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GVC - shares up on strong Q4

George Salmon | 17 January 2019 | A A A
GVC - shares up on strong Q4

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

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In a brief trading update, GVC confirmed it's enjoyed a strong final quarter of the year, with continued market share gains in all major territories.

The group now expects to deliver underlying earnings before interest, tax, depreciation and amortisation of £750-755m, around 1.5-2% above analyst expectations.

The shares rose 5.2% on the news.

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Our view

Online gaming specialist GVC is a serial accumulator. The latest addition, Ladbrokes Coral, makes it an unusual mix of established high street name and digital disruptor.

That split is reflected in recent trading updates. UK in-shop trends have been negative, and tighter restrictions on gambling machines look set to make things worse. The government's move to cap staking on fixed odds betting terminals (FOBTs) will hopefully make society richer, but the lost profits will make GVC poorer, at least in the short term. Around 1,000 shops are likely to close.

However, we think there are positives.

The group reckons it can get £130m of cost savings from integrating the two businesses. That figure's actually increased from the initial target of around £100m, despite the tighter restrictions on FOBTs.

There's also growth in online gambling to make up for the declines in-store. After clearing the FOBT hurdle, GVC should still be able to grow earnings. But of course there's no such thing as a dead cert.

In time, those earnings could be boosted by an exciting opportunity in the US. A Supreme Court judgement has given every state the power to legalise sports betting if it wants to.

The illegal sports betting market in the US sees an estimated $150bn change hands every year. The chance to snap up market share in such a populous, affluent and sports-mad country is a once in a generation opportunity. Of course such opportunities don't come without risks. It remains to be seen how quickly different states give the thumbs up to sports betting, and there'll be plenty of competition for a seat at the table.

But we think GVC has given itself a good chance of success. At least initially, casinos will be the go-to location for sports betting, and GVC has teamed with a US high roller, MGM Resorts. There's a lot to like about combining GVC's experience with MGM's well-established brand.

The dividend remains well-underpinned by earnings and cash flow, and the prospective yield is 5.1%. That should mean investors should get an attractive dividend while they wait to see if GVC can deliver the goods stateside.

GVC features as one of our five shares to watch in 2019.

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Fourth quarter and full year trading update

For the year, net gaming revenue (NGR) is 9% ahead of 2017, with online growth of 19% more than offsetting a 3% decline on the UK high street.

While fourth quarter growth is lower at 5%, that reflects the fact the group reported a higher than usual online win margin in the equivalent period last year.

Despite online sports win margins falling 1.5 percentage points, an 18% rise in wagers meant GVC delivered a 15% increase in underlying online NGR in Q4.

In the UK retail estate, like-for like NGR fell 3% in Q4. Within that, like-for-like machine revenue rose 3% with over the counter revenue down 10%.

Eurobet Retail wagers rose 15% but European Retail NGR was 7% down on Q4 last year as win margins dropped 7.4 percentage points on last year's exceptionally high level.

Full year results will be released on 5 March 2019.

Find out more about GVC shares including how to invest

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.