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GVC - COVID-19 update

Emilie Stevens, Equity Analyst | 17 March 2020 | A A A
GVC - COVID-19 update

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GVC Holdings plc Eur0.01

Sell: 794.80 | Buy: 796.20 | Change -22.00 (-2.70%)
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GVC expects the cancellation of major sporting events around the world to have a significant negative impact on this year's profits, with around 45% of total group revenues generated from sporting events.

The shares remained broadly stable following the announcement on Monday afternoon but fell 14% over the following morning.

View the latest GVC share price and how to deal

Our view

Life just got a lot tougher for GVC and its peers. The outbreak of coronavirus is seeing sports events cancelled worldwide - the group is facing a serious hit to both revenue and profits this year.

Coronavirus comes at a time when the group was already contending with the introduction of a £2 stake limit on fixed odd betting terminals and more recently a ban on using credit cards for gambling online.

Analyst EBITDA expectations before the outbreak were in the region of £815m for the year. However GVC now expects a £130 - £150m hit from cancelled sporting events this year this year. And the closure of UK retail branches would set the group back another £45 - 50m per month. Given the UK's Government's recent stay at home guidance - shop closures seem likely.

With uncertainty around earnings, investors will be looking to the balance sheet to see how GVC might weather the storm.

At the end of 2019 GVC had £260m in accessible cash on the balance sheet. Net debt was 2.69 times cash profits. GVC also has access to £550m of credit, which is currently unused, but this is subject to a keeping a handle on net debt to EBITDA levels - something that will prove trickier in the current environment.

But while GVC's balance sheet is in relatively good shape, it faces the same serious challenges as the sector overall. As with peers, cash preservation and cost control remain key.

GVC does have a couple of points in its favour though. It's cash generative, driven by growth in its online business. While online growth will be far from immune from the sports impact, GVC will be hoping its online, non-sports, gaming brands like Foxy Bingo and Party Poker draw some of gamblers extra cash.

Perhaps unsurprisingly all this has meant a hit to the share price recently. Pre virus the shares were trading around 12 times future earnings, above their long run average of 9.8, but have since dropped to 4.7 (although bear in mind that this was before the drastic change in earnings guidance issued today). The shares offer a prospective yield of 12% and while GVC haven't mentioned the dividend to date - given the current events we'd encourage investors to view this with caution.

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Trading details

Around £1.7bn group net gaming revenue (NGR) last year was related to sports events and around £950 of online NGR.

The group said it's too early to be precise on the effect of COVID-19 but provided the market with some scenarios they're currently considering.

For football events GVC currently assumes the Euros will be postponed until 2021 and all other football will be cancelled until July 2020. Major horse racing events, such as Aintree and Royal Ascot, are expected to be cancelled - with all other horse racing to continue behind closed doors. At present GVC is forecasting for UK retail shops to remain open but stores in Italy and Belgium to remain closed for three months.

GVC expects the impact these events to reduce this year's cash profits (EBITDA) by £130m to £150m - before accounting for any mitigating actions. If UK retail stores are closed there would be an additional hit to EBITDA of around £45-50m per month.

On 31 December 2019, the group has access to £260m cash and net debt/EBITDA was 2.69 times. GVC has access to £550m of credit, which is currently unused. If GVC draw on 35% or more of this credit, it will become subject to a covenant, where GVC must maintain a net debt/EBITDA under 4.

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 disclosure for more information.