Following the resignation of Sports Minister Tracey Crouch, the UK government has bowed to pressure to bring forward the reduction in FOBT stake limits, from October 2019 to April 2019. The planned increase in remote gaming duty (from 15% to 21%) will also commence in April. We reduce our FY19 EBITDA by a further £95m and net debt/EBITDA now peaks at 3.0x in FY19. Our FY20 estimates are broadly unchanged.
Written by
GVC Holdings |
Parliamentary U-turn |
FOBT and RGD tax changes |
Travel & leisure |
15 November 2018 |
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GVC Holdings is a research client of Edison Investment Research Limited |
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Following the resignation of Sports Minister Tracey Crouch, the UK government has bowed to pressure to bring forward the reduction in FOBT stake limits, from October 2019 to April 2019. The planned increase in remote gaming duty (from 15% to 21%) will also commence in April. We reduce our FY19 EBITDA by a further £95m and net debt/EBITDA now peaks at 3.0x in FY19. Our FY20 estimates are broadly unchanged.
Year |
Revenue (£m) |
EBITDA |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/16p |
2,998.8 |
523.4 |
225.9 |
N/M |
N/M |
N/A |
N/A |
12/17p** |
3,291.5 |
666.5 |
442.1 |
N/M |
N/M |
N/A |
N/A |
12/18e |
3,472.7 |
734.9 |
498.5 |
70.5 |
32.0 |
11.7 |
3.9 |
12/19e |
2,922.0 |
641.4 |
392.9 |
54.8 |
34.0 |
15.0 |
4.1 |
12/20e |
3,319.2 |
700.0 |
445.1 |
62.0 |
36.0 |
13.2 |
4.4 |
Note: Pro-forma results include LCL as if it has been included from 2016. *Normalised and diluted (EPS), excluding amortisation of acquired intangibles and exceptional items. Share-based payments are included in normalised EPS. **Continuing operations, excluding Turkey in 2017.
Parliamentary U-turn
Following the Budget announcement on 29 October and the resignation of Tracey Crouch, the government has brought forward the timing for the FOBT stake reduction. The move from £100 stake to £2 stake will now commence in April 2019 rather than October 2019. The increase in remote gaming duty (from 15% to 21%) will also happen at the same time. A positive by-product is that GVC will likely not be liable for a c £695m (£674m + interest) to former LCL shareholders (from the original M&A agreement), given that legislation will need to be enacted prior to the April implementation of the £2 stakes cut.
A further £95m reduction in FY19 EBITDA
UK online revenues comprise c 20% of group revenues and we estimate that UK online gaming (not sports) comprise c £500m. The 6% increase in RGD will therefore have an annual impact of c £30m on group EBITDA. The additional six months in 2019 mean a further £15m reduction in EBITDA. Together with an additional £80m impact from the FOBT timing, we reduce 2019 EBITDA by £95m. Our FY20 P&L forecasts remain broadly unchanged, although we note that we now include share-based payments in our normalised EPS forecasts, to be consistent with consensus.
