Stride is gaining market share with strong organic growth in real money gaming (RMG). In its FY17 pre-close trading update, the company expects to meet the upper end of consensus and we have increased our FY17 and FY18 EBITDA forecasts by c 2.5%. The 8Ball earnout is now complete, with the Tarco earnout period ending in December. Stride has invested heavily in technology and operational leverage should kick in as acquired customers migrate to the higher-margin proprietary platform. The stock trades at 7.0x CY18e EV/EBITDA, a meaningful discount to peers.
Stride Gaming |
Strong trading - nudging up EBITDA |
Pre-close trading update |
Travel & leisure |
19 September 2017 |
Share price performance
Business description
Next events
Analysts
Stride Gaming is a research client of Edison Investment Research Limited |
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Stride is gaining market share with strong organic growth in real money gaming (RMG). In its FY17 pre-close trading update, the company expects to meet the upper end of consensus and we have increased our FY17 and FY18 EBITDA forecasts by c 2.5%. The 8Ball earnout is now complete, with the Tarco earnout period ending in December. Stride has invested heavily in technology and operational leverage should kick in as acquired customers migrate to the higher-margin proprietary platform. The stock trades at 7.0x CY18e EV/EBITDA, a meaningful discount to peers.
Year |
Revenue (£m) |
EBITDA* |
PBT* |
EPS* |
DPS |
P/E |
Yield |
08/15 |
27.8 |
7.3 |
7.2 |
14.0 |
0.0 |
15.9 |
N/A |
08/16 |
47.8 |
12.3 |
11.3 |
20.3 |
2.5 |
11.0 |
1.1 |
08/17e |
89.5 |
20.0 |
18.0 |
22.9 |
2.8 |
9.7 |
1.3 |
08/18e |
100.7 |
19.0 |
16.7 |
19.0 |
3.0 |
11.7 |
1.3 |
08/19e |
112.5 |
23.0 |
20.3 |
23.1 |
4.0 |
9.7 |
1.8 |
Note: *Normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. EPS is fully diluted.
Winning market share in real money gaming
On the back of robust organic growth and strong trading from acquired assets, Stride expects to meet the upper end of consensus for FY17, and we have nudged up our FY17 revenue forecast to £89.5m (from £88.8m) and our FY17 EBITDA goes from £19.5m to £20.0m. For FY18, our headline revenue remains unchanged, although we have altered the mix in favour of RMG (vs social gaming) and we have increased EBITDA by 2.7%. FY18 and FY19 EPS have been lowered by c 3.5% to reflect an increased share count. We anticipate further information on all verticals at the FY17 results on 21 November.
Acquisition update: 8Ball earnout complete
Stride Gaming acquired two bingo assets in August 2016 and the earnout payment for 8Ball has now been agreed at £13.1m (vs a total possible £18m), split between £4.0m cash and the issuance of 4.1m new shares. The Tarco earnout period ends in December, with a maximum payment of £22.0m. Post both earnouts, Stride believes it can achieve £2.5m of cost synergies and £3m of revenue synergies, as customers migrate to the higher-margin proprietary platform. In addition, the final $1.2m earnout consideration for the social gaming business InfiApps has been settled.
Valuation: 7.0x CY18e EV/EBITDA
Stride is fully regulated, successfully increasing market share, growing well ahead of the sector average and generating cash, with a progressive dividend policy. However, its 7.0x CY18e EV/EBITDA is below the peer group average. In our opinion, a demonstrable success in integrating the recent acquisitions, post all the earnouts, is key for a re-rating.
Forecast changes and acquisitions update
Acquisition update
The acquisitions last year (8Ball, Netboost Media and Tarco) doubled Stride’s market share in the UK online bingo market, from 5% to 10%.
Stride paid an initial £12.0m in cash to acquire 8Ball and the earnout period for 8Ball ended in August 2017. During the year, 8Ball achieved an adjusted EBITDA of £4.18m and the final consideration payable is £13.1m (compared to a maximum of £18m). The consideration will be split between £4.0m cash and the issuance of 4.1m shares. From 30 September, the total issued share capital will comprise 72.1m shares.
For Tarco, Stride paid an initial £16.0m and the earnout period ends in December. The maximum amount to be paid is £22.0m (51% cash and 49% shares) based on the EBITDA for the 12 months to December 2017.
Post all the earnouts, Stride believes it can achieve £2.5m of cost synergies and £3m of revenue synergies. Revenue synergies include increasing LTV, yield and cash hold, and cross-selling lapsing Tarco/8Ball players onto its higher-margin proprietary platform.
In addition, the final $1.2m earnout consideration for InfiApps has now been paid.
Forecast changes
In its pre-close trading update, Stride Gaming announced that it is confident of meeting the upper end of consensus estimates for FY17. The company continues to deliver strong organic growth in RMG and we have nudged up our FY17 revenue forecast to £89.5m (from £88.8m) and our FY17 EBITDA goes from £19.5m to £20.0m.
