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GVC - full year guidance upgraded

Sophie Lund-Yates, Equity Analyst | 8 October 2020 | A A A
GVC - full year guidance upgraded

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Entain plc Eur0.01

Sell: 1,421.00 | Buy: 1,423.00 | Change 6.50 (0.46%)
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GVC's net gaming revenue (NGR) rose 14% in the third quarter. That reflects strong growth in the online business, with digital games and sports wagers doing well. This offset a weaker performance from reopened retail stores.

Full year cash profits (EBITDA) are expected to be ahead of previous guidance, at £770 - £790m.

The shares rose 6.1% following the announcement.

View the latest GVC share price and how to deal

Our view

Fresh off a resilient first half, GVC has bounded into the third quarter with more good news.

Like the rest of the UK and Europe's high streets, GVC's retail stores were forced to close in lockdown. And while the return of physical wagering is still more of a trickle than a deluge, GVC has managed to offset this trend with a surge of online gaming and betting thanks to names like Foxy Bingo and partypoker. Combine that with better than expected trading in the US, and full year cash profits are expected to come in about £50m better than previous guidance.

However, that's not to say it's all plain sailing.

GVC's architect and longstanding CEO recently stepped down, and a change in leadership can add risk. That's all the more the case at a time of significant change in the business and wider sector.

The sector continues to face intense regulatory scrutiny. Most recently that led to a ban in the UK on using credit cards for gambling online and with the UK Gambling Act soon to be under review, we can't rule out further policy hurdles in the near to medium term. It's a similar story overseas, with growth in online gambling drawing regulators' attention.

Further disruption to earnings is not out of the question, and with net debt 2.9 times cash profits at the last count, the balance sheet isn't exactly awash with cash. We're aware that the group's managed to keep cash flow in positive territory through the crisis so far, and we don't have concerns over liquidity. But in an ideal world, debt would start to come down sooner rather than later.

A likely home for any surplus pennies over the next couple of years is the nascent US market. GVC estimates the US sports-betting and iGaming market will be worth approximately $20.3bn by 2025. The group's joint venture with casino group MGM Resorts as BetMGM is making good headway, and means GVC is currently in line for a respectable portion of the pie. Its technology-led approach means building scale shouldn't be a cumbersome process.

But it's worth remembering competition is fierce. We're impressed so far, but GVC's higher-than-average valuation means the group needs to keep hold of this lead if the share price is to be sustained. That could prove an even more difficult job if the recently announced acquisition of rival William Hill by Caesars goes ahead. William Hill is already a dominant player in the US market, and the deal demonstrates the significant value of the opportunity others see in the US market, and would only intensify competition.

Overall we think GVC has done a good job, and continues to offer long term potential. The US in particular is a huge opportunity, but expansion doesn't come cheap and will demand meaningful investment for some time to come.

GVC key facts

  • Forward Price/Earnings Ratio: 14.7
  • 10 year average Forward Price/Earnings ratio: 10.1
  • Prospective yield: 2.9%

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Third quarter trading details

Online NGR rose 28%, with Sports up 27% - well ahead of last year thanks to a busy sporting schedule. Gaming rose 28%, and volumes are well ahead of pre-Covid levels.

UK Retail NGR fell 5% on a like-for-like (LFL) basis, with the amount of money wagered on sports down 9%. The group said customers returned "quickly" to reopened stores, with self-service betting terminals performing well. GVC's win margins remained broadly flat. European Retail saw total NGR improve 2% thanks to a strong performance in Italy, and sports wagers were up 3%. Win margins were broadly flat in this region too.

The US joint venture, BetMGM is expected to do better than anticipated this year, with full year net revenues of $150m - $160m. BetMGM is now live in 8 states, with three more expected by the end of the year. BetMGM's market share in the markets it currently operates in is around 17%. GVC expects its share of the loss for the joint venture will be about £60m this financial year.

GVC also announced it's agreed to acquire Bet.pt, a leading online gambling operator in Portugal. Of the deal, GVC said: "this acquisition is consistent with our strategy of expanding into new markets that are either regulated or regulating, in order to support our international growth ambitions."

The group is encouraged by recent performance, but remains mindful of ongoing uncertainty, which could impact full year profits if conditions deteriorate.

Find out more about GVC shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.

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