenues, as well as a decline in Sweden. Germany and Brazil also exhibited high growth in the quarter.

Japan (25% of revenues): revenues from Japan increased from £8.9m in Q118 to £20.8m in Q119. Japan is a fast-growing, unregulated market that has the advantage of producing higher cash (no taxes) and JPJ has clearly been successful at developing content that appeals to the local market. We note that unregulated markets are characterised by greater volatility, which is likely to be reflected in future growth.

Sweden (5% of revenues): revenues from Sweden declined from £5.9m to £4.2m (this includes a portion of bingo from the Jackpotjoy division). As confirmed by results from other operators (Kindred, Betsson), Sweden has become increasingly competitive since full regulation in January 2019. There is a risk (similar to other European markets) that the regulator will further clamp down on online advertising and we believe that, in this scenario, JPJ is unlikely to invest too much in the country in the near term.

Cash flow and balance sheet

Post tax operating cash flow was £20.6m, which was lower than expected (71% conversion vs c 90% in previous periods). The main reason for the shortfall was a higher level of restricted cash (an increase of £3.6m) required by payment processors in some international markets.

Nonetheless, JPJ ended the quarter with an unrestricted cash balance of £106.1m and adjusted net debt (including non-compete clauses and contingent consideration) of £274.8m (vs £302.1m at FY18). This equates to a trailing 12m net debt/ adjusted EBITDA ratio of 2.44x at Q119 vs 2.68x at FY18. We forecast unadjusted net debt of £224.2m at FY19 and adjusted net debt of £225.6m, which equates to an adjusted net debt/EBITDA of 2.3x.

Management has previously stated it will seek to return cash to shareholders once the net debt/ EBITDA ratio is comfortably below 2.5x and we expect confirmation of its intentions in this respect at interims in August. We forecast a dividend of 30p for FY19 and 45p for FY20.

Exhibit 1: Estimate changes

Revenue (£m)

EBITDA (£m)

EPS (p)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2019e

318.6

318.8

0.0

95.8

95.8

0.0

101.0

100.5

(0.5)

2020e

336.1

336.6

0.0

99.0

99.0

0.0

105.8

106.8

0.9

2021e

354.5

354.5

0.0

104.6

104.1

(0.5)

112.9

114.6

1.5

Source: Edison Investment Research


Exhibit 2: Financial summary

£m

2015

2016

2017

2018

2019e

2020e

2021e

December

PROFIT & LOSS

Revenue

 

 

194.6

269.0

304.7

319.6

318.8

336.6

354.5

Cost of Sales

(101.4)

(130.7)

(147.5)

(158.9)

(170.7)

(183.2)

(191.4)

Gross Profit

93.3

138.3

157.2

160.7

148.1

153.4

163.1

EBITDA

 

 

70.4

102.2

108.6

112.7

95.8

99.0

104.1

Operating Profit (before amort. and except.)

70.1

101.6

108.2

112.2

95.3

98.5

103.6

Intangible Amortisation

(50.6)

(55.5)

(62.6)

(60.3)

(54.0)

(54.0)

(54.0)

Exceptional and other items **

(109.7)

(80.3)

(104.9)

(16.3)

(4.5)

0.0

0.0

Share based payments

(2.9)

(2.3)

(1.4)

(0.6)

(0.5)

(0.5)

(0.5)

Operating Profit

(93.1)

(36.5)

(60.8)

35.0

36.3

44.0

49.2

Net Interest

(24.0)

(18.1)

(30.0)

(19.5)

(15.0)

(13.0)

(11.0)

Profit Before Tax (norm)

 

 

46.1

83.5

78.2

92.7

80.3

85.5

92.6

Profit Before Tax (FRS 3)

 

 

(114.2)

(36.7)

(65.8)

18.5

22.6

31.0

38.2

Tax

(0.5)

0.1

(0.7)

(0.5)

(3.5)

(5.0)

(6.0)

Profit After Tax (norm)

45.5

83.6

77.5

92.3

76.8

80.5

86.6

Profit After Tax (FRS 3)

(114.8)

(36.7)

(66.5)

18.1

19.1

26.0

32.2

Average Number of Shares Outstanding (m)

