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Research: Consumer
The major Gamesys earn-out period finished in March 2017 and, as expected, Jackpotjoy plc (JPJ) has announced a £94.2m payment for its penultimate earn-out. There is a further c £44m due for the Spanish assets (Botemania) in June 2018, which should be comfortably covered by operating cash flow. Although adjusted net debt/EBITDA of c 4.0x remains high, we expect significant deleverage from 2018. The stock has recovered some ground recently, but continues to trade at a significant discount to peers, with 2018e multiples of 6.8x EV/EBITDA and 5.7x P/E. Given the company’s leading market position and robust cash flow generation, we would expect a re-rating as the market regains confidence in the business model. Our forecasts remain unchanged.
Jackpotjoy plc |
Earn-out paid; another milestone achieved |
Earn-out update |
Travel & leisure |
22 June 2017 |
Share price performance
Business description
Next events
Analysts
Jackpotjoy plc is a research client of Edison Investment Research Limited |
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The major Gamesys earn-out period finished in March 2017 and, as expected, Jackpotjoy plc (JPJ) has announced a £94.2m payment for its penultimate earn-out. There is a further c £44m due for the Spanish assets (Botemania) in June 2018, which should be comfortably covered by operating cash flow. Although adjusted net debt/EBITDA of c 4.0x remains high, we expect significant deleverage from 2018. The stock has recovered some ground recently, but continues to trade at a significant discount to peers, with 2018e multiples of 6.8x EV/EBITDA and 5.7x P/E. Given the company’s leading market position and robust cash flow generation, we would expect a re-rating as the market regains confidence in the business model. Our forecasts remain unchanged.
Year end |
Revenue (£m) |
EBITDA* |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/15 |
194.6 |
70.4 |
46.1 |
73.0 |
0.0 |
8.6 |
N/A |
12/16 |
269.0 |
102.2 |
65.6 |
88.4 |
0.0 |
7.1 |
N/A |
12/17e |
294.8 |
105.7 |
70.9 |
93.8 |
0.0 |
6.7 |
N/A |
12/18e |
322.3 |
113.8 |
84.4 |
109.2 |
0.0 |
5.7 |
N/A |
12/19e |
345.3 |
116.4 |
93.0 |
118.0 |
0.0 |
5.3 |
N/A |
Note: *EBITDA, PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. EPS is fully diluted.
Penultimate £94.2m earn-out payment to Gamesys
The Jackpotjoy division was acquired from Gamesys in April 2015 for an initial price of c £425.8m and the major earn-out period finished in March 2017. JPJ has now paid the largest earn-out of £94.2m, which comprised the final £63.9m payment for the non-Spanish assets and £30.3m for the Spanish brand, Botemania. We expect a further final payment of c £44m in June 2018 for Botemania and estimate that the total acquisition price equates to c 6.3x 2017e EV/EBITDA. With an unrestricted cash balance at Q117 of £112m (pre earn-out) and an ongoing quarterly operating cash flow of c £25m, JPJ is well positioned to internally fund its future obligations.
Strong underlying trading and cash flow
Our forecasts remain unchanged. Please see our May update for a discussion of Q117 results, where market dominance was demonstrated by the 14% growth in the leading Jackpotjoy division. Q2 trading into May was also reported as strong across all divisions. We forecast stable net debt levels this year (£307.5m in 2017), falling to £214.2m in FY19. During 2019, we expect JPJ to reach its target 2.0x adjusted net debt/EBITDA and the company would then be in a position to commence dividend payouts.
Valuation: Meaningfully below peers
Despite the sustained momentum in growth and underlying profitability, JPJ trades at a meaningful discount to its peer group, at 6.8x EV/EBITDA, 5.7x P/E and 15.9% free cash flow yield for 2018. The valuation reflects legacy concerns over the Gamesys relationship, high leverage, the lack of dividend and low stock liquidity. In our view, cash generation should lead to demonstrable debt reduction from 2018 and we would expect a re-rating as the market regains confidence in the business.
