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Primary Health Properties — Steady long-term income

Primary Health Properties (LSE: PHP)

Last close As at 05/08/2026

GBP0.96

▲ 0.05 (0.05%)

Market capitalisation

GBP2,481m

More on this equity

Research: Real Estate

Primary Health Properties — Steady long-term income

Primary Health Properties’ (PHP) 26 April trading update demonstrated several positive developments in the year to date: continued portfolio and rental growth, new long-term financing, a revision of the advisory agreement with Nexus and a higher quarterly dividend (5.25p annualised vs 5.125p in FY16). Long-term demographic trends and broad political will for healthcare reform continue to support the outlook for primary care property in both the UK and Ireland, and PHP’s long and largely government-backed leases underpin an attractive and fully covered dividend, which we expect to continue its 20-year growth trend.

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Written by

Real Estate

Primary Health Properties

Steady long-term income

AGM trading update

Real estate

16 May 2017

Price

112.50p

Market cap

£673m

€1.1762/£

Net debt (£m) at 31 March 2017

669.0

Shares in issue

598.3m

Free float

98%

Code

PHP

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

4.2

4.2

7.1

Rel (local)

6.9

3.9

(4.4)

52-week high/low

440.0p

350.0p

Business description

Primary Health Properties is a long-term investor in primary healthcare property in the UK and, recently, Ireland. Assets are mainly long-let to GPs and the NHS or HSE, organisations backed by the UK and Irish governments, respectively. The tenant profile and long average lease duration provide an exceptionally secure rental income stream.

Next events

Q2 dividend paid

26 May 2017

Q3 dividend declared

6 July 2017

Analysts

Julian Roberts

+44 (0)20 3077 5748

Andrew Mitchell

+44 (0)20 3681 2500

Primary Health Properties is a research client of Edison Investment Research Limited

Primary Health Properties’ (PHP) 26 April trading update demonstrated several positive developments in the year to date: continued portfolio and rental growth, new long-term financing, a revision of the advisory agreement with Nexus and a higher quarterly dividend (5.25p annualised vs 5.125p in FY16). Long-term demographic trends and broad political will for healthcare reform continue to support the outlook for primary care property in both the UK and Ireland, and PHP’s long and largely government-backed leases underpin an attractive and fully covered dividend, which we expect to continue its 20-year growth trend.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

Yield
(%)

EPRA NAV/
share (p)

12/15

63.1

21.7

4.9

5.000

4.4

87.7

12/16

67.4

26.7

4.8**

5.125

4.6

91.1

12/17e

72.6

32.2

5.4

5.250

4.7

92.9

12/18e

78.5

33.7

5.6

5.360

4.8

95.3

Note: *PBT and EPS are on an underlying EPRA basis, excluding valuation movements and other exceptional items. **Using weighted average shares for the year. The total cash dividend was fully covered by earnings.

Income and asset growth

PHP completed 48 rent reviews in Q117, increasing rents by £0.2m or an average of 1.6%, which is an encouraging increase over the 0.9% seen in 2016. PHP has also continued to add to its portfolio, with the acquisitions of two standing let properties near Aberdeen for £7.2m and a second Irish asset for €7.3m. The latter is a 2,900sqm Primary Care Centre in County Cork where the Health Service Executive comprises over 75% of the rent roll. PHP is funding the development, which is expected to be complete in Q317. PHP has one development asset in the UK, which is on track for completion in May, and 297 standing let properties.

Financing and advisory agreement

The issue of £100m of secured notes was PHP’s first private debt placement, extending its already broad access to debt funding and increasing the weighted average maturity of debt to 6.1 years from 5.1 years at 31 December. The changes to the advisory agreement include further reductions in the incremental management fee and a change to the measurement criteria of the advisor’s performance, to use EPRA rather than IFRS metrics. Neither of these has an effect on our estimates yet, although when the portfolio does exceed £1.5bn (which we expect to be beyond FY18 – the current limit of our forecast period), the EPRA cost ratio, which is already the lowest in the sector, should be reduced slightly.

Valuation: Secure income supports rising dividends

The primary care market in the UK and Ireland is inherently stable compared with other real estate subsectors; long leases, effectively full occupancy at all times and the presence of the NHS and HSE as major tenants mean that rents and valuations are less volatile than in other markets. The stable, long-term cash flows PHP’s portfolio generates support an FY17e dividend yield of 4.7%, fully covered by EPRA earnings and which we expect to continue to grow, as it has for 20 years.

Summary of the update

Portfolio growth

PHP bought two modern, purpose-built healthcare facilities near Aberdeen in January for £7.2m through the acquisition of Carden Medical Investments. These have unexpired leases of 15.3 and 13.0 years. The former is let to a GP practice and the Scottish Ministers and the latter to the Haddo Medical Group, another practice. In March, PHP contracted to provide development funding for the Carrigaline Primary Care Centre near Cork. This is PHP’s second Irish acquisition and is expected to be completed in Q317. The portfolio now 299 assets valued at over £1.2bn and with a contracted rent roll of £68.8m.