Our headline revenue forecasts for FY18 and FY19 remain unchanged, although we have altered the mix to reflect strong growth in RMG and a lower contribution from social gaming. Our FY18 EBITDA goes from £18.5m to £19.0m and our FY19 EBITDA goes from £22.7m to £23.0m. We expect a full update on all verticals at the FY17 results on 21 November.
Exhibit 1: Summary divisional forecasts
£m |
FY15 |
FY16 |
FY17e |
FY18e |
FY19e |
Real money gaming (RMG) |
26.7 |
35.0 |
81.5 |
93.2 |
104.1 |
Social gaming |
1.1 |
12.8 |
8.0 |
7.5 |
8.4 |
Net gaming revenue (NGR) |
27.8 |
47.8 |
89.5 |
100.7 |
112.5 |
COS (POC gaming tax) |
(2.8) |
(5.4) |
(11.6) |
(16.8) |
(19.3) |
% of RMG NGR |
10.3% |
15.4% |
14.2% |
18.0% |
18.5% |
Gross profit |
25.1 |
42.4 |
77.9 |
83.9 |
93.3 |
Marketing cost |
(7.0) |
(10.9) |
(22.0) |
(24.8) |
(27.7) |
Marketing % |
25.2% |
22.8% |
24.6% |
24.6% |
24.6% |
Other distribution costs |
(2.9) |
(7.8) |
(17.1) |
(18.8) |
(20.4) |
Other distribution % |
10.4% |
16.2% |
19.1% |
18.7% |
18.1% |
Admin costs |
(7.8) |
(11.4) |
(18.9) |
(21.3) |
(22.1) |
Admin % |
28.2% |
23.9% |
21.2% |
21.2% |
19.7% |
Adjusted EBITDA |
7.3 |
12.3 |
20.0 |
19.0 |
23.0 |
RMG EBITDA |
7.0 |
8.2 |
19.4 |
18.4 |
21.9 |
Social gaming EBITDA |
0.3 |
4.1 |
0.6 |
0.6 |
1.2 |
Adjusted EBITDA margin |
26.3% |
25.8% |
22.3% |
18.8% |
20.5% |
RMG EBITDA margin % |
26.4% |
23.5% |
23.8% |
19.7% |
21.0% |
Social gaming EBITDA margin % |
24.3% |
32.0% |
7.0% |
8.0% |
14.0% |
Source: Edison Investment Research
In addition, we have lowered our FY18 and FY19 fully diluted EPS forecasts by c 3.5%, largely due to the issue of new shares, as well as employee options.
Exhibit 2: Edison estimate changes
Revenue (£m) |
EBITDA (£m) |
EPS (p) |
|||||||
Old |
New |
% chg. |
Old |
New |
% chg. |
Old |
New |
% chg. |
|
08/17e |
88.8 |
89.5 |
0.8 |
19.5 |
20.0 |
2.6 |
21.4 |
22.9 |
7.0 |
08/18e |
100.7 |
100.7 |
0.0 |
18.5 |
19.0 |
2.7 |
19.7 |
19.0 |
(3.5) |
08/19e |
112.5 |
112.5 |
0.0 |
22.7 |
23.0 |
1.3 |
24.0 |
23.1 |
(3.8) |
Source: Edison Investment Research
Exhibit 3: Financial summary
£m |
2014 |
2015 |
2016 |
2017e |
2018e |
2019e |
||
August |
UK GAAP |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||||
Revenue |
|
|
8.5 |
27.8 |
47.8 |
89.5 |
100.7 |
112.5 |
Cost of Sales |
0.0 |
(2.8) |
(5.4) |
(11.6) |
(16.8) |
(19.3) |
||
Gross Profit |
8.5 |
25.1 |
42.4 |
77.9 |
83.9 |
93.3 |
||
EBITDA |
|
|
1.2 |
7.3 |
12.3 |
20.0 |
19.0 |
23.0 |
Operating Profit (norm) |
|
|
1.2 |
7.3 |
12.0 |
18.5 |
17.2 |
20.8 |
Amortisation of acquired intangibles |
(0.3) |
(2.5) |
(4.2) |
(5.1) |
(5.0) |
(5.0) |
||
Exceptionals |
(0.1) |
(3.3) |
(5.1) |
(19.6) |
0.0 |
0.0 |
||
Share based payments |
0.0 |
(1.0) |
(1.9) |
(1.3) |
(1.3) |
(1.3) |
||
Operating Profit |
0.8 |
0.4 |
0.8 |
(7.4) |
10.9 |
14.5 |
||
Net Interest |
0.0 |
(0.1) |
(0.7) |
(0.6) |
(0.5) |
(0.5) |
||
Profit Before Tax (norm) |
|
|
1.2 |
7.2 |