Valuation: 10.3x EV/EBITDA and 15.0x P/E for FY19e
The LCL acquisition has cemented GVC’s leading global position and the £130m+ cost savings are expected to contribute to significant EPS accretion. Net debt to EBITDA now peaks at 3.0x in FY19, but strong FCF should rapidly reduce leverage. The stock has fallen c 30% since August on the back of the regulatory changes and trades at 10.3x EV/EBITDA and 15.0x P/E for FY19e, 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 |
2,922.0 |
3,319.2 |
Cost of Sales |
(1,233.8) |
(1,418.7) |
(1,581.7) |
(1,482.0) |
(1,650.6) |
||
Gross Profit |
1,765.0 |
1,872.8 |
1,890.9 |
1,440.0 |
1,668.6 |
||
EBITDA |
|
|
523.4 |
666.5 |
734.9 |
641.4 |
700.0 |
Normalised operating profit |
|
|
344.6 |
508.8 |
582.4 |
473.9 |
522.5 |
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) |
||
Reported operating profit |
(389.7) |
69.3 |
190.4 |
234.9 |
269.5 |
||
Net Interest |
(124.6) |
(72.0) |
(85.0) |
(82.2) |
(79.0) |
||
Joint ventures & associates (post tax) |
5.9 |
5.3 |
1.1 |
1.3 |
1.6 |
||
Profit Before Tax (norm) |
|
|
225.9 |
442.1 |
498.5 |
392.9 |
445.1 |
Profit Before Tax (reported) |
|
|
(508.5) |
2.5 |
106.5 |
153.9 |
192.1 |
Reported tax |
23.6 |
(9.9) |
(66.4) |
(52.7) |
(59.5) |
||
Profit After Tax (norm) |
225.9 |
442.1 |
498.5 |
392.9 |
445.1 |
||
Profit After Tax (reported) |
(508.5) |
2.5 |
106.5 |
153.9 |
192.1 |
||
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) |
190.3 |
381.9 |
424.1 |
329.8 |
373.1 |
||
Net income (reported) |
(456.5) |
(20.6) |
32.1 |
90.8 |
120.1 |
||
Basic average number of shares outstanding (m) |
NM |
NM |
582 |
582 |
582 |
||
EPS - basic normalised (p) |
|
|
NM |
NM |
72.87 |
56.68 |
64.13 |
EPS - diluted normalised (p) |
|
|
NM |
NM |
70.45 |
54.80 |
61.99 |
EPS - basic reported (p) |
|
|
NM |
NM |
5.51 |
15.61 |
20.65 |
Dividend (p) |
NM |
NM |
32.00 |
34.00 |
36.00 |
||
Revenue growth (%) |
NM |
10% |
6% |
-16% |
14% |
||
Gross Margin (%) |
58.9 |
56.9 |
54.5 |
49.3 |
50.3 |
||
EBITDA Margin (%) |
17.5 |
20.2 |
21.2 |
21.9 |
21.1 |
||
Normalised Operating Margin |
11.5 |
15.5 |
16.8 |
16.2 |
15.7 |
||
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 |
782.7 |
771.9 |
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 |
137.5 |
96.7 |
||
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) |
(2,610.0) |
(2,460.0) |
Long term borrowings |
(749.6) |
(1,212.1) |
(2,012.1) |
(2,000.0) |
(1,850.0) |
||
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 |
3,726.5 |
3,700.7 |
Minority interests |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Shareholders' equity |
|
|
4,196.9 |
4,220.9 |
3,911.9 |
3,726.5 |
3,700.7 |
CASH FLOW |
|||||||
Op Cash Flow before WC and tax |
526.8 |
680.5 |
584.4 |
628.9 |
687.5 |
||
Working capital |
3.8 |
(29.1) |
(50.0) |
(25.0) |
(25.0) |
||
Exceptional & other |
(534.3) |
(38.8) |
(129.5) |
(26.5) |
(60.5) |
||
Tax |
(6.5) |
(14.9) |
(60.0) |
(52.7) |
(59.5) |
||
Net operating cash flow |
|
|
(10.1) |
597.7 |
344.9 |
524.6 |
542.5 |
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) |
(82.2) |
(79.0) |
||
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 |
(934.2) |
131.5 |
(803.6) |
(25.7) |
108.8 |
||
Opening net debt/(cash) |
|
|
312.7 |
1,215.1 |
1,083.6 |
1,887.2 |
1,912.9 |
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 |
1,083.6 |
1,887.2 |
1,912.9 |
1,804.1 |
Source: GVC Holdings accounts, Edison Investment Research
|
|
Research: TMT
IQE has announced an immediate slowdown in shipments of VCSEL wafers, which materially affects FY18 revenues and profitability, and has issued revised guidance. Although we have cut our EPS estimates by 43% and 24% for FY18 and FY19 respectively, we note this is a short-term problem that does not impact the prospects for photonics growth in the medium term. Our revised estimates give an indicative value of 73p/share.