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GVC - lending agreements relaxed

Emilie Stevens, Equity Analyst | 28 April 2020 | A A A
GVC - lending agreements relaxed

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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 agreed a replacement £535m credit facility with its banks, it's on largely the same terms as the previous one, but will see one borrowing restriction, known as a covenant, relaxed until September 2021.

As before, if GVC draws on 35% or more of this credit it will become subject to a covenant. But now GVC is required to keep net debt under 6 times cash profits (EBITDA) each quarter until 31 September 2021, after which the limit returns to 4 times. The facility is currently undrawn.

As previously announced, on 31 March GVC had access to over £350m in cash, £250m of which is cash at hand - which excludes cash held for customers, cash in shops and other sources of cash not immediately available. On 31 December 2019 GVC's net debt was 2.69 times EBITDA.

GVC also said it's confident that it can achieve its target of breakeven cashflow each month during this crisis.

The shares rose 2.9 % on the news.

View the latest GVC share price and how to deal

Our view

Life is tough for GVC and its peers at the moment. The outbreak of coronavirus has seen sports events cancelled globally and retail shops are closed in response to government lock downs. GVC is facing a serious hit to both revenue and profits this year.

Analyst EBITDA expectations before the outbreak were in the region of £815m for the year, or around £65m a month. Without any mitigating actions, GVC said the impact of coronavirus would be a hit of around £100m to monthly cash profits. But thanks to a number of cost saving measures, including cancelling the dividend, furloughing retail staff and scrapping non-essential spend - GVC has halved that to around £50m a month.

Still not pretty, but it mean's GVC are now confident they can breakeven on cash terms over the crisis.

With earnings taking a hit, both GVC and investors will be looking to its balance sheet for help in weathering the storm.

At the end of March 2020, GVC had access to £250m in immediately accessible cash, which covers GVC's monthly cash bill of £15m a few times over. The group also has access to £535m of unused credit, which now comes with more relaxed lending restrictions, providing the group with some much needed financial headroom.

But while GVC's balance sheet is in relatively good shape, it faces the same serious challenges as the sector overall. 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.

There are some reasons for hope though. While online growth is far from immune from the sports impact, GVC hopes its online, non-sports gaming brands like Foxy Bingo and Party Poker will draw some of gamblers extra cash. Gaming makes up just over half of online NGR, and so far GVC said signs were "encouraging".

While the picture isn't pretty, clarity on the impact to GVC and the knowledge that it can cover its costs for now is reassuring. So is the breathing room it's been given from lenders. But as the pandemic rumbles on, 'how long' remains the key question. The longer the disruption the bigger the dent, so for now cash preservation and online gaming revenues remain key.

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Trading Update (6 April 2020)

GVC's net gaming revenue (NGR) rose 2% at constant currency in the first three months to 31 March. That reflects a period of strong trading before the outbreak of coronavirus which has since seen sporting events cancelled and retail shops closed - significantly reducing revenue from mid-March.

However, cost saving measures introduced by the group have halved the expected monthly impact to cash profits to around £50m.

GVC has withdrawn its second dividend of 17.6p which was due to paid on 23 April.

For the first quarter as a whole, Online NGR rose 19% in the first quarter, with Sports up 21% and Gaming 18%. UK Retail NGR was down 19% and European Retail was flat. Over the period the amount of money wagered on Sports bets dropped significantly both online and in store, but GVC's saw its win margins improve.

However, GVC's trading up to 15 March pre COVID-19, was stronger - with Group NGR up 11%. That reflects growth in Online NGR of 23%, UK Retail was 5% lower and European Retail was up 24%.

GVC said there had been an "encouraging performance" in Online gaming in the absence of sports events. That's in line with the group's expectations of a "modest increase" in gaming revenue - which accounts for just over half of Online NGR.

Prior to the outbreak of COVID-19, analyst estimated GVC would generate around £65m per month in cash profits. When sports events cancellations and retail shop closures were first announced (mid-March), GVC estimated the impact to cash profits would be a hit of £100m per month - before any mitigating actions.

Following a range of cost saving measures by the group, this has dropped to around £50m per month. Withdrawing the dividend saves GVC £103m in cash costs. In the UK, government grants for furloughed staff and business rates relief is expected to save around £20m per month. GVC has furloughed staff in its UK retail business, but in Italy and Belgium the group operates a franchise model, meaning GVC is not responsible for operating cost. Other cost measures include reductions in online sports marketing, sports content and trading costs.

As a result of these measures, GVC expects monthly cash profits to be around £15m per month.

Taking into account around £30m monthly cash costs that have to be paid (including capital expenditure, interest and tax) GVC expects its monthly cash outflow during the current circumstances will be around £15m per month.

GVC has withdrawn all previous performance guidance and its AGM is postponed until further notice.

Find out more about GVC shares including how to invest

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