GVC Holdings — Q3 trading update shows continued progress

GVC Holdings — Q3 trading update shows continued progress

In a continuation of previous trends, GVC’s Q318 trading update has demonstrated strong growth and market share gains across all territories. Total net gaming revenues (NGR) were up 14%, driven by a 28% growth in online NGR. UK retail was only down 2%, helped by a strong FIFA World Cup. The integration of Ladbrokes is progressing well, although GVC has announced that Paul Bowtell (former Ladbrokes CFO) will resign in March 2019. Our estimates remain unchanged, but there is a £20-25m risk to our EBITDA forecasts, following an anticipated increase in remote gaming duty (RGD) at the government’s budget on 29 October. The stock has fallen 19% from recent highs and trades at 10.0x EV/EBITDA and 13.0x P/E for 2018e.

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Written by

GVC Holdings

Q3 trading update shows continued progress

H118 results

Travel & leisure

18 October 2018

Price

950p

Market cap

£5,494m

£1:€1.139

Net debt (£m) at June 2018

1,887

Shares in issue

578.4m

Free float

99%

Code

GVC

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(6.6)

(16.0)

3.0

Rel (local)

(2.8)

(9.1)

9.5

52-week high/low

1,170.0p

860.0p

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

UK government budget

29 October 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

In a continuation of previous trends, GVC’s Q318 trading update has demonstrated strong growth and market share gains across all territories. Total net gaming revenues (NGR) were up 14%, driven by a 28% growth in online NGR. UK retail was only down 2%, helped by a strong FIFA World Cup. The integration of Ladbrokes is progressing well, although GVC has announced that Paul Bowtell (former Ladbrokes CFO) will resign in March 2019. Our estimates remain unchanged, but there is a £20-25m risk to our EBITDA forecasts, following an anticipated increase in remote gaming duty (RGD) at the government’s budget on 29 October. The stock has fallen 19% from recent highs and trades at 10.0x EV/EBITDA and 13.0x P/E for 2018e.

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

3,472.7

734.9

511.0

73.0

32.0

13.0

3.4

12/19e

3,558.5

794.5

560.6

79.8

34.0

11.9

3.6

12/20e

3,318.3

730.0

491.6

69.4

36.0

13.7

3.8

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 Q3 trading, in line with expectations

In line with our expectations, GVC produced a strong Q318 trading update, with total NGR up 14%. Online NGR growth of 28% was driven by a 31% increase in Sports Brands NGR (including a 43% growth from legacy GVC). Adjusting for the World Cup and the acquisition of CrystalBet, Online NGR was up 21%. European retail NGR grew 24%, boosted by Italy, and UK retail like-for-like NGR declined by only 2%, helped by a good second half of the World Cup. Year to date, group NGR has increased 10%, driven by a 21% growth in online NGR and a 28% growth in European retail NGR. Our estimates remain unchanged.

Anticipated RGD tax from the budget to impact FY19

The government is expected to provide an update on its plans to increase RGD in the budget on 29 October 2018. We will reassess our estimates for the RGD tax once the budget has been announced. Our estimated impact for GVC is c £20–25m on EBITDA, starting in April 2019. We also expect clarity on the implementation date for the cut in B2 stakes to £2, with the enaction of the Triennial Review legislation anticipated this year. Currently our estimates include the impact from the Fixed Odds Betting Terminals cut in 2020.

Valuation: 10.0x EV/EBITDA and 13.0x P/E for FY18e

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/EBITDA peaking at 2.6x in 2018, strong FCF should rapidly reduce leverage. The stock has fallen c 19% from its recent highs and trades at 10.0x EV/EBITDA and 13.0x P/E for FY18e, appropriately towards the top end of the peer group.

Exhibit 1: 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

3,472.7

3,558.5

3,318.3

Cost of Sales

(1,233.8)

(1,418.7)

(1,581.7)

(1,631.8)

(1,620.4)

Gross Profit

1,765.0

1,872.8

1,890.9

1,926.8

1,698.0

EBITDA

 

 

523.4

666.5

734.9

794.5

730.0

Normalised operating profit

 

 

376.4

529.5

594.9

639.5

565.0

Amortisation of acquired intangibles

(200.0)

(380.0)

(250.0)

(200.0)

(150.0)

Exceptionals

(534.3)

(59.5)

(142.0)

(39.0)

(103.0)

Share-based payments

(31.8)

(20.7)

(12.5)

(12.5)

(12.5)

Reported operating profit

(389.7)

69.3

190.4

388.0

299.5

Net Interest

(124.6)

(72.0)

(85.0)

(80.2)

(75.0)

Joint ventures & associates (post tax)

5.9

5.3

1.1

1.3

1.6

Profit Before Tax (norm)

 

 

257.7

462.8

511.0

560.6

491.6

Profit Before Tax (reported)

 

 

(508.5)

2.5

106.5

309.1

226.1

Reported tax

23.6

(9.9)

(66.4)

(72.9)

(63.9)

