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The UK government has raised remote gaming duty (RGD) from 15% to 21%. This was better than recent rumours of 25%, but 1% higher than market expectations of 20%. With implementation from October 2019 (rather than April), we raise our FY19e EBITDA by 5%. However, assuming no mitigation, we lower our FY20e EBITDA by £3m to £14.5m. While regulatory pressures are likely to remain a feature of the UK gaming sector, Stride is the number three online bingo-led operator and should benefit from its strong market position. The balance sheet is robust (£20m net cash) and, despite the increased taxes, we expect strong cash flow through synergies and strategic growth. The stock has fallen 58% this year and trades at depressed levels of 3.6x EV/EBITDA and 5.8x P/E for CY19e.
Written by
Victoria Pease
Stride Gaming |
RGD marginally higher than expected |
Budget announcement |
Travel & leisure |
30 October 2018 |
Share price performance
Business description
Next events
Analysts
Stride Gaming 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 was better than recent rumours of 25%, but 1% higher than market expectations of 20%. With implementation from October 2019 (rather than April), we raise our FY19e EBITDA by 5%. However, assuming no mitigation, we lower our FY20e EBITDA by £3m to £14.5m. While regulatory pressures are likely to remain a feature of the UK gaming sector, Stride is the number three online bingo-led operator and should benefit from its strong market position. The balance sheet is robust (£20m net cash) and, despite the increased taxes, we expect strong cash flow through synergies and strategic growth. The stock has fallen 58% this year and trades at depressed levels of 3.6x EV/EBITDA and 5.8x P/E for CY19e.
Year |
Revenue* (£m) |
EBITDA |
PBT** |
EPS** |
DPS |
P/E |
Yield |
08/16 |
47.8 |
12.3 |
11.3 |
20.3 |
2.5 |
5.1 |
2.4 |
08/17 |
89.9 |
20.2 |
18.9 |
25.8 |
2.7 |
4.0 |
2.6 |
08/18e |
89.0 |
16.1 |
14.2 |
17.1 |
2.9 |
6.0 |
2.8 |
08/19e |
85.0 |
17.0 |
15.7 |
18.5 |
3.0 |
5.6 |
2.9 |
08/20e |
93.5 |
14.5 |
13.8 |
16.2 |
3.1 |
6.4 |
3.0 |
Note: *Adjusted revenue excludes social from FY18, and includes Stride’s share of Stride Together (including Aspers JV). **PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
21% RGD to commence in October 2019
The government’s budget has provided long-awaited clarity on remote gaming duty, which will rise from 15% to 21%. This is marginally higher than the widely expected 20%, but 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, 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 set to benefit. We note that as the third largest online bingo-led operator in the UK, Stride is very well positioned.
Tax increase to affect FY20 figures
With almost 100% of revenues derived from the UK, Stride Gaming has been particularly affected by UK regulatory burdens. Factoring in the October 2019 implementation date, we adjust our FY19 tax estimate back to the blended 19% rate (which includes bonus tax) and EBITDA rises from £16.2m to £17.0m. For FY20e, we now assume no mitigation and using a 26% blended tax rate (including bonuses), our EBITDA declines from £17.5m to £14.5m.
Valuation: 3.6x EV/EBITDA and 5.8x P/E for CY19e
The stock has fallen 58% ytd and trades at depressed multiples of 3.6x EV/EBITDA and 5.8x P/E for CY19e. Given the company’s superior technology, high net cash and continued strong cash generation (despite the regulatory environment), this seems unjustified, in our view. For a meaningful re-rating, we expect investors to focus on synergies, cost controls and, ultimately, an uptick in EBITDA.
Exhibit 1: Financial summary
£m |
2015 |
2016 |
2017 |
2018e |
2019e |
2020e |
||
August |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||||
NGR |
|
|
27.8 |
47.8 |
89.9 |
85.5 |
80.0 |
86.0 |
Adjusted Revenue (inc Stride Together) |
27.8 |
47.8 |
89.9 |
89.0 |
85.0 |
93.5 |
||
Cost of Sales |
(2.8) |
(5.4) |
(11.6) |
(15.4) |
(15.2) |
(22.1) |
||
Gross Profit |
25.1 |
42.4 |
78.3 |
70.1 |
64.8 |
63.9 |
||
EBITDA |
|
|
7.3 |
12.3 |
20.2 |
16.1 |
17.0 |
14.5 |
Operating Profit (norm) |
|
|
7.3 |
12.0 |
19.4 |
