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Entain - ups its Tabcorp offer

Nicholas Hyett, Equity Analyst | 28 April 2021 | A A A
Entain - ups its Tabcorp offer

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Entain plc Eur0.01

Sell: 1,953.50 | Buy: 1,955.50 | Change 0.00 (0.00%)
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Entain has offered to buy Tabcorp Holding's Wagering and Media business for A$3.5bn after Australia's largest gambling company turned down the group's original proposal.

Entain said if the bid is successful it, "would be in-line with Entain's current M&A strategy, and presents an opportunity to acquire an attractive business, which when combined with Entain's existing Australian business, would create a leading, integrated multi-channel and multi-brand wagering company."

Entain shares were broadly flat following the announcement.

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Our view

The pandemic has been both a blessing and a curse for Entain. Its bricks-and-mortar betting shops suffered huge losses amid lockdowns, but there's been a surge in online activity. With things returning to normal, we think Entain is well-placed to make the best of both worlds.

A significant high street presence, in the form of Ladbrokes and Coral shops, means Entain has lost out from nationwide lockdowns. The shops themselves cost money to maintain whether they're open or not, and this was a drag on overall profits.

However, the revenue and profit declines could have been much worse. Having people stuck in their homes was a huge benefit for Entain's online businesses like Foxy Bingo and partypoker. We've seen double digit growth across all geographies, bar Germany. This is particularly good news because running a website or app is much cheaper than the cost associated with running physical shops. A higher proportion of each pound of revenue in this division makes its way to profit.

As of 12 April, Entain's shops have been open which should translate into a marked recovery for overall revenue. A return to in-person gambling is undoubtedly positive for Entain, but as online is more profitable, a sizable shift back to bricks-and-mortar could see margins under pressure. Newly minted CEO Jette Nygaard-Andersen is optimistic that the group can carry the group's online momentum forward into the post-pandemic world, and we're inclined to agree. Many players have probably shifted online permanently. The extent of this shift is unknowable at this point, but if there's a marked change in customer behaviour, it could mean some strategic changes where the UK retail estate is concerned.

That brings us to the group's US operation, BetMGM, the jewel in Entain's crown. 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 but there are no guarantees.

A relatively modest debt position gives the group the financial resources to grow its geographical footprint - with recent deals in Portugal and the Baltic and an Australian takeover bid in progress. 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 28.4 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 ups and downs in the short-term.

Entain key facts

  • Price/Earnings ratio: 28.4
  • 10 year average Price/Earnings ratio: 10.8
  • Prospective dividend yield (next 12 months): 2.1%

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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First Quarter Trading Update (Constant Currency) 15/04/2021

Total net gaming revenue (NGR) fell 13% in the first quarter, excluding the impact of exchange rates. Retail closures because of coronavirus restrictions were the reason for the decline.

This was partially offset by Online NGR, which saw double-digit growth. That was in-line with expectations, with strong performances across most major markets.

Revenues fell 99% in Retail as lockdowns shut shops. The group reopened some UK stores on April 12.

Online revenue rose 32%, supported by strong growth in all major markets bar Germany, where regulatory issues impacted the market. Sports betting revenue rose 44% while Gaming revenue was up 23%.

In the US, BetMGM now commands a 19% market share in the areas where it operates. It's the top iGaming operator in the US, controlling 23% of the market and is working towards becoming the second largest sports betting and iGaming provider.

The group completed two acquisitions during the quarter - in Portugal and Enlabs in the Baltic region.

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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 Refinitiv. 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.