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Research: Consumer
JPJ has announced a £490m proposed acquisition of Gamesys (its current platform provider), which equates to c 7.3x adjusted EV/EBITDA. The resulting company will be over 50% larger and key benefits include full control of the technology and meaningful scale with high-profile brands. The £490m consideration will be split between £250m cash (including £175m add-on facilities) and £240m in 33.7m new JPJ shares. Net debt/EBITDA is expected to be c 3.1x on the pro forma basis, although we envisage rapid deleveraging going forward. Our initial analysis suggests that the deal will be c 10% EPS accretive in FY20, implying a c 6.5x FY20 P/E, and we will adjust our forecasts after the conference call.
Written by
JPJ Group plc |
Proposed acquisition of Gamesys |
Acquisition of Gamesys |
Travel & leisure |
13 June 2019 |
Share price performance
Business description
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JPJ Group plc is a research client of Edison Investment Research Limited |
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JPJ has announced a £490m proposed acquisition of Gamesys (its current platform provider), which equates to c 7.3x adjusted EV/EBITDA. The resulting company will be over 50% larger and key benefits include full control of the technology and meaningful scale with high-profile brands. The £490m consideration will be split between £250m cash (including £175m add-on facilities) and £240m in 33.7m new JPJ shares. Net debt/EBITDA is expected to be c 3.1x on the pro forma basis, although we envisage rapid deleveraging going forward. Our initial analysis suggests that the deal will be c 10% EPS accretive in FY20, implying a c 6.5x FY20 P/E, and we will adjust our forecasts after the conference call.
Year end |
Revenue (£m) |
EBITDA |
EPS* |
DPS |
P/E |
Yield |
12/17 |
304.7 |
108.6 |
103.9 |
0.0 |
7.4 |
N/A |
12/18 |
319.6 |
112.7 |
118.5 |
0.0 |
6.5 |
N/A |
12/19e** |
318.8 |
95.8 |
100.5 |
30.0 |
7.7 |
3.9 |
12/20e |
336.6 |
99.0 |
106.8 |
45.0 |
7.2 |
5.9 |
Note: *EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Excludes Mandalay revenues for the entire year.
Gaining control of the platform
JPJ’s proposed acquisition of Gamesys appears to be a neat solution to gain control of the platform, reduce reliance on third parties and thereby should further improve operational performance and margins. The deal adds meaningful scale – over 50% larger, with FY18 pro forma revenues and adjusted EBITDA of £504m and £171m respectively. Gamesys brings a number of high-profile brands (Virgin, Heart Bingo, Monopoly – but not the sports brands), ownership of bingo and slot games studios, as well as a 15-year new content agreement. Integration risk is low given the longstanding relationship between the two companies and the Gamesys CEO will become the CEO for the enlarged group. Completion is expected in Q319.
7.3x EV/EBITDA; 10% EPS accretive in FY20
The £490m acquisition price is to be split between £250m cash (including £175m add-on debt facilities and existing cash) and £240m of new JPJ shares. Gamesys revenues and EBITDA in 2018 were £185m and £67m respectively, and the deal is valued at 7.3x adjusted LTM EBITDA. Pro forma net debt increases from £275m at Q119 to £524m, equivalent to 3.1x net debt/EBITDA (vs 2.4x at Q119). Given the inherent cash generation in the business (c 90% cash conversion), we expect steady deleverage and forecast a c 10% EPS accretion from FY20. We will update our forecasts after the conference call and we note that the company is now unlikely to pay a dividend this year.
Valuation: Implied c 6.5x pro forma P/E for FY20
JPJ currently trades at 7.2x P/E and 8.6x EV/EBITDA for FY20. Factoring in an estimated 10% EPS accretion, the implied pro forma FY20 P/E is c 6.5x, with an EV/EBITDA of c 7.8x. JPJ has successfully deleveraged in the past two years and, with its cash conversion, we believe there should be a meaningful future value shift from debt to equity.
