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GVC - trading still strong, name change to Entain

Nicholas Hyett, Equity Analyst | 12 November 2020 | A A A
GVC - trading still strong, name change to Entain

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Entain plc Eur0.01

Sell: 1,644.00 | Buy: 1,644.50 | Change 5.00 (0.31%)
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GVC said it has continued to see strong trading since the beginning of October, with good results in both sports betting and gaming. This will offset the additional headwind from store closures during England's second lockdown, with guidance unchanged as a result.

The group also announced it would be changing its name to Entain plc.

GVC shares were broadly unmoved following the announcement.

View the latest GVC share price and how to deal

Our view

A significant high street presence, in the form of Ladbrokes and Coral shops, means GVC has lost out from nationwide lockdowns.

However, a surge in online gaming, thanks to names like Foxy Bingo and partypoker, as well as the return of major sporting events has offset most of the pain. Combine that with better than expected trading in the US, and full year cash profits are expected to come in about £50m better than originally expected.

That's not to say it's all plain sailing.

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

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. We suspect that's behind the group's recent move to boost it's ESG credentials, with increased focus on responsible gambling, and a shift to regulated markets that provide a greater degree of certainty

Nonetheless disruption to earnings isn't 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. Fortunately 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 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 while the deal demonstrates the significant value on offer in the US market, it's likely to 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

  • Price/Earnings ratio: 14.6
  • 10 year average Price/Earnings ratio: 10.2
  • Prospective dividend yield (next 12 months): 3.4%

All ratios are sourced from Refinitiv. 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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Strategy Update

GVC has made moves to strengthen its ESG (environmental, social and governance) credentials, with an exclusive focus on regulated markets, embedding responsible gambling metrics into bonus conditions and improved corporate governance practices.

The group aims to generate 100% of revenues from regulated markets by the end of 2023. That means exiting markets where there is no viable route to regulation, with 99% of revenues to be from regulated or regulating markets by the end of 2020.

Collectively these actions are expected to reduce cash profits by £40m next year - although this expected to be offset by growth within the business.

GVC has also set out four key growth drivers for the next three to five years. These are;

  • Leadership in the US: where joint venture BetMGM already has an estimated 18% market share in states where it operates
  • Grow in core markets
  • Enter new markets: considering both organic expansion and M&A
  • Expand to new audiences: entering new markets such as eSports and digital gaming, which are evolving new betting markets

Find out more about GVC shares including how to invest

The Author holds shares in GVC.

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.