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Entain - strong online growth offsets retail weakness in Q4

Nicholas Hyett, Equity Analyst | 21 January 2021 | A A A
Entain - strong online growth offsets retail weakness in Q4

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Entain plc Eur0.01

Sell: 1,645.00 | Buy: 1,645.50 | Change 6.50 (0.40%)
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Entain reported total fourth quarter net gaming revenue (NGR) growth of 7% at constant exchange rates. That was driven by very strong online results, with sports betting out performing gaming, and means full year NGR has risen 1% at constant exchange rates.

Full year cash profits (EBITDA) are expected to be in range of £825m-£845m, as announced on 7 January, with year end net debt expected to come in at 2.1 times EBITDA.

The group also announced the appointment of a new CEO, with non-executive director Jette Nygaard-Andersen to step into the role.

Entain shares were broadly flat in early trading.

View the latest Entain share price and how to deal

Our view

MGM's decision to walk away from a deal with Entain caught the market by surprise - reflected in a sudden share price fall.

We suspect that the higher price demanded by the Entain board was just too big for MGM's pocketbook. Under the proposal, Entain shareholders would have owned 41.5% of the combined group. Upping the number of MGM shares on offer risked moving the deal into reverse takeover territory. Meanwhile a significant amount of debt already on the US group's balance sheet, equal to 4 times cash profits last year, probably placed an upper limit on how much cash could have been included as a sweetener.

However, with no deal on the table and CEO Shay Segev announcing he's leaving the business, Entain needed a strong set of numbers in the final quarter to settle some investor nerves.

Fortunately the US operation, the jewel in Entain's crown, continues to show real progress. MGM were keen to reaffirm their commitment to the joint venture when withdrawing their bid and these numbers show why. Entain estimates the US sports-betting and iGaming market will be worth approximately $20.3bn by 2025. Recent market share gains and the steady increase in the number of states in which the company operates suggest BetMGM could be in-line for a sizeable chunk of that.

We think Entain has fundamental attractions outside the US too.

A significant high street presence, in the form of Ladbrokes and Coral shops, means Entain has lost out from nationwide lockdowns. But a surge in online gaming, thanks to names like Foxy Bingo and partypoker, as well as the return of major sporting events has more than offset the pain. Double digit growth in markets from Georgia to Brazil shows the breadth of growth, and full year cash profits are now expected to come in significantly better than feared.

A relatively modest debt position gives the group the financial resources to grow its geographical footprint - with recent deals in Portugal and the Baltic. Greater scale should drive improved efficiency and while regulatory scrutiny remains high, Entain's geographically diverse footprint (50% of revenues are generated outside the UK) helps mitigate the risk to some extent. The group's also taken steps to boost its ESG credentials, with increased focus on responsible gambling, and a shift to regulated markets that provide a greater degree of regulatory certainty.

Overall we think Entain's growth prospects remain attractive. That's reflected in a PE ratio of 18 times earnings, well above the long run average. However, that's not so eyewatering that it should put off investors prepared to take a long-term view even if it creates space for short term volatility.

Entain key facts

  • Price/Earnings ratio: 18.0
  • 10 year average Price/Earnings ratio: 10.4
  • Prospective dividend yield (next 12 months): 2.8%

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.

Fourth Quarter Trading Update (Constant Currency)

Online revenue rose 41% in the quarter and 28% in the half. All major markets with the exception of Germany reported double digit growth.

That was driven by a very strong result in online sports betting revenues, with 58% growth in the fourth quarter thanks to a combination of 25% growth in staking and a 2.4 percentage point increase in win margins. Online gaming revenues rose 27% in the quarter and 30% in the year.

Revenues fell in Retail as lockdowns shut stores. Fourth quarter revenues fell 38% in the UK and 59% in Europe, while full year revenue was down 36% and 39% respectively. That was despite an improvement in win margins and reflects considerably lower staking. When shops were open trade was within single-digit percentages of pre-pandemic levels.

In the US BetMGM is now operating in 11 states, with a market share of approximately 18% across the states in which it operates. Online revenues rose 130% in the year, with the BetMGM app the fastest growing download in the industry in the US. Full year US revenues are now expected to be in the range of $175-$180m, ahead of previous guidance.

The group announced two acquisitions during the year - Bet.pt in Portugal and Enlabs in the Baltic region.

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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.