61.2

71.2

73.9

74.2

74.8

75.0

75.3

EPS - normalised (p)

74.4

117.3

104.9

119.5

100.9

107.3

115.1

EPS - normalised and fully diluted (p)

 

73.1

112.6

103.9

118.5

100.5

106.8

114.6

EPS - (IFRS) (p)

(187.6)

(51.5)

(90.0)

19.5

23.8

34.6

42.7

Dividend per share (p)

0.0

0.0

0.0

0.0

30.0

45.0

50.0

Gross Margin (%)

47.9

51.4

51.6

50.3

46.5

45.6

46.0

EBITDA Margin (%)

36.2

38.0

35.6

35.3

30.0

29.4

29.4

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

36.0

37.8

35.5

35.1

29.9

29.3

29.2

BALANCE SHEET

Fixed Assets

 

 

674.3

652.3

595.9

521.9

456.5

409.0

361.5

Intangible Assets

668.8

648.8

589.0

514.7

446.2

395.7

345.2

Tangible Assets

0.2

0.9

1.3

2.2

5.2

8.2

11.2

Other long term assets

5.3

2.6

5.6

5.0

5.0

5.0

5.0

Current Assets

 

 

63.9

139.0

93.2

124.0

150.6

147.4

142.1

Stocks

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Debtors (incl swaps)

25.6

62.0

26.0

30.5

40.5

44.5

49.5

Cash

31.8

68.5

59.0

84.4

97.0

88.8

77.5

Player balances

6.5

8.6

8.2

9.0

13.0

14.0

15.0

Current Liabilities

 

 

(54.3)

(154.9)

(98.5)

(52.3)

(44.8)

(43.8)

(42.8)

Creditors

(23.1)

(41.3)

(46.3)

(47.8)

(44.8)

(43.8)

(42.8)

Short term borrowings

(25.2)

(26.7)

(0.3)

0.0

0.0

0.0

0.0

Contingent consideration

(6.0)

(86.9)

(51.9)

(4.5)

0.0

0.0

0.0

Long Term Liabilities

 

 

(394.8)

(397.1)

(386.7)

(374.5)

(323.5)

(273.5)

(223.5)

Long term borrowings

(189.3)

(347.4)

(369.5)

(371.5)

(321.5)

(271.5)

(221.5)

Contingent consideration

(203.6)

(33.3)

(7.7)

0.0

0.0

0.0

0.0

Other long term liabilities

(2.0)

(16.4)

(9.4)

(3.0)

(2.0)

(2.0)

(2.0)

Net Assets

 

 

289.0

239.4

204.1

219.1

238.8

239.1

237.3

CASH FLOW

Operating Cash Flow

 

 

23.3

84.2

102.0

106.8

80.8

92.0

97.1

Net Interest

(24.0)

(17.5)

(30.9)

(19.5)

(15.0)

(13.0)

(11.0)

Tax

(0.5)

(1.2)

(1.0)

(0.8)

(3.5)

(5.0)

(6.0)

Capex

(2.5)

(2.5)

(3.2)

(5.3)

(7.0)

(7.0)

(7.0)

Acquisitions (inc earn-outs)

(355.6)

(156.3)

(94.2)

(55.3)

13.0

0.0

0.0

Financing

203.7

(29.6)

22.2

(2.3)

0.0

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

(5.6)

(25.1)

(34.5)

Net Cash Flow

(155.6)

(122.9)

(5.2)

23.6

62.7

41.8

38.7

Opening net debt/(cash)

 

 

27.1

182.7

305.6

310.7

287.1

224.4

182.6

HP finance leases initiated

0.0

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

0.0

Closing net debt/(cash)

 

 

182.7

305.6

310.7

287.1

224.4

182.6

143.9

NPV of outstanding earnouts/ other

 

209.5

140.8

76.6

15.0

1.4

0.0

0.1

Currency swaps

 

 

(4.7)

(38.2)

0.0

0.0

0.0

0.0

0.0

Adjusted net debt

 

 

387.5

408.1

387.3

302.1

225.8

182.6

144.0

Source: Company accounts, 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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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.

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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.

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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

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United States

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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

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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