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. To coincide with the FOBT changes, the planned increase in remote gaming duty (from 15% to 21%) will also commence in April. We reduce our FY19e EBITDA by a further £6m but our FY20 estimates are unchanged. JPJ shares have fallen by c 30% ytd and, despite the reduced EBITDA, trade at only 5.7x P/E, 7.5x EV/EBITDA and 15.1% free cash flow yield for FY19e.
Written by
JPJ Group plc |
Remote gaming duty increases in April 2019 |
RGD tax changes |
Travel & leisure |
15 November 2018 |
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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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. To coincide with the FOBT changes, the planned increase in remote gaming duty (from 15% to 21%) will also commence in April. We reduce our FY19e EBITDA by a further £6m but our FY20 estimates are unchanged. JPJ shares have fallen by c 30% ytd and, despite the reduced EBITDA, trade at only 5.7x P/E, 7.5x EV/EBITDA and 15.1% free cash flow yield for FY19e.
Year end |
Revenue (£m) |
EBITDA* |
PBT* |
EPS* |
DPS |
P/E |
Yield (%) |
12/16 |
269.0 |
102.2 |
83.5 |
112.6 |
0.0 |
5.3 |
0.0 |
12/17 |
304.7 |
108.6 |
78.2 |
103.9 |
0.0 |
5.7 |
0.0 |
12/18e |
311.4 |
106.2 |
86.3 |
110.6 |
0.0 |
5.4 |
0.0 |
12/19e |
328.4 |
99.0 |
84.5 |
105.1 |
40.0 |
5.7 |
6.7 |
12/20e |
345.8 |
102.0 |
88.5 |
109.6 |
45.0 |
5.5 |
7.5 |
Note: *PBT and EPS are normalised and fully diluted (EPS), excluding amortisation of acquired intangibles, exceptional items and share-based payments.
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. To coincide with the FOBT changes, the increase in remote gaming duty (from 15% to 21%) will also happen at the same time.
A further £6m reduction in EBITDA
At Q318, the UK comprised c 56% of JPJ’s total revenues and the increase in RGD (from 15% to 21%) will have a c £12m annual impact on group EBITDA. As a result of an additional six months, we reduce our FY19e EBITDA by a further £6m. This one-off hit in FY19 represents 8p per share. At this stage we have not factored any mitigation into our forecasts and we continue to assume limited market growth due to the variety of regulatory burdens. Please see our 14 November Update for the recent Q318 trading commentary.
Valuation: 5.7x P/E for FY19e
As a reflection of the uncertain UK regulatory environment, JPJ shares have fallen by c 30% ytd and, despite the EBITDA hit, trade at only 5.7x P/E, 7.5x EV/EBITDA and 15.1% free cash flow yield for FY19e. Despite the regulatory challenges, the online bingo-led business model remains highly cash generative and from next year we anticipate annual operating cash flow of c £90m. Continual debt reduction should lead to a 2.5x net debt to EBITDA ratio during 2019 (vs 3.0x at Q318) and we anticipate dividends next year.
Exhibit 1: Financial summary
£m |
2015 |
2016 |
2017 |
2018e |
2019e |
2020e |
||
December |
||||||||
PROFIT & LOSS |
||||||||
Revenue |
|
|
194.6 |
269.0 |
304.7 |
311.4 |
328.4 |
345.8 |
Cost of Sales |
(101.4) |
(130.7) |
(147.5) |
(159.6) |
(178.1) |
(185.3) |
||
Gross Profit |
93.3 |
138.3 |
157.2 |
151.9 |
150.3 |
160.5 |
||
EBITDA |
|
|
70.4 |
102.2 |
108.6 |
106.2 |
99.0 |
102.0 |
Operating Profit (before amort. and except.) |
70.1 |
101.6 |
108.2 |
105.7 |
98.5 |
101.5 |
||
Intangible Amortisation |
(50.6) |
(55.5) |
(62.6) |
(61.3) |
(61.3) |
(61.3) |
||
Exceptional and other items |
(109.7) |
(80.3) |
(104.9) |
(20.1) |
0.6 |
0.6 |
||
Share based payments |
(2.9) |
(2.3) |
(1.4) |