Rental growth

While we note that on the 48 reviews completed in the quarter, the average increase of 1.6% is higher than in 2015 or 2016 (Exhibit 1). Our model assumes that annual rental growth is 1%, and one stronger quarter is not sufficient to change that assumption, but we note that higher inflation and any increase in new primary care construction could make our assumption appear conservative. An increase in our annual rent growth assumption would increase our forecasts of both EPRA earnings and EPRA NAV.

Exhibit 1: Average rental uplift

Source: Primary Health Properties data

New financing

The £100m 10-year senior secured note has a fixed coupon of 2.83%, similar to the club facility that it is partially being used to refinance, and we have not changed our debt cost assumptions. The £115m facility with RBS and Santander has been replaced with a bilateral loan for £50m from RBS, initially on a four-year term, which may be extended by a further year and to £100m with the approval of RBS. The refinancing adds further diversity to PHP’s debt funding and a year to its average maturity. Net debt stood at £669.0m at 31 March for pro forma LTV of 54.3% (31 December: £655.7m and 53.7%; this differs from the IFRS calculation we show because of the marking to market of convertible bonds in the financial summary at Exhibit 3).

Advisory agreement

The changes affect both the management fee and the performance fee: the top band of the management fee was previously 0.3% of gross assets in the portfolio over £1.5bn; this has been replaced with 0.275% of assets between £1.5bn and £1.75bn and 0.25% between £1.75bn and £2.0bn. The portfolio was valued at £1.22bn at 31 December, and we do not expect it to reach £1.5bn before FY19, the current limit of our forecast period.

The terms of the performance incentive fee (PIF) have been amended to use EPRA rather than IFRS NAV. Nexus, the advisor, is still entitled to a fee of 11.25% of the NAV total return above a hurdle of 8%, but by using the EPRA rather than the IFRS metric, the impact of changes to the mark to market valuation of PHP’s derivatives and convertible bonds will be excluded. These do not reflect the performance of the underlying property portfolio. New controls on the PIF have been introduced too: it is now capped at the lower of 20% of the management fee or £2m and payment of it is restricted if doing so would cause dividend cover to fall below 98%. No PIF has been paid since 2007 and the £12.1m cumulative PIF deficit at 31 December 2016, which was entirely attributable to IFRS mark-to-market adjustments, has been eliminated.

Valuation

We have not changed our estimates as a result of the update. The current pipeline of deals in solicitors’ hands stands at £45m in the UK and €30m in Ireland, combined with acquisitions in the year to date, represents c 90% of our assumption that PHP will invest £95m in total in FY17.

The security and length of PHP’s lease portfolio are attractive to investors, and have contributed to the c 24% price premium to the last reported EPRA NAV per share. This is in line with other stocks with similarly strong income characteristics: as Exhibit 3 shows, although the small sample size means we cannot draw strong conclusions, there appears to be a relationship between the earnings yield on NAV, and the price/NAV among listed UK healthcare property investors with long leases. In the current environment of low interest rates, PHP’s fully covered prospective dividend yield of 4.7%, which is paid from cash earnings 90% backed by the UK and Irish governments, compares well with 10-year gilts (c 1.1%),10-year Irish government bonds (c 0.9%) and the FTSE 100 (3.67%).

Exhibit 2: Price/EPRA NAV vs EPRA EPS yield on EPRA NAV

Source: Bloomberg, Edison Investment Research. Note: Companies: Primary Heath Properties (PHP, green marker), Assura Group (AGR), MedicX Fund (MXF), Secure Income REIT (SIR) and Target Healthcare REIT (THRL). Prices as at 15 May 2017.

Exhibit 3: Financial summary

Year end 31 December

2014

2015

2016

2017e

2018e

£000s

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

59,985

63,115

67,439

72,564

78,485

Cost of Sales

(723)

(852)

(868)

(953)

(1,031)

Gross Profit

59,262

62,263

66,571

71,611

77,454

Administrative expenses

(6,782)

(6,807)

(7,332)

(7,652)

(7,996)

EBITDA

52,480

55,456

59,239

63,959

69,457

Other income and expenses

0

0

0

0

0

Non-recurring items

(2,426)

0

0

0

0

Net valuation gain on property portfolio

29,204

39,767

20,686

9,872

12,331

Operating profit before financing costs

79,258

95,223

79,925

73,831

81,788

Net Interest

(34,275)

(33,727)

(32,490)

(31,795)

(35,788)

Non-recurring finance income/expense

0

0

0

0

0

Early loan repayment fees

(1,187)

0

(24)

0

0

Fair value gain/(loss) on interest rate derivatives and convertible bond, and swap amortisation

(6,916)

(5,464)

(3,710)