11.3 |
18.0 |
16.7 |
20.3 |
Profit Before Tax (FRS 3) |
|
|
0.8 |
0.4 |
0.1 |
(8.0) |
10.4 |
14.0 |
Tax (reported) |
0.0 |
0.1 |
(0.5) |
0.0 |
(1.3) |
(1.6) |
||
Profit After Tax (norm) |
1.2 |
6.2 |
10.9 |
16.7 |
15.4 |
18.7 |
||
Profit After Tax (FRS 3) |
0.8 |
0.4 |
(0.4) |
(7.9) |
9.1 |
12.4 |
||
Average Number of Shares Outstanding (m) |
31.2 |
43.8 |
51.5 |
68.0 |
75.5 |
78.0 |
||
EPS - normalised (p) |
|
|
0.0 |
14.2 |
21.2 |
24.6 |
20.4 |
23.9 |
EPS - normalised fully diluted (p) |
|
|
4.0 |
14.0 |
20.3 |
22.9 |
19.0 |
23.1 |
EPS - (IFRS) (p) |
|
|
0.0 |
0.9 |
(0.8) |
(11.7) |
12.1 |
15.9 |
Dividend per share (p) |
0.00 |
0.00 |
2.50 |
2.80 |
3.00 |
4.00 |
||
Gross Margin (%) |
100.0 |
90.1 |
88.7 |
87.1 |
83.3 |
82.9 |
||
EBITDA Margin (%) |
14.6 |
26.3 |
25.8 |
22.3 |
18.8 |
20.5 |
||
Operating Margin (before GW and except.) (%) |
14.6 |
26.1 |
25.0 |
20.7 |
17.1 |
18.5 |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
0.1 |
37.1 |
78.7 |
64.0 |
59.7 |
54.7 |
Intangible Assets |
0.0 |
36.4 |
73.6 |
58.6 |
53.9 |
48.6 |
||
Tangible Assets |
0.0 |
0.2 |
0.7 |
0.9 |
1.3 |
1.6 |
||
Investments |
0.1 |
0.5 |
4.4 |
4.4 |
4.5 |
4.5 |
||
Current Assets |
|
|
5.7 |
11.7 |
27.1 |
29.5 |
33.7 |
49.6 |
Stocks |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Debtors |
5.7 |
4.2 |
5.8 |
6.4 |
7.0 |
7.0 |
||
Cash |
0.0 |
7.4 |
21.1 |
23.1 |
26.7 |
42.6 |
||
Other |
0.0 |
0.0 |
0.2 |
0.0 |
0.0 |
0.0 |
||
Current Liabilities |
|
|
(1.2) |
(7.7) |
(26.1) |
(20.6) |
(19.7) |
(19.7) |
Creditors |
(0.8) |
(5.2) |
(16.3) |
(18.6) |
(17.5) |
(17.5) |
||
Player balances |
(0.4) |
(1.4) |
(1.8) |
(2.0) |
(2.2) |
(2.2) |
||
Short term borrowings |
0.0 |
(1.1) |
(8.0) |
0.0 |
0.0 |
0.0 |
||
Long Term Liabilities |
|
|
0.0 |
(10.2) |
(10.5) |
(14.0) |
(10.5) |
(10.5) |
Long term borrowings |
0.0 |
(8.0) |
0.0 |
(8.0) |
(8.0) |
(8.0) |
||
Other long term liabilities |
0.0 |
(2.2) |
(10.5) |
(6.0) |
(2.5) |
(2.5) |
||
Net Assets |
|
|
4.6 |
30.8 |
69.2 |
58.8 |
63.2 |
74.1 |
CASH FLOW |
||||||||
Operating Cash Flow |
|
|
0.0 |
4.6 |
14.4 |
12.0 |
18.1 |
22.1 |
Net Interest |
0.0 |
0.0 |
(0.6) |
(0.3) |
(0.3) |
(0.3) |
||
Tax |
0.0 |
(0.1) |
(0.7) |
(0.5) |
(1.3) |
(1.6) |
||
Capex |
0.0 |
(0.6) |
(1.9) |
(2.1) |
(2.3) |
(2.3) |
||
Acquisitions/disposals |
0.0 |
(18.1) |
(22.2) |
(5.0) |
(18.4) |
0.0 |
||
Financing |
0.0 |
10.4 |
25.9 |
0.0 |
10.0 |
(0.0) |
||
Dividends |
0.0 |
(3.0) |
(0.6) |
(1.8) |
(2.0) |
(2.1) |
||
Net Cash Flow |
0.0 |
(6.6) |
14.4 |
2.3 |
3.8 |
15.7 |
||
Opening net debt/(cash) |
|
|
0.0 |
0.0 |
3.1 |
(11.3) |
(13.6) |
(17.3) |
Moving in player balances |
0.0 |
1.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other adjustments |
0.0 |
2.5 |
0.0 |
0.0 |
(0.0) |
(0.0) |
||
Closing net debt/(cash) |
|
|
0.0 |
3.1 |
(11.3) |
(13.6) |
(17.3) |
(33.0) |
Source: Stride Gaming Accounts, Edison Investment Research
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