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GVC - better outlook helps profit forecasts rise

George Salmon | 15 August 2019 | A A A
GVC - better outlook helps profit forecasts rise

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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.

GVC Holdings plc Eur0.01

Sell: 812.00 | Buy: 812.40 | Change 4.20 (0.52%)
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GVC has confirmed a better than forecast result from the UK retail division, meaning it expects to deliver full year 2019 adjusted cash profits (EBITDA) of £650m-£670m, around £10m higher than the previous range.

The shares rose 4.8% on the news.

The half year dividend rises from 16p to 17.6p per share.

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Our view

Gambling shares aren't for everyone, but we think there are attractions to GVC.

It's a serial accumulator, and 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. The sports betting, digital casinos and brands are delivering good growth online, but the UK retail estate has seen revenues tumble following the introduction of a £2 stake limit on fixed odd betting terminals (FOBTs). The fallout hasn't been quite as bad as expected, with gamblers moving from machines to the counter, but around 900 shops are still expected to close.

However, we think there are long term positives.

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 we think GVC looks well-placed to deliver strong profit growth in 2020 and beyond. Management also reckons it can deliver £130m of cost savings from integrating its new high street business - an increase from the initial target of around £100m.

In time, 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, and GVC now has the right to operate in three of those states. The chance to snap up market share in the world's largest economy 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.

Still, we think GVC has given itself a good chance of success across the pond. At least initially, casinos will be the go-to location for sports betting, and the group has teamed up with established brand, MGM Resorts.

The multitude of moving parts means GVC has been fairly volatile in recent times, and significant share sales from key directors rocked investors' confidence in March. But throughout that period trading has remained impressive. Going forwards the dividend looks well-underpinned by earnings and cash flow, and the prospective yield is an enticing 6.9%. That means investors should get paid to wait and see if GVC can deliver the goods stateside.

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Half year results (on a constant currency and underlying basis unless otherwise stated)

GVC's half year underlying EBITDA (earnings before interest, tax, depreciation and amortisation) has risen 5% to £366.8m.

Growth was again driven by the Online business, where the amount of money wagered for sports bets increased 14%, and GVC's win margin for these stakes improved 0.4% to 10.8%. Together with a 18% increase in gaming revenue, that helped underlying net gaming revenue (NGR) increase 18% to £1bn, (before accounting for the Ladbrokes Coral acquisition). EBITDA was £241.3m, up 14% as higher costs countered the revenue increase.

The cut in maximum stakes on fixed odd betting terminals (FOBTs) to £2, meant UK Retail NGR dropped 12% to £586.8m. However, this was better than had been expected, as some of the lost FOBT spending shifted to sports betting. Despite a slight improvement in rent and operating costs, underlying EBITDA fell 11% to £112m.

Within the European Retail estate, sports wagers grew 11%, while the win margin dropped from 17.8% to 17.3%. Add in growth outside of sports, and divisional revenue rose 8% to £144.1m. Underlying EBITDA rose 19% to £34.4m

CEO Kenneth Alexander said the joint venture with MGM resorts in America is progressing well. The group added more licences during the half and expects to be up and running in time for the new NFL season in September.

Changes to accounting rules pushed net debt up to £2.3bn, but was flat on an adjusted basis at £1.9bn. Higher profits mean the group is expecting to reduce leverage, as measured by net debt to EBITDA, faster than originally planned.

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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 disclosure for more information.