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GVC - strong results and a good start to 2019

George Salmon | 5 March 2019 | A A A
GVC - strong results and a good start to 2019

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GVC's Underlying net gaming revenue for the year rose 9% to £3.6bn, as online market share gains in all key territories more than offset declines in UK retail.

Underlying cash profits, as measured by EBITDA, came in slightly ahead of the guidance range, at £755.3m, and the group says 2019 has started well, particularly online.

The shares rose 2.8% on the news.

A second interim dividend of 16p takes the full year payment to 32p, up 7% on last year.

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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.

In any case, the group's trump card remains its online business. While the FOBT hit will likely see group profits dip in 2019, the mushrooming digital division means GVC looks well-placed to deliver strong growth in 2020 and beyond. 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.

It'll take years for the US to play out, but the dividend remains well-underpinned by earnings and cash flow, and the prospective yield is 5.1%.That should mean investors get an attractive dividend, while they wait to see if GVC can deliver the goods stateside.

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Full year results details:

Online NGR rose 21% at constant exchange rates to £1.9bn, with growth in amounts wagered and margins, in both gaming and sports brands, boosted by a positive World Cup. Sports brands' underlying NGR rose 22% to £1.5bn, with games brands up 16% to £351m. Operating costs only increased 6%, meaning underlying EBITDA was up 19% to £485.7m, despite increased taxes in the UK and Australia.

UK Retail NGR was down 5% to £1.3bn. Sports wagers fell 8% to £3.1bn, and margins dipped from 18.2% to 17.9% due to the non-repeat of bookie-friendly results in 2017. These declines were moderated by steadier Machine NGR, down 1% to £780.7m. Underlying EBITDA fell 2% to £251.7m

European Retail underlying NGR was 14% up on last year at constant exchange rates, with wagers 9% ahead, and win margins rising from 17.1% to 17.7%. Operating costs only rose 1%, so despite higher marketing costs, underlying EBITDA rose 35% to £65.4m.

Underlying EBITDA in Other bookmaking was £3.1m, compared to a £0.3m loss last year, while Central Corporate losses were £50.6m, up from £45.3m in 2017.

Net debt at 31 December was £1.9bn, representing 2.5x net debt to underlying EBITDA. The loss of earnings from lower max FOBT stakes means leverage is expected to increase to 3x in 2019, but GVC expects that to fall by around 0.5x in each subsequent year.

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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.