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GVC - a strong finish to the year

Nicholas Hyett | 17 January 2020 | A A A
GVC - a strong finish to the year

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Entain plc Eur0.01

Sell: 1,830.50 | Buy: 1,832.00 | Change -2.00 (-0.11%)
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Full year cash profits are now expected be towards the top of end of the £670m - £680m guidance range. That reflects a strong fourth quarter, with online continuing to offset declines on the UK high street.

The shares fell 1% on the news.

View the latest GVC share price and how to deal

Our view

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

It's been a serial accumulator over the years, and the string of acquisitions means it operates as both an online digital disruptor and high street bookie. Brands range from Ladbrokes and Coral to Party Poker and Foxy Bingo.

This split has been evident this year. Online sports betting and digital casinos are delivering good growth, 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, delivering a sufficiently strong performance this year that profits are set to rise despite the FOBT ban. With the headwind from the £2 staking limit subsiding next year, profits are forecast to continue growing in the years to come.

In time, the US could also provide an exciting boost to earnings. Every state now has the power to legalise sports betting if it wants to. GVC has the right to operate in three so far, and the chance to snap up market share in the world's largest economy is a once in a generation opportunity.

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 GVC's Roar Digital is a partnership with casino operator MGM Resorts. Blending the group's digital expertise with MGM's market know-how is a potentially powerful combination. It's not the only player in the market though, and there's already plenty of competition for a seat at the table.

It would be remiss not to mention challenges from regulation too. Just this week the Gambling Commission has banned the use of credit cards for online gambling in the UK. It's not yet clear what the impact will be, but gambling is clearly very much in the regulators sights.

All these moving parts means GVC has been fairly volatile in recent times, and significant share sales from key directors rocked investors' confidence in March. But trading has so far remained impressive. Going forwards the dividend looks well-underpinned by earnings and cash flow. With a prospective yield of 4.2% underpinned by more established businesses, investors should get paid to wait and see if GVC can deliver the goods stateside.

Register for updates on GVC

Fourth quarter and full year trading update (constant exchange rates)

Full year net gaming revenue (NGR) rose 3%. That reflects online revenue growth of 14% and European Retail up 5%, partly offset by a 12% decline on the UK high street.

Online NGR rose 11% in the fourth quarter, with 9% growth in gaming and 15% in sports. The growth in sports reflects a 10% rise in wagers and a 0.6 percentage point increase in win margins.

Like-for-like NGR was 11% lower in UK Retail in the quarter. That's largely down to a 31% fall in machine NGR (following the introduction of the £2 maximum bet), while over the counter (OTC) NGR was 17% higher. The rise in OTC revenues reflects clients switching from machine to counter bets together with an improved OTC win margin of 0.9 percentage points.

European Retail NGR was 7% ahead of last year, with OTC wagers up 5% and win margins up 0.4 percentage points. Performance was particularly strong in Eurobet Retail, where wagers were 10% higher and gross win margin was up 2.0 percentage points.

Roar Digital, GVC's joint venture in the US, saw online revenues grow strongly over the quarter. The group announced a multiyear partnership with Yahoo Sports, which has over 60m monthly online unique viewers.

Find out more about GVC shares including how to invest

The author holds shares in GVC.

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.