Financial summary
Exhibit 1: Financial summary
IFRS |
|
£m |
2015 |
2016 |
2017e |
2018e |
2019e |
Year end 31 December |
|
||||||
PROFIT & LOSS |
|
||||||
Revenue |
|
|
194.6 |
269.0 |
294.8 |
322.3 |
345.3 |
Cost of Sales |
(101.4) |
(130.7) |
(138.1) |
(162.8) |
(179.5) |
||
Gross Profit |
93.3 |
138.3 |
156.7 |
159.5 |
165.7 |
||
EBITDA |
|
|
70.4 |
102.2 |
105.7 |
113.8 |
116.4 |
Operating Profit (before amort. and except.) |
70.1 |
101.6 |
104.3 |
112.4 |
115.0 |
||
Intangible Amortisation |
(50.6) |
(55.5) |
(55.0) |
(55.0) |
(55.0) |
||
Exceptional and other items* |
(109.7) |
(52.5) |
(9.7) |
(5.2) |
(4.9) |
||
Share based payments |
(2.9) |
(2.3) |
(2.1) |
(2.5) |
(2.5) |
||
Operating Profit |
(93.1) |
(8.7) |
37.5 |
49.6 |
52.5 |
||
Net Interest |
(24.0) |
(35.9) |
(33.3) |
(28.0) |
(22.0) |
||
Profit Before Tax (norm) |
|
|
46.1 |
65.6 |
70.9 |
84.4 |
93.0 |
Profit Before Tax (FRS 3) |
|
|
(114.2) |
(40.7) |
(1.0) |
24.3 |
33.0 |
Tax |
(0.5) |
0.1 |
(0.7) |
(2.5) |
(4.5) |
||
Profit After Tax (norm) |
45.5 |
65.7 |
70.3 |
81.9 |
88.5 |
||
Profit After Tax (FRS 3) |
(114.8) |
(40.6) |
(1.7) |
21.8 |
28.5 |
||
|
|
||||||
Average Number of Shares Outstanding (m) |
61.2 |
71.2 |
74.0 |
74.5 |
74.5 |
||
EPS - normalised (p) |
74.4 |
92.2 |
94.9 |
109.9 |
118.8 |
||
EPS - normalised and fully diluted (p) |
|
73.0 |
88.4 |
93.8 |
109.2 |
118.0 |
|
EPS - (IFRS) (p) |
(187.5) |
(57.1) |
(2.3) |
29.2 |
38.3 |
||
Dividend per share (p) |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
|
|
||||||
Gross Margin (%) |
47.9 |
51.4 |
53.2 |
49.5 |
48.0 |
||
EBITDA Margin (%) |
36.2 |
38.0 |
35.9 |
35.3 |
33.7 |
||
Operating Margin (before GW and except.) (%) |
36.0 |
37.8 |
35.4 |
34.9 |
33.3 |
||
|
|
||||||
BALANCE SHEET |
|
||||||
Fixed Assets |
|
|
674.3 |
652.3 |
598.4 |
545.9 |
494.5 |
Intangible Assets |
668.8 |
648.8 |
593.8 |
538.8 |
483.8 |
||
Tangible Assets |
0.2 |
0.9 |
1.9 |
4.5 |
8.0 |
||
Other long-term assets |
5.3 |
2.6 |
2.6 |
2.6 |
2.6 |
||
Current Assets |
|
|
63.9 |
139.0 |
80.5 |
70.8 |
97.8 |
Stocks |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Debtors (incl swaps) |
25.6 |
62.0 |
35.0 |
37.0 |
37.0 |
||
Cash |
31.8 |
68.5 |
36.5 |
23.8 |
49.8 |
||
Player balances |
6.5 |
8.6 |
9.0 |
10.0 |
11.0 |
||
Current Liabilities |
|
|
(54.3) |
(154.9) |
(118.7) |
(64.4) |
(60.7) |
Creditors |
(23.1) |
(41.3) |
(40.0) |
(34.0) |
(34.0) |
||
Short term borrowings |
(25.2) |
(26.7) |
(26.7) |
(26.7) |
(26.7) |
||
Contingent consideration |
(6.0) |
(86.9) |
(52.0) |
(3.8) |
0.0 |
||
Long Term Liabilities |
|
|
(394.8) |
(397.1) |
(333.4) |
(289.4) |
(239.4) |
Long term borrowings |
(189.3) |
(347.4) |
(317.4) |
(287.4) |
(237.4) |
||
Contingent consideration |
(203.6) |
(33.3) |
0.0 |
0.0 |
0.0 |
||
Other long term liabilities |
(2.0) |
(16.4) |
(16.0) |
(2.0) |
(2.0) |
||
Net Assets |
|
|
289.0 |
239.4 |
226.8 |
263.0 |
292.3 |
|
|
||||||
CASH FLOW |
|
||||||
Operating Cash Flow |
|
|
23.3 |
83.0 |
98.7 |
108.8 |
114.5 |
Net Interest |
(24.0) |
(35.9) |
(32.0) |
(28.0) |
(22.0) |
||
Tax |
(0.5) |
(1.2) |
(0.7) |
(2.5) |
(4.5) |
||
Capex |
(2.5) |
(2.5) |
(2.5) |
(4.0) |
(5.0) |
||
Acquisitions (inc earnouts) |
(355.6) |
(156.3) |
(101.0) |
(57.0) |
(7.0) |
||
Financing |
203.7 |
(10.0) |
35.5 |
0.0 |
0.0 |
||
Dividends |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Net Cash Flow |
(155.6) |
(122.9) |
(2.0) |
17.3 |
76.0 |
||
Opening net debt/(cash) |
|
|
27.1 |
182.7 |
305.6 |
307.5 |
290.2 |
HP finance leases initiated |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other |
0.0 |
0.0 |
(0.0) |
0.0 |
(0.0) |
||
Closing net debt/(cash) |
|
|
182.7 |
305.6 |
307.5 |
290.2 |
214.2 |
NPV of outstanding earnouts/other |
|
209.5 |
140.7 |
70.0 |
18.0 |
10.0 |
|
Currency swaps |
|
|
(4.7) |
(38.2) |
0.0 |
0.0 |
0.0 |
Adjusted net debt |
|
|
387.5 |
408.1 |
377.5 |
308.2 |
224.2 |
Source: Jackpotjoy 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.
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