0

0

Profit Before Tax

36,880

56,032

43,701

42,036

46,001

Tax

0

0

0

0

0

Profit After Tax (FRS 3)

36,880

56,032

43,701

42,036

46,001

Adjusted for the following:

Net gain/(loss) on revaluation

(29,204)

(39,767)

(20,686)

(9,872)

(12,331)

Fair value gain/(loss) on derivatives & convertible bond

6,916

5,464

3,710

0

0

Profit on termination of finance lease

0

0

0

0

0

Early loan repayment fees

1,187

0

24

0

0

Issue costs of convertible bond

2,426

0

0

0

0

EPRA basic earnings

18,205

21,729

26,749

32,164

33,670

Period end number of shares (m)

445.1

446.3

598.2

599.6

601.1

Average Number of Shares Outstanding (m)

444.2

445.5

560.0

598.8

600.5

Fully diluted average number of shares outstanding (m)

496.6

530.2

644.6

683.5

685.1

EPS - fully diluted (p)

7.9

11.2

7.3

6.4

7.0

EPRA EPS (p)

4.1

4.9

4.8

5.4

5.6

Dividend per share (p)

4.875

5.000

5.125

5.250

5.360

Dividend cover

84%

98%

100%

102%

105%

BALANCE SHEET

Fixed Assets

1,026,232

1,100,621

1,220,155

1,321,277

1,442,358

Investment properties

1,026,207

1,100,612

1,220,155

1,321,277

1,442,358

Net investment in finance leases

0

0

0

0

0

Derivative interest rate swaps

25

9

0

0

0

Current Assets

17,740

7,034

8,442

7,282

5,880

Trade & other receivables

5,668

4,153

3,343

3,537

3,839

Net investment in finance leases

0

0

0

0

0

Cash & equivalents

12,072

2,881

5,099

3,746

2,041

Current Liabilities

(33,065)

(34,864)

(32,260)

(33,048)

(34,278)

Term loans

(711)

(862)

(803)

(803)

(803)

Trade & other payables

(14,244)

(16,099)

(13,600)

(14,388)

(15,618)

Derivative interest rate swaps

(5,802)

(4,734)

(3,795)

(3,795)

(3,795)

Deferred rental income

(12,308)

(13,169)

(14,062)

(14,062)

(14,062)

Other

0

0

0

0

0

Long Term Liabilities

(701,777)

(727,431)

(697,141)

(784,141)

(887,141)

Term loans

(437,022)

(460,550)

(429,433)

(516,433)

(619,433)

Bonds

(229,543)

(236,328)

(238,197)

(238,197)

(238,197)

Derivative interest rate swaps

(35,212)

(30,553)

(29,511)

(29,511)

(29,511)

Net Assets

309,130

345,360

499,196

511,370

526,818

Derivative interest rate swaps

40,989

35,278

33,306

33,306

33,306

Change in fair value of convertible bond

4,462

10,931

12,456

12,456

12,456

EPRA net assets

354,581

391,569

544,958

557,132

572,580

IFRS NAV per share (p)

69.5

77.4

83.5

85.3

87.6

EPRA NAV per share (p)

79.7

87.7

91.1

92.9

95.3

CASH FLOW

Operating Cash Flow

49,020

57,145

56,838

64,553

70,385

Net Interest & other financing charges

(49,633)

(32,337)

(31,374)

(31,795)

(35,788)

Tax

(23)

0

(51)

0

0

Acquisitions/disposals

(54,396)

(29,477)

(97,359)

(91,250)

(108,750)

Net proceeds from issue of shares

17

(139)

145,232

0

0

Equity dividends paid (net of scrip)

(20,688)

(21,083)

(24,734)

(29,862)

(30,553)

Other (including debt assumed on acquisition)

7,647

(13,764)

(17,027)

0

0

Net Cash Flow

(68,056)

(39,655)

31,525

(88,353)

(104,705)

Opening net (debt)/cash

(587,148)

(655,204)

(694,859)

(663,334)

(751,687)

Closing net (debt)/cash

(655,204)

(694,859)

(663,334)

(751,687)

(856,392)

Source: Primary Health Properties accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Primary Health Properties and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Primary Health Properties and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Research: Consumer

Jackpotjoy plc — Market dominance brings the cash

Driven by the market-leading Jackpotjoy division, Q1 gaming revenues rose 11% to £71.4m with an EBITDA margin of 40.9% and underlying cash conversion of c 100%. Q2 trading has started well across all divisions. Adjusted net debt/EBITDA of c 4.0x remains high, but Jackpotjoy plc (JPJ) is comfortably positioned to pay a major c £95m earnout in June and we expect significant deleverage from 2018. The market is pricing in a high degree of execution risk, with 2017 trading multiples of 6.9x EV/EBITDA and 6.1x P/E. Despite regulatory headwinds, we forecast continued strong underlying growth and we would expect a re-rating as debt repayments begin to drive value to equity.

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