Profit After Tax (norm)

257.7

462.8

511.0

560.6

491.6

Profit After Tax (reported)

(508.5)

2.5

106.5

309.1

226.1

Minority interests

0.0

0.0

(8.0)

(10.4)

(12.5)

Discontinued operations

28.4

(13.2)

0.0

0.0

0.0

Net income (normalised)

222.1

402.6

436.6

477.3

415.2

Net income (reported)

(456.5)

(20.6)

32.1

225.8

149.7

Basic average number of shares outstanding (m)

NM

NM

578

578

578

EPS - basic normalised (p)

 

 

NM

NM

75.48

82.52

71.78

EPS - diluted normalised (p)

 

 

NM

NM

72.95

79.76

69.38

EPS - basic reported (p)

 

 

NM

NM

5.54

39.04

25.88

Dividend (p)

NM

NM

32.00

34.00

36.00

Revenue growth (%)

NM

10%

6%

2%

-7%

Gross Margin (%)

58.9

56.9

54.5

54.1

51.2

EBITDA Margin (%)

17.5

20.2

21.2

22.3

22.0

Normalised Operating Margin

12.6

16.1

17.1

18.0

17.0

BALANCE SHEET

Fixed Assets

 

 

6,040.7

6,082.0

6,779.8

6,574.8

6,399.8

Intangible Assets

5,605.3

5,607.0

6,224.0

6,054.0

5,926.0

Tangible Assets

245.0

264.4

210.0

175.0

128.0

Investments & other

190.4

210.7

345.8

345.8

345.8

Current Assets

 

 

792.0

773.8

785.2

817.2

835.2

Stocks

1.6

2.0

2.0

2.0

2.0

Debtors

342.6

258.7

393.2

413.2

433.2

Cash & cash equivalents

272.2

328.8

175.0

172.0

160.0

Other

175.6

184.3

215.0

230.0

240.0

Current Liabilities

 

 

(1,583.1)

(1,121.0)

(1,031.0)

(1,021.0)

(1,011.0)

Creditors

(699.9)

(594.1)

(815.0)

(805.0)

(795.0)

Tax and social security

(67.7)

(253.8)

(40.0)

(40.0)

(40.0)

Short term borrowings

(742.4)

(200.0)

(50.0)

(50.0)

(50.0)

Other

(73.1)

(73.1)

(126.0)

(126.0)

(126.0)

Long Term Liabilities

 

 

(1,052.8)

(1,513.9)

(2,622.1)

(2,510.0)

(2,360.0)

Long term borrowings

(749.6)

(1,212.1)

(2,012.1)

(1,900.0)

(1,750.0)

Other long term liabilities

(303.2)

(301.8)

(610.0)

(610.0)

(610.0)

Net Assets

 

 

4,196.9

4,220.9

3,911.9

3,861.0

3,864.0

Minority interests

0.0

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

4,196.9

4,220.9

3,911.9

3,861.0

3,864.0

CASH FLOW

Op Cash Flow before WC and tax

558.6

701.2

596.9

794.5

730.0

Working capital

3.8

(29.1)

(50.0)

(25.0)

(25.0)

Exceptional & other

(534.3)

(59.5)

(142.0)

(39.0)

(73.0)

Tax

(6.5)

(14.9)

(60.0)

(72.9)

(63.9)

Net operating cash flow

 

 

21.7

597.7

344.9

657.6

568.1

Capex

(58.2)

(205.8)

(177.0)

(150.0)

(140.0)

Acquisitions/disposals

(1,032.4)

(6.0)

(3,157.0)

0.0

0.0

Net interest

(71.1)

(101.3)

(50.0)

(80.2)

(75.0)

Equity financing

158.8

47.0

2,497.0

0.0

0.0

Dividends

(30.4)

(200.1)

(138.5)

(190.7)

(202.3)

Other

109.3

0.0

(123.0)

(127.3)

(12.5)

Net Cash Flow

(902.4)

131.5

(803.6)

109.3

138.3

Opening net debt/(cash)

 

 

312.7

1,215.1

1,083.5

1,887.2

1,777.9

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

1,887.2

1,777.9

1,639.6

Source: Company accounts, Edison Investment Research

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 Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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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

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 Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by GVC Holdings 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 Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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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Frankfurt +49 (0)69 78 8076 960

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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

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: TMT

Mercia Technologies — Realising value

Mercia Technologies (Mercia) is a leading player in the funding and scaling of high growth companies from the UK regions, with a business model that is significantly de-risked vs peers. £400m of managed funds (Mercia Fund Managers, MFM) are used to predominately support all early-stage activity, whilst also providing meaningful revenue to offset group operating costs. As a result, the balance sheet investment is reserved for only the most promising companies or ‘Emerging Stars’ sourced from MFM. The group has a strong cash position and an experienced management, as well as a good track record, with three successful full cash exits to date. The shares trade at 0.73x NAV, not including the contribution from MFM, which we estimate at a further c 9p per share (total discount to NAV of 0.60x).

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