In a continuation of previous trends, GVC’s Q318 trading update has demonstrated strong growth and market share gains across all territories. Total net gaming revenues (NGR) were up 14%, driven by a 28% growth in online NGR. UK retail was only down 2%, helped by a strong FIFA World Cup. The integration of Ladbrokes is progressing well, although GVC has announced that Paul Bowtell (former Ladbrokes CFO) will resign in March 2019. Our estimates remain unchanged, but there is a £20-25m risk to our EBITDA forecasts, following an anticipated increase in remote gaming duty (RGD) at the government’s budget on 29 October. The stock has fallen 19% from recent highs and trades at 10.0x EV/EBITDA and 13.0x P/E for 2018e.
Written by
GVC Holdings |
Q3 trading update shows continued progress |
H118 results |
Travel & leisure |
18 October 2018 |
Share price performance
Business description
Next events
Analysts
GVC Holdings is a research client of Edison Investment Research Limited |
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In a continuation of previous trends, GVC’s Q318 trading update has demonstrated strong growth and market share gains across all territories. Total net gaming revenues (NGR) were up 14%, driven by a 28% growth in online NGR. UK retail was only down 2%, helped by a strong FIFA World Cup. The integration of Ladbrokes is progressing well, although GVC has announced that Paul Bowtell (former Ladbrokes CFO) will resign in March 2019. Our estimates remain unchanged, but there is a £20-25m risk to our EBITDA forecasts, following an anticipated increase in remote gaming duty (RGD) at the government’s budget on 29 October. The stock has fallen 19% from recent highs and trades at 10.0x EV/EBITDA and 13.0x P/E for 2018e.
Year |
Revenue (£m) |
EBITDA |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/16p |
2,998.8 |
523.4 |
257.7 |
N/M |
N/M |
N/A |
N/A |
12/17p** |
3,291.5 |
666.5 |
462.8 |
N/M |
N/M |
N/A |
N/A |
12/18e |
3,472.7 |
734.9 |
511.0 |
73.0 |
32.0 |
13.0 |
3.4 |
12/19e |
3,558.5 |
794.5 |
560.6 |
79.8 |
34.0 |
11.9 |
3.6 |
12/20e |
3,318.3 |
730.0 |
491.6 |
69.4 |
36.0 |
13.7 |
3.8 |
Note: Pro forma results include LCL as if it has been included from 2016. *Normalised and diluted (EPS) excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Continuing operations, excluding Turkey in 2017.
Strong Q3 trading, in line with expectations
In line with our expectations, GVC produced a strong Q318 trading update, with total NGR up 14%. Online NGR growth of 28% was driven by a 31% increase in Sports Brands NGR (including a 43% growth from legacy GVC). Adjusting for the World Cup and the acquisition of CrystalBet, Online NGR was up 21%. European retail NGR grew 24%, boosted by Italy, and UK retail like-for-like NGR declined by only 2%, helped by a good second half of the World Cup. Year to date, group NGR has increased 10%, driven by a 21% growth in online NGR and a 28% growth in European retail NGR. Our estimates remain unchanged.
Anticipated RGD tax from the budget to impact FY19
The government is expected to provide an update on its plans to increase RGD in the budget on 29 October 2018. We will reassess our estimates for the RGD tax once the budget has been announced. Our estimated impact for GVC is c £20–25m on EBITDA, starting in April 2019. We also expect clarity on the implementation date for the cut in B2 stakes to £2, with the enaction of the Triennial Review legislation anticipated this year. Currently our estimates include the impact from the Fixed Odds Betting Terminals cut in 2020.
