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
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. Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note. 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. Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest. Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.
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