Exhibit 1: Financial summary (prior to the Gamesys deal)
£m |
2017 |
2018 |
2019e |
2020e |
||
December |
||||||
PROFIT & LOSS |
||||||
Revenue |
|
|
304.7 |
319.6 |
318.8 |
336.6 |
Cost of Sales |
(147.5) |
(158.9) |
(170.7) |
(183.2) |
||
Gross Profit |
157.2 |
160.7 |
148.1 |
153.4 |
||
EBITDA |
|
|
108.6 |
112.7 |
95.8 |
99.0 |
Operating Profit (before amort. and except.) |
|
|
108.2 |
112.2 |
95.3 |
98.5 |
Intangible Amortisation |
(62.6) |
(60.3) |
(54.0) |
(54.0) |
||
Exceptional and other items ** |
(104.9) |
(16.3) |
(4.5) |
0.0 |
||
Share based payments |
(1.4) |
(0.6) |
(0.5) |
(0.5) |
||
Operating Profit |
(60.8) |
35.0 |
36.3 |
44.0 |
||
Net Interest |
(30.0) |
(19.5) |
(15.0) |
(13.0) |
||
Profit Before Tax (norm) |
|
|
78.2 |
92.7 |
80.3 |
85.5 |
Profit Before Tax (FRS 3) |
|
|
(65.8) |
18.5 |
22.6 |
31.0 |
Tax |
(0.7) |
(0.5) |
(3.5) |
(5.0) |
||
Profit After Tax (norm) |
77.5 |
92.3 |
76.8 |
80.5 |
||
Profit After Tax (FRS 3) |
(66.5) |
18.1 |
19.1 |
26.0 |
||
Average Number of Shares Outstanding (m) |
73.9 |
74.2 |
74.8 |
75.0 |
||
EPS |
104.9 |
119.5 |
100.9 |
107.3 |
||
EPS - normalised (p) |
|
|
103.9 |
118.5 |
100.5 |
106.8 |
EPS - (IFRS) (p) |
(90.0) |
19.5 |
23.8 |
34.6 |
||
Dividend per share (p) |
0.0 |
0.0 |
30.0 |
45.0 |
||
Gross Margin (%) |
51.6 |
50.3 |
46.5 |
45.6 |
||
EBITDA Margin (%) |
35.6 |
35.3 |
30.0 |
29.4 |
||
Operating Margin (before GW and except.) (%) |
35.5 |
35.1 |
29.9 |
29.3 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
595.9 |
521.9 |
456.5 |
409.0 |
Intangible Assets |
589.0 |
514.7 |
446.2 |
395.7 |
||
Tangible Assets |
1.3 |
2.2 |
5.2 |
8.2 |
||
Other long-term assets |
5.6 |
5.0 |
5.0 |
5.0 |
||
Current Assets |
|
|
93.2 |
124.0 |
150.6 |
147.4 |
Stocks |
0.0 |
0.0 |
0.0 |
0.0 |
||
Debtors (incl swaps) |
26.0 |
30.5 |
40.5 |
44.5 |
||
Cash |
59.0 |
84.4 |
97.0 |
88.8 |
||
Player balances |
8.2 |
9.0 |
13.0 |
14.0 |
||
Current Liabilities |
|
|
(98.5) |
(52.3) |
(44.8) |
(43.8) |
Creditors |
(46.3) |
(47.8) |
(44.8) |
(43.8) |
||
Short term borrowings |
(0.3) |
0.0 |
0.0 |
0.0 |
||
Contingent consideration |
(51.9) |
(4.5) |
0.0 |
0.0 |
||
Long Term Liabilities |
|
|
(386.7) |
(374.5) |
(323.5) |
(273.5) |
Long term borrowings |
(369.5) |
(371.5) |
(321.5) |
(271.5) |
||
Contingent consideration |
(7.7) |
0.0 |
0.0 |
0.0 |
||
Other long-term liabilities |
(9.4) |
(3.0) |
(2.0) |
(2.0) |
||
Net Assets |
|
|
204.1 |
219.1 |
238.8 |
239.1 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
102.0 |
106.8 |
80.8 |
92.0 |
Net Interest |
(30.9) |
(19.5) |
(15.0) |
(13.0) |
||
Tax |
(1.0) |
(0.8) |
(3.5) |
(5.0) |
||
Capex |
(3.2) |
(5.3) |
(7.0) |
(7.0) |
||
Acquisitions (inc earnouts) |
(94.2) |
(55.3) |
13.0 |
0.0 |
||
Financing |
22.2 |
(2.3) |
0.0 |
0.0 |
||
Dividends |
0.0 |
0.0 |
(5.6) |
(25.1) |
||
Net Cash Flow |
(5.2) |
23.6 |
62.7 |
41.8 |
||
Opening net debt/(cash) |
|
|
305.6 |
310.7 |
287.1 |
224.4 |
HP finance leases initiated |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other |
0.0 |
0.0 |
0.0 |
0.0 |
||
Closing net debt/(cash) |
|
|
310.7 |
287.1 |
224.4 |
182.6 |
NPV of outstanding earnouts/other |
|
|
76.6 |
15.0 |
1.4 |
0.0 |
Currency swaps |
|
|
0.0 |
0.0 |
0.0 |
0.0 |
Adjusted net debt |
|
|
387.3 |
302.1 |
225.8 |
182.6 |
Source: Company accounts, Edison Investment Research
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Research: Investment Companies
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