GVC Holdings — Full steam ahead

GVC’s capital markets day on 25 May showcased the company’s success in integrating bwin.party within a year of the acquisition, with positive KPIs across all divisions. Throughout the business, GVC provided demonstrable evidence of efficiency gains, increased cross-sell, improved business intelligence and technology enhancements.

As discussed in more detail below, there are three key pillars underpinning the company’s growth strategy:

95% of GVC’s revenue is derived and processed through its powerful proprietary platform, providing the company with a high degree of flexibility and control. The fully integrated and hugely scalable technology platform supports future growth with limited incremental costs.

Exhibits 1 and 2 below demonstrate the continued growth of the business, despite the numerous cost-savings and efficiencies achieved since the bwin acquisition.

Europe is GVC’s biggest market, contributing almost 75% of NGR. It is well diversified, with 17 countries contributing 2% or more to NGR and scope to expand in a number of core markets. GVC has four business segments with a number of leading brands, of which Sports and Games Brands comprise 96% in total.

GVC owns a number of sports betting brands including bwin, Sportingbet, Betboo and Gamebookers. Within this division, GVC focuses marketing on sports betting and then cross-sells casino and other games such that NGR within Sports Brands is split roughly 50/50 between sports and games. The substantial sports book is dominated by football and live (in-play).

Since the bwin acquisition, GVC has been focusing on increasing player value, improving cross-sell (from 89% in 2015 to 96% in 2016), optimising mobile performance and improving trading capabilities. Highlights include:

The Games Brands are standalone brands that only cross-sell a small (2%) volume of sports and include partycasino, partypoker, Foxy Bingo, Gioco Digitale and CasinoClub.

Prior to the acquisition, bwin’s Games Brands lacked focus, not helped by the structural decline in the poker market and a competitive UK online bingo market. During 2016 GVC put in place a long-term strategic road map for each business, brought in new senior hires and worked on the product and user experience. The decline in Games Brands NGR in FY16 has now been reversed, and Q217 Games Brands daily NGR increased by an impressive 13%.

The global online casino market is estimated at €10.5bn GGR in 2016 (source: H2 Gambling Capital, March 2017) and, although there is less volatility than the sportsbook, industry churn levels are high and competition is fierce.

GVC has a number of well-established casino brands, which comprised 12% of total NGR in Q117. Since the bwin acquisition, the company has focused on ROI marketing and the decline in the bwin.party casino brands (partycasino and Gioco Digitale) has now been halted.

GVC’s casino brands are:

Given the structural challenges in the poker market, the global online poker market has declined by 1% CAGR since 2006 and is now estimated be worth €2.4bn (source: H2GC). Bwin’s partypoker franchise had commensurately suffered from long-term decline and a lack of investment.

Since the acquisition, a new management team has reinvigorated and repositioned the brand, with targeted investment in key markets (eg Canada and the UK). Success is evident from the 16% growth in H216 vs the prior year, as well as an acceleration of daily NGR into H117.

The UK is the world’s largest online real-money bingo market segment with approximately €600m in 2016 and we estimate that GVC’s Cashcade brands have c 5% market share.

Bingo is the only part of the group that is not run on the proprietary platform and, despite having one of the best-known bingo brands in the UK, Foxy Bingo has suffered a challenging few years.

Recent initiatives include a high-profile Foxy rebrand (with Heather Graham), terminating the bingo affiliate programme and launching a new casino programme. The current focus is on profitability rather than revenues, with a 15% decline in Q117 NGR vs the prior year. The majority of marketing spend will occur from September onwards, with the aim of returning the business to top line growth in 2018.

Instrumental in the process has been the recruitment of Adele Lawton as head of bingo (with 20 years’ marketing experience, mainly in bingo, with brands including Gala, Skybet and Gamesys).

Bwin brought in a small B2B business whose clients include Borgata in the US and Danske Spil in Denmark. Bwin also brought in some non-core businesses including InterTrade (financial markets trading) and Kalixa (payment processing, sold for €29m in December 2016, with completion on 31 May 2017). During H117, Kalixa contributed revenues of €6.1m against €7.6m in the prior year.

GVC’s board and executive team has a considerable depth of experience in online gaming. Kenneth (Kenny) Alexander has been CEO since March 2007 and was previously MD of Sportingbet’s European operations.

Immediately after the bwin acquisition, Kenny began to restructure the management team to take the best talent from both bwin and GVC, with a management structure that emphasises clear reporting lines and management accountability. Shay Segev was brought in as group COO, having previously been COO of leading gaming software provider Playtech and Nick Batram joined from Peel Hunt as head of investor relations and corporate strategy. Paul Miles joined as CFO in 2017, from Wonga plc. A number of new management positions have also been created, including chief product officer and VP business operations, as Kenny has put in place an organisation that can handle material group expansion. Exhibit 10 illustrates the calibre of new management who have joined GVC over the past year; many others have also joined from leading operators in key markets.

GVC has always believed in management and employee incentivisation. Post the bwin acquisition a new option plan (LTIP) was put in place, with currently c 15m options held. Employee bonuses are linked to revenue outperformance.

GVC reported a robust Q217 trading update on 6 July, with group NGR growth of 8% vs the prior year. Excluding Euro 2016 revenues, underlying daily group wagers and group NGR grew 10% and 15% respectively.

Within Sports Brands, Sports daily NGR declined by 1%, but with an increase in cross-sell into Gaming, total daily Sports Brands NGR increased 7%. The gross win sports margin was 10.1% vs 9.9% in the prior year. As noted above, this is in line with management’s expectations of the long-term sustainable average.

Games Brands daily NGR increased by 13% in Q217, assisted by an impressive turnaround in partypoker performance and an improving performance from the group’s standalone casino brands.

We have nudged up our 2017 revenue and EBITDA forecasts by approximately 1%, to reflect the positive trading update. This represents NGR growth of 5.7% y-o-y, and takes into account the lack of major football tournaments this summer, as well as a cautious outlook for customer migrations later this year. We summarise the divisional revenue breakdown in Exhibit 12.We also introduce 2019 forecasts, which continue the trend of c 5% NGR growth, success in cross-sell and a robust sports margin. Fixed costs and operational leverage are expected to offset steadily increasing gaming taxes and we forecast EBITDA margins rising to 30.1% by 2018.

Our balance sheet and cash flow forecasts remain largely unchanged, with underlying operating cash flow of over 90% enabling a progressive dividend policy, as well as the potential for future special dividends (not in our forecasts). We forecast net debt of €122m in 2017, falling to €17m in 2018 and a net cash position of €82m in 2019.

GVC has strong organic growth prospects, as well as an excellent track record with integration, which may continue to be augmented by M&A at some stage. In our view, the stock trades appropriately towards the top end of its broader peer group, at 9.9x EV/EBITDA and 12.5x P/E for 2018e. A 7.7% free cash flow yield in 2018 is attractive, enabling the potential for further special dividends (not included in our forecasts).