GVC Holdings — Integration paying dividends

As previously announced in February, GVC reported pro forma NGR of €894.6m. This represents a 9% increase (12% on constant currency) and compares to reported revenues of €247.7m in 2015. Within pro forma revenue, sports labels accounted for 73%, games labels for 23% and other for 4%. By geography, we estimate that the largest market (Germany) accounts for 25% and the largest unregulated market is Turkey, at 11% of revenues. The enlarged group has a very broad geographic spread elsewhere including the UK, Greece, Italy, Spain, France, Brazil and various East European markets.

Pro forma 2016 adjusted EBITDA was €205.7m, representing a margin of 23%. This was above our estimate of €204.5m and compares to a pro forma EBITDA of €163.2m (a 20.2% margin) in the previous year. The contribution margin of 52% was lower than the previous year (54%), largely due to higher VAT and gaming taxes.

On a reported basis, clean EBITDA was €193.5m compared to €54.1m in the previous year, while normalised PBT grew 102% to €93.8m. A statutory loss before tax of €138.6m reflects one-off costs of €117.8m, largely due to the acquisition of bwin.party, finance expenses of €65.3m and depreciation and amortisation charges (including acquired intangibles) of €136.5m.

All core sports labels delivered growth in 2016, with overall sports wagers increasing by 4% to €4,488m. An improvement in gross win (9.6% from 8.6%) contributed to a 9% growth in sports NGR, from €304.5m to €333.2m.

The higher gross win was particularly due to improved risk management in bwin sports. During the year the value of first-time deposits across the acquired bwin sports labels rose 37%, while improved products and more effective cross-sell saw games revenues from sports customers increase by 26%.

As a deliberate measure to exit poor ROI marketing in acquired businesses, sports labels marketing was only c 17% of NGR in 2016. This is expected to rise to more normal levels of 23-25% of NGR.

Trading in 2017 has continued the strong trajectory, with total sports labels NGR up 18% ytd (19% in constant currency).

The games labels in the bwin business have historically been the most challenged and pro forma games labels NGR declined to €203.5m from €211.8m (flat in constant currency). Pro forma contribution declined to €89.0m from €109.6m, partly due to higher gaming taxes/VAT, as well as increased investment (from a low base) in partypoker.

Following the enhancements during the year, the partypoker franchise grew 16% in H2 vs the previous year and overall games labels NGR has returned to a 4% growth in H2, with a contribution margin of 45% in H2 (vs 41% in H1).

Trading in 2017 has started well, with games labels NGR up 6% ytd (8% on a constant currency basis).

GVC’s scale and diversification is a key competitive advantage, as is its proprietary platform. We believe it is now the fourth largest online gambling operator, with 55% of revenues coming from regulated markets (c 69% including taxed and soon-to-regulate). It spent much of 2016 integrating bwin (€55m of synergies achieved by year-end) and the assimilation has progressed positively and ahead of initial expectations.

The preparatory work to migrate the Sportingbet and associated brands onto the bwin platform has largely been completed, with three countries already switched over. The migration of the larger territories is expected to commence once the relevant football seasons have finished.

The synergy target of €125m is on track and continued momentum in cross-selling is a key opportunity. To achieve this, GVC has stated that marketing spend will increase to 23-25% of NGR vs 20% in 2016.

In March 2017, GVC secured a €320m senior secured term and revolving facility, comprising a €250m term loan (3.25% above Euribor) and a €70m revolving credit facility (2.75% above Euribor). GVC has no plans to draw on the revolving credit facility at this time.

The new long-term debt structure fully replaces the previous short-term financing from Nomura and represents the company’s first entry into the syndicated debt market. The €250m loan from Nomura was itself a replacement of the more restrictive €400m Cerberus loan, which had originally enabled the February 2016 bwin acquisition.

Year-end net debt of €132m was lower than our forecast of €145m. GVC reported material exceptional cash costs in 2016, fully offsetting the group’s natural underlying cash generation. The company has guided to restructuring cash costs of €25-35m in 2017, but after this we expect the one-off restructuring and deal costs to fall away, while the cumulative synergies should continue to grow to the forecast €125m. As a result, we expect net debt to decline and our forecasts indicate net debt of €21.4m by year end 2018, depending on the dividend payout and before any potential acquisitions.

Our 2017 and 2018 revenue and EBITDA forecasts remain largely unchanged. The reported strong start to the year is expected to be slightly offset by the lack of major football tournaments this summer.

Our forecasts allow for rising gaming taxes as markets regulate, but despite this we forecast normalised PBT growth of 67% and 19% in 2017 and 2018, respectively, driven by synergies and falling interest charges.

The refinancing of the original Cerberus loan has enabled the company to resume its dividend policy and the company has announced two special dividends this year, totalling 30c. Thereafter, our forecasts allow for a c 50% dividend pay-out ratio from 2017. We forecast net debt of €124.3m in 2017 and €21.4m in 2018.

Given the company’s high FCF yield (5.4% and 8.1% in 2017 and 2018), there is also clear potential for additional special dividends in the future.

The reduction in net finance charges has a positive impact on our EPS estimates, which change from 55.4c to 58.5c in 2017.

The most straightforward way to value GVC is via a peer group comparison. The stock currently trades at 10.5x 2017e EV/EBITDA and 14.7x 2017e P/E, at the top end of its larger peer group.

Exhibit 2 compares GVC with the leading UK online gambling operators, together with Sweden-listed Betsson and Kindred as they are both pure online sports-led operators. William Hill and Ladbrokes both have large low-growth, land-based operations; analysts generally apply a much higher rating to online businesses.

GVC’s share price has performed well over the past year, helped by encouraging KPIs, demonstration that the bwin acquisition is paying off, entry into the FTSE 250 last September and increased analyst coverage.

With the rapid momentum the group has established, we consider that it could easily merit a further premium rating to the peer group. For example, a 2017e EV/EBITDA of 11x would imply a share price of 767p and a P/E of 15.3x.

This is supported by our DCF (WACC 9.6%), which produces a value of 787p. Flexing the WACC and terminal EBITDA margins by 5% gives a range of 716-874p per share.