(0.6) |
(0.6) |
(0.6) |
||
Operating Profit |
(93.1) |
(36.5) |
(60.8) |
23.8 |
37.3 |
40.3 |
||
Net Interest |
(24.0) |
(18.1) |
(30.0) |
(19.4) |
(14.0) |
(13.0) |
||
Profit Before Tax (norm) |
|
|
46.1 |
83.5 |
78.2 |
86.3 |
84.5 |
88.5 |
Profit Before Tax (FRS 3) |
|
|
(114.2) |
(36.7) |
(65.8) |
7.0 |
23.3 |
27.3 |
Tax |
(0.5) |
0.1 |
(0.7) |
(3.0) |
(5.0) |
(5.0) |
||
Profit After Tax (norm) |
45.5 |
83.6 |
77.5 |
83.3 |
79.5 |
83.5 |
||
Profit After Tax (FRS 3) |
(114.8) |
(36.7) |
(66.5) |
4.0 |
18.3 |
22.3 |
||
Average Number of Shares Outstanding (m) |
61.2 |
71.2 |
73.9 |
74.6 |
75.0 |
75.5 |
||
EPS - normalised (p) |
74.4 |
117.3 |
104.9 |
111.7 |
106.1 |
110.7 |
||
EPS - normalised and fully diluted (p) |
|
73.1 |
112.6 |
103.9 |
110.6 |
105.1 |
109.6 |
|
EPS - (IFRS) (p) |
(187.6) |
(51.5) |
(90.0) |
5.3 |
24.4 |
29.5 |
||
Dividend per share (p) |
0.0 |
0.0 |
0.0 |
0.0 |
40.0 |
45.0 |
||
Gross Margin (%) |
47.9 |
51.4 |
51.6 |
48.8 |
45.8 |
46.4 |
||
EBITDA Margin (%) |
36.2 |
38.0 |
35.6 |
34.1 |
30.2 |
29.5 |
||
Operating Margin (before GW and except.) (%) |
36.0 |
37.8 |
35.5 |
33.9 |
30.0 |
29.4 |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
674.3 |
652.3 |
595.9 |
538.2 |
480.4 |
422.7 |
Intangible Assets |
668.8 |
648.8 |
589.0 |
527.7 |
466.5 |
405.2 |
||
Tangible Assets |
0.2 |
0.9 |
1.3 |
4.8 |
8.3 |
11.9 |
||
Other long term assets |
5.3 |
2.6 |
5.6 |
5.6 |
5.6 |
5.6 |
||
Current Assets |
|
|
63.9 |
139.0 |
93.2 |
122.5 |
130.1 |
118.5 |
Stocks |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Debtors (incl swaps) |
25.6 |
62.0 |
26.0 |
28.0 |
30.0 |
32.0 |
||
Cash |
31.8 |
68.5 |
59.0 |
84.5 |
89.1 |
74.5 |
||
Player balances |
6.5 |
8.6 |
8.2 |
10.0 |
11.0 |
12.0 |
||
Current Liabilities |
|
|
(54.3) |
(154.9) |
(98.5) |
(44.3) |
(40.3) |
(38.3) |
Creditors |
(23.1) |
(41.3) |
(46.3) |
(40.0) |
(38.0) |
(36.0) |
||
Short term borrowings |
(25.2) |
(26.7) |
(0.3) |
(0.3) |
(0.3) |
(0.3) |
||
Contingent consideration |
(6.0) |
(86.9) |
(51.9) |
(4.0) |
(2.0) |
(2.0) |
||
Long Term Liabilities |
|
|
(394.8) |
(397.1) |
(386.7) |
(373.5) |
(321.5) |
(271.5) |
Long term borrowings |
(189.3) |
(347.4) |
(369.5) |
(369.5) |
(319.5) |
(269.5) |
||
Contingent consideration |
(203.6) |
(33.3) |
(7.7) |
(2.0) |
0.0 |
0.0 |
||
Other long term liabilities |
(2.0) |
(16.4) |
(9.4) |
(2.0) |
(2.0) |
(2.0) |
||
Net Assets |
|
|
289.0 |
239.4 |
204.1 |
242.9 |
248.8 |
231.4 |
CASH FLOW |
||||||||
Operating Cash Flow |
|
|
23.3 |
84.2 |
102.0 |
104.2 |
90.0 |
93.0 |
Net Interest |
(24.0) |
(17.5) |
(30.9) |
(19.4) |
(14.0) |
(13.0) |
||
Tax |
(0.5) |
(1.2) |
(1.0) |
(3.0) |
(5.0) |
(5.0) |
||
Capex |
(2.5) |
(2.5) |
(3.2) |
(4.0) |
(4.0) |
(4.0) |
||
Acquisitions (inc earn-outs) |
(355.6) |
(156.3) |
(94.2) |
(52.4) |
(5.0) |
(5.0) |
||
Financing |
203.7 |
(29.6) |
22.2 |
0.0 |
0.0 |
0.0 |
||
Dividends |
0.0 |
0.0 |
0.0 |
0.0 |
(7.4) |
(30.6) |
||
Net Cash Flow |
(155.6) |
(122.9) |
(5.2) |
25.5 |
54.6 |
35.4 |
||
Opening net debt/(cash) |
|
|
27.1 |
182.7 |
305.6 |
310.7 |
285.2 |
230.6 |
HP finance leases initiated |
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 |
||
Closing net debt/(cash) |
|
|
182.7 |
305.6 |
310.7 |
285.2 |
230.6 |
195.2 |
NPV of outstanding earnouts/ other |
|
209.5 |
140.8 |
76.6 |
10.0 |
5.0 |
0.0 |
|
Currency swaps |
|
|
(4.7) |
(38.2) |
0.0 |
0.0 |
0.0 |
0.0 |
Adjusted net debt |
|
|
387.5 |
408.1 |
387.3 |
295.3 |
235.7 |
195.3 |
Source: Company accounts, Edison Investment Research
|
|
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.