The UK government has raised remote gaming duty (RGD) from 15% to 21%. This is 1% higher than expected by the market and we now include a c £12m annual impact on group EBITDA into our forecasts for JPJ. While regulatory pressures are likely to remain a feature of the UK gaming sector, JPJ should benefit from its market leading position and we anticipate annual operating cash flow of over £90m. The stock has fallen c 40% since June and now trades at 7.9x EV/EBITDA, 5.6x P/E and 15.5% free cash flow yield for FY19e.
Written by
JPJ Group plc |
RGD increase marginally higher than expected |
Budget announcement |
Travel & leisure |
30 October 2018 |
Share price performance
Business description
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Analysts
JPJ Group plc is a research client of Edison Investment Research Limited |
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The UK government has raised remote gaming duty (RGD) from 15% to 21%. This is 1% higher than expected by the market and we now include a c £12m annual impact on group EBITDA into our forecasts for JPJ. While regulatory pressures are likely to remain a feature of the UK gaming sector, JPJ should benefit from its market leading position and we anticipate annual operating cash flow of over £90m. The stock has fallen c 40% since June and now trades at 7.9x EV/EBITDA, 5.6x P/E and 15.5% free cash flow yield for FY19e.
Year end |
Revenue (£m) |
EBITDA* |
PBT* |
EPS* |
DPS |
P/E |
Dividend yield (%) |
12/16 |
269.0 |
102.2 |
83.5 |
112.6 |
0.0 |
5.6 |
0.0 |
12/17 |
304.7 |
108.6 |
78.2 |
103.9 |
0.0 |
6.1 |
0.0 |
12/18e |
311.4 |
106.2 |
86.2 |
110.5 |
0.0 |
5.7 |
0.0 |
12/19e |
328.4 |
105.0 |
90.5 |
113.0 |
40.0 |
5.6 |
6.3 |
12/20e |
345.8 |
102.0 |
88.5 |
109.6 |
45.0 |
5.8 |
7.1 |
Note: *PBT and EPS are normalised and fully diluted (EPS), excluding amortisation of acquired intangibles, exceptional items and share-based payments.
RGD increase to begin October 2019
The UK government’s budget has provided long-awaited clarity on remote gaming duty, which will rise from 15% to 21%. This compares to the 20% that was widely expected, but is a better result than recent rumours of 25%. The increased duties will affect all online gaming operators (not sports) in the UK from October 2019 (rather than April), but at least the sector now has a degree of certainty. Other ongoing regulatory pressures include social responsibility, anti-money laundering, source of funds etc. All this is likely to lead to a continued market shake out, with dominant players likely to benefit. We note that as the largest online bingo-led operator in the UK, JPJ is particularly well positioned.
21% RGD impacts EBITDA by £12m
The UK comprises c 63% of JPJ’s total revenues and the increase in RGD (from 15% to 21%) will have a c £12m annual impact on group EBITDA. At this stage we have not factored any mitigation into our forecasts and we also assume limited market growth due to the variety of regulatory burdens. Including the tax increase, our EBITDA estimates decline by 7% in FY19 and by 14% in FY20. Our FY19 and FY20 EPS forecasts decline by 9% and 16% respectively.
Valuation: 5.6x P/E for FY19e
As a reflection of the uncertain UK regulatory environment, JPJ shares have fallen by c 40% since June and now trade at only 5.6x P/E, 7.9x EV/EBITDA and 15.5% free cash flow yield for FY19e. Despite the regulatory challenges, the online bingo-led business model remains highly cash generative and we anticipate annual operating cash flow of over £90m. Continual debt reduction should lead to a 2.5x net debt to EBITDA ratio at YE19 (vs 3.4x at H118) and we forecast dividends from 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) |
(157.9) |
(173.4) |
(186.5) |
||
Gross Profit |
93.3 |
138.3 |
157.2 |
153.5 |
155.0 |
159.3 |
||
EBITDA |
|
|
70.4 |
102.2 |
108.6 |
106.2 |
105.0 |
102.0 |
Operating Profit (before amort. and except.) |
70.1 |
101.6 |
108.2 |
105.7 |
104.5 |
101.5 |
||
Intangible Amortisation |
(50.6) |
(55.5) |
(62.6) |
(62.0) |
(62.0) |
(62.0) |
||
Exceptional and other items ** |
(109.7) |
(80.3) |
(104.9) |
(20.4) |
1.0 |
1.0 |
||
Share based payments |
(2.9) |
(2.3) |
(1.4) |
(0.7) |
(1.0) |
(1.0) |
||
Operating Profit |
(93.1) |
(36.5) |
(60.8) |
22.6 |
42.5 |
39.5 |
||
Net Interest |
(24.0) |
(18.1) |
(30.0) |
(19.4) |
(14.0) |
(13.0) |
||
Profit Before Tax (norm) |
|
|
46.1 |
83.5 |
78.2 |
86.2 |
90.5 |
88.5 |
Profit Before Tax (FRS 3) |
|
|
(114.2) |
(36.7) |
(65.8) |
5.2 |
28.5 |
26.5 |
Tax |
(0.5) |
0.1 |
(0.7) |
(3.0) |
(5.0) |
(5.0) |
||
Profit After Tax (norm) |
45.5 |
83.6 |
77.5 |
83.2 |
85.5 |
83.5 |
||
Profit After Tax (FRS 3) |
(114.8) |
(36.7) |
(66.5) |
2.2 |
23.5 |
21.5 |
||
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 |
111.6 |
114.0 |
110.6 |
||
EPS - normalised and fully diluted (p) |
|
73.1 |
112.6 |
103.9 |
110.5 |
113.0 |
109.6 |
|
EPS - (IFRS) (p) |
(187.6) |
(51.5) |
(90.0) |
2.9 |
31.3 |
28.5 |
||
Dividend per share (p) |
0.0 |
0.0 |
0.0 |
0.0 |
40.0 |
45.0 |
||
Gross Margin (%) |
47.9 |
51.4 |
51.6 |
49.3 |
47.2 |
46.1 |
||
EBITDA Margin (%) |
36.2 |
38.0 |
35.6 |
34.1 |
32.0 |
29.5 |
||
Operating Margin (before GW and except.) (%) |
36.0 |
37.8 |
35.5 |
33.9 |
31.8 |
29.4 |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
674.3 |
652.3 |
595.9 |
537.4 |
478.9 |
420.4 |
Intangible Assets |
668.8 |
648.8 |
589.0 |
527.0 |
465.0 |
402.9 |
||
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 |
82.4 |
73.7 |
59.3 |
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 |
44.4 |
32.7 |
15.3 |
||
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) |
(343.5) |
(291.5) |
(241.5) |
Long term borrowings |
(189.3) |
(347.4) |
(369.5) |
(339.5) |
(289.5) |
(239.5) |
||
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 |
232.1 |
220.8 |
199.9 |
CASH FLOW |
||||||||
Operating Cash Flow |
|
|
23.3 |
84.2 |
102.0 |
94.2 |
96.0 |
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 |
(29.7) |
(33.4) |
||
Net Cash Flow |
(155.6) |
(122.9) |
(5.2) |
15.4 |
38.3 |
32.6 |
||
Opening net debt/(cash) |
|
|
27.1 |
182.7 |
305.6 |
310.7 |
295.3 |
257.0 |
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 |
295.3 |
257.0 |
224.4 |
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 |
305.4 |
262.1 |
224.5 |
Source: Company accounts and Edison Investment Research
|
|
Research: Investment Companies
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