Valuation: 10.0x EV/EBITDA and 13.0x P/E for FY18e
The LCL acquisition has cemented GVC’s leading global position and the £130m+ cost savings are expected to contribute to significant EPS accretion. With net debt/EBITDA peaking at 2.6x in 2018, strong FCF should rapidly reduce leverage. The stock has fallen c 19% from its recent highs and trades at 10.0x EV/EBITDA and 13.0x P/E for FY18e, 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 |
3,558.5 |
3,318.3 |
Cost of Sales |
(1,233.8) |
(1,418.7) |
(1,581.7) |
(1,631.8) |
(1,620.4) |
||
Gross Profit |
1,765.0 |
1,872.8 |
1,890.9 |
1,926.8 |
1,698.0 |
||
EBITDA |
|
|
523.4 |
666.5 |
734.9 |
794.5 |
730.0 |
Normalised operating profit |
|
|
376.4 |
529.5 |
594.9 |
639.5 |
565.0 |
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) |
||
Share-based payments |
(31.8) |
(20.7) |
(12.5) |
(12.5) |
(12.5) |
||
Reported operating profit |
(389.7) |
69.3 |
190.4 |
388.0 |
299.5 |
||
Net Interest |
(124.6) |
(72.0) |
(85.0) |
(80.2) |
(75.0) |
||
Joint ventures & associates (post tax) |
5.9 |
5.3 |
1.1 |
1.3 |
1.6 |
||
Profit Before Tax (norm) |
|
|
257.7 |
462.8 |
511.0 |
560.6 |
491.6 |
Profit Before Tax (reported) |
|
|
(508.5) |
2.5 |
106.5 |
309.1 |
226.1 |
Reported tax |
23.6 |
(9.9) |
(66.4) |
(72.9) |
(63.9) |
||
Profit After Tax (norm) |
257.7 |
462.8 |
511.0 |
560.6 |
491.6 |
||
Profit After Tax (reported) |
(508.5) |
2.5 |
106.5 |
309.1 |
226.1 |
||
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) |
222.1 |
402.6 |
436.6 |
477.3 |
415.2 |
||
Net income (reported) |
(456.5) |
(20.6) |
32.1 |
225.8 |
149.7 |
||
Basic average number of shares outstanding (m) |
NM |
NM |
578 |
578 |
578 |
||
EPS - basic normalised (p) |
|
|
NM |
NM |
75.48 |
82.52 |
71.78 |
EPS - diluted normalised (p) |
|
|
NM |
NM |
72.95 |
79.76 |
69.38 |
EPS - basic reported (p) |
|
|
NM |
NM |
5.54 |
39.04 |
25.88 |
Dividend (p) |
NM |
NM |
32.00 |
34.00 |
36.00 |
||
Revenue growth (%) |
NM |
10% |
6% |
2% |
-7% |
||
Gross Margin (%) |
58.9 |
56.9 |
54.5 |
54.1 |
51.2 |
||
EBITDA Margin (%) |
17.5 |
20.2 |
21.2 |
22.3 |
22.0 |
||
Normalised Operating Margin |
12.6 |
16.1 |
17.1 |
18.0 |
17.0 |
||
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 |
817.2 |
835.2 |
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 |
172.0 |
160.0 |
||
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) |
(2,510.0) |
(2,360.0) |
Long term borrowings |
(749.6) |
(1,212.1) |
(2,012.1) |
(1,900.0) |
(1,750.0) |
||
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 |
3,861.0 |
3,864.0 |
Minority interests |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Shareholders' equity |
|
|
4,196.9 |
4,220.9 |
3,911.9 |
3,861.0 |
3,864.0 |
CASH FLOW |
|||||||
Op Cash Flow before WC and tax |
558.6 |
701.2 |
596.9 |
794.5 |
730.0 |
||
Working capital |
3.8 |
(29.1) |
(50.0) |
(25.0) |
(25.0) |
||
Exceptional & other |
(534.3) |
(59.5) |
(142.0) |
(39.0) |
(73.0) |
||
Tax |
(6.5) |
(14.9) |
(60.0) |
(72.9) |
(63.9) |
||
Net operating cash flow |
|
|
21.7 |
597.7 |
344.9 |
657.6 |
568.1 |
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) |
(80.2) |
(75.0) |
||
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 |
(902.4) |
131.5 |
(803.6) |
109.3 |
138.3 |
||
Opening net debt/(cash) |
|
|
312.7 |
1,215.1 |
1,083.5 |
1,887.2 |
1,777.9 |
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 |
1,083.5 |
1,887.2 |
1,777.9 |
1,639.6 |
Source: Company accounts, Edison Investment Research
|
|
Research: TMT
Mercia Technologies (Mercia) is a leading player in the funding and scaling of high growth companies from the UK regions, with a business model that is significantly de-risked vs peers. £400m of managed funds (Mercia Fund Managers, MFM) are used to predominately support all early-stage activity, whilst also providing meaningful revenue to offset group operating costs. As a result, the balance sheet investment is reserved for only the most promising companies or ‘Emerging Stars’ sourced from MFM. The group has a strong cash position and an experienced management, as well as a good track record, with three successful full cash exits to date. The shares trade at 0.73x NAV, not including the contribution from MFM, which we estimate at a further c 9p per share (total discount to NAV of 0.60x).