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GVC - profits down, dividend up

Sophie Lund-Yates, Equity Analyst | 5 March 2020 | A A A
GVC - profits down, dividend up

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GVC Holdings plc Eur0.01

Sell: 1,041.00 | Buy: 1,042.50 | Change 27.00 (2.66%)
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GVC's full year net gaming revenue (NGR) increased by 3% to £3.7bn excluding the impact of currency movements, and adjusting for the acquisition of Ladbrokes Coral.

Underlying operating profit fell 20% to £490.1m. However, on a reported basis there was a pre-tax loss of £140.7m, reflecting non-cash charges from the Ladbrokes Coral acquisition, and the impairment of the Australian Online business.

The board has declared a second interim dividend of 17.6p per share, which takes the full year payment to 35.2p - a 10% increase on last year.

The shares fell 4.6% in early trading.

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 recently. 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 450 shops are still expected to close.

However, we think there are long term positives.

The group's trump card remains its online business, which delivered a strong performance in 2019. With the headwind from the £2 staking limit plateauing 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 19 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. For example, only recently 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. But trading has so far remained impressive. Going forwards the dividend looks well-underpinned by cash flow. With a prospective yield of 4.9% underpinned by more established businesses, investors should get paid to wait and see if GVC can deliver the goods stateside.

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Full year results (proforma at constant currency)

GVC's Online business took £11.2bn in sports wagers, up 11% year on year. NGR for the division rose 14% to £2.2bn as Sports and Gaming grew 17% and 13% respectively. An increase in non-cash depreciation charges saw underlying operating profit rise 3% to £412.2m.

The business grew in all major territories. In the UK, online NGR grew 11%, which was supported by improvements to the Ladbrokes brand. Management continues to target double digit revenue growth in the medium term, although it remains mindful of the rapidly evolving regulatory landscape.

The UK Retail business saw wagers increase 3% to £3.2bn. Sports NGR rose 3% to £565.9m, while Machines NGR fell 28% to £561.9m. That reflects the new £2 stake limit, although the overall impact of this has been better than initially expected as more customers swapped to sports betting. Total NGR fell 15% to £1.1bn. Underlying operating profit fell 49% to £107m.

The group doesn't expect results to deteriorate much further thanks to cost saving measures and competitor store closures.

The European Retail division reported £1.7bn in wagers, up 6% year on year. NGR rose 5% to £289.8m and underlying operating profit fell 27% to £36.2m, reflecting an 11% increase in costs.

The Corporate division reported an underlying operating loss of £65.1m, compared with £59.9m last year. Other operating losses were £0.4m.

Net debt stands at £2.2bn representing 2.9 times cash profits (EBITDA). The group generated £395.2m of free cash, up from £300.7m last 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 disclosure for more information.