15.0 |
15.7 |
13.3 |
Amortisation of acquired intangibles |
(2.5) |
(4.2) |
(7.8) |
(7.0) |
(7.0) |
(7.0) |
||
Exceptionals |
(3.3) |
(5.1) |
(36.1) |
(3.7) |
0.0 |
0.0 |
||
Share based payments |
(1.0) |
(1.9) |
(1.8) |
(1.4) |
(1.4) |
(1.4) |
||
Operating Profit |
0.4 |
0.8 |
(26.2) |
3.0 |
7.3 |
4.9 |
||
Net Interest |
(0.1) |
(0.7) |
(0.5) |
(0.9) |
(0.5) |
(0.5) |
||
Contribution from jvs/assocs. |
0.0 |
0.0 |
0.0 |
0.1 |
0.5 |
1.0 |
||
Profit Before Tax (norm) |
|
|
7.2 |
11.3 |
18.9 |
14.2 |
15.7 |
13.8 |
Profit Before Tax (FRS 3) |
|
|
0.4 |
0.1 |
(26.7) |
2.1 |
6.8 |
4.4 |
Tax (reported) |
0.1 |
(0.5) |
1.1 |
(0.6) |
(0.6) |
(0.6) |
||
Profit After Tax (norm) |
6.2 |
10.9 |
18.2 |
13.8 |
15.1 |
13.2 |
||
Profit After Tax (FRS 3) |
0.4 |
(0.4) |
(25.6) |
1.6 |
6.2 |
3.9 |
||
Average Number of Shares Outstanding (m) |
43.8 |
51.5 |
67.3 |
74.5 |
76.0 |
76.0 |
||
EPS - normalised (p) |
|
|
14.2 |
21.2 |
27.1 |
18.5 |
19.8 |
17.4 |
EPS - normalised fully diluted (p) |
|
|
14.0 |
20.3 |
25.8 |
17.1 |
18.5 |
16.2 |
EPS - (IFRS) (p) |
|
|
0.9 |
(0.8) |
(38.1) |
2.1 |
8.2 |
5.1 |
Dividend per share (p) |
0.00 |
2.50 |
2.70 |
2.90 |
3.00 |
3.10 |
||
Gross Margin (%) |
90.1 |
88.7 |
87.1 |
82.0 |
81.0 |
74.3 |
||
EBITDA Margin (%) |
26.3 |
25.8 |
22.5 |
18.8 |
21.2 |
16.9 |
||
Operating Margin (before GW and except.) (%) |
26.1 |
25.0 |
21.6 |
17.6 |
19.6 |
15.4 |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
37.1 |
78.7 |
61.1 |
62.1 |
55.8 |
49.6 |
Intangible Assets |
36.4 |
73.6 |
57.8 |
51.5 |
45.0 |
38.5 |
||
Tangible Assets |
0.2 |
0.7 |
0.7 |
0.9 |
1.1 |
1.3 |
||
Investments |
0.5 |
4.4 |
2.7 |
2.7 |
2.7 |
2.7 |
||
Assets Available for sale/other |
0.0 |
0.0 |
0.0 |
7.0 |
7.0 |
7.0 |
||
Current Assets |
|
|
11.7 |
27.1 |
36.5 |
34.1 |
46.6 |
55.3 |
Stocks |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Debtors |
4.2 |
5.8 |
9.9 |
7.0 |
8.0 |
8.0 |
||
Cash |
7.4 |
21.1 |
26.2 |
26.6 |
38.1 |
46.8 |
||
Assets Available for sale/other |
0.0 |
0.2 |
0.5 |
0.5 |
0.5 |
0.5 |
||
Current Liabilities |
|
|
(7.7) |
(26.1) |
(35.7) |
(19.8) |
(17.6) |
(17.6) |
Creditors |
(5.2) |
(16.3) |
(31.3) |
(17.3) |
(15.0) |
(15.0) |
||
Player balances |
(1.4) |
(1.8) |
(2.4) |
(2.5) |
(2.6) |
(2.6) |
||
Short term borrowings |
(1.1) |
(8.0) |
(2.0) |
0.0 |
0.0 |
0.0 |
||
Long Term Liabilities |
|
|
(10.2) |
(10.5) |
(7.1) |
(6.5) |
(6.5) |
(6.5) |
Long term borrowings |
(8.0) |
0.0 |
(4.4) |
(4.0) |
(4.0) |
(4.0) |
||
Other long term liabilities |
(2.2) |
(10.5) |
(2.6) |
(2.5) |
(2.5) |
(2.5) |
||
Net Assets |
|
|
30.8 |
69.2 |
54.9 |
69.9 |
78.3 |
80.7 |
CASH FLOW |
||||||||
Operating Cash Flow |
|
|
4.6 |
14.4 |
14.3 |
14.5 |
15.3 |
13.1 |
Net Interest |
0.0 |
(0.6) |
(0.6) |
(0.9) |
(0.5) |
(0.5) |
||
Tax |
(0.1) |
(0.7) |
(1.4) |
(0.6) |
(0.6) |
(0.6) |
||
Capex |
(0.6) |
(1.9) |
(2.0) |
(2.0) |
(2.0) |
(2.0) |
||
Acquisitions/disposals |
(18.1) |
(22.2) |
(1.9) |
(22.5) |
5.0 |
0.0 |
||
Financing/other |
10.4 |
25.9 |
(0.5) |
16.2 |
(3.5) |
1.0 |
||
Dividends |
(3.0) |
(0.6) |
(1.8) |
(2.1) |
(2.2) |
(2.3) |
||
Net Cash Flow |
(6.6) |
14.4 |
6.1 |
2.7 |
11.4 |
8.7 |
||
Opening net debt/(cash) |
|
|
0.0 |
3.1 |
(11.3) |
(17.4) |
(20.1) |
(31.5) |
Moving in player balances |
1.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other adjustments |
2.5 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Closing net debt/(cash) |
|
|
3.1 |
(11.3) |
(17.4) |
(20.1) |
(31.5) |
(40.2) |
Source: Company accounts, Edison Investment Research
|
|
The Budget has provided long-awaited clarity on a number of gaming-related issues. The implementation of the £2 FOBT stake reduction will begin in October 2019, at the same time as a 600bp increase in remote gaming duty (RGD), from 15% to 21%. This is 1% higher than market expectations, but lower than recent rumours of 25%. We now include a £30m annual EBITDA impact in our forecasts. Also adjusting for an earlier implementation of the FOBT stake limit, we have lowered our FY19e EBITDA by 7%. Our FY20e EBITDA declines by 4%. The stock has fallen c 22% since August and trades at 9.8x EV/EBITDA and 13.0x P/E for FY19e.
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