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Entain - full year to beat consensus as retail recovers

Sophie Lund-Yates, Equity Analyst | 8 July 2021 | A A A
Entain - full year to beat consensus as retail recovers

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Entain plc Eur0.01

Sell: 1,417.00 | Buy: 1,418.00 | Change 55.50 (4.09%)
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Entain's Total Net Gaming Revenue (NGR) rose 11% in the first half, ignoring the effect of exchange rates. That reflects a 48% increase in online Sports Wagers, and an 11% rise in online gaming NGR. This offset declines in Retail caused by lockdown restrictions earlier in the period. Retail shops reopened in the second quarter meaning performance was stronger, and group NGR rose 43% in Q2.

The BetMGM joint venture now has 21% market share of the sports betting and iGaming market in the US, and generated NGR of around $350m in the half.

Entain expects full year underlying cash profits (EBITDA) of £850m - £900m, which is ahead of consensus.

The shares rose 2.6% following the announcement.

View the latest Entain share price and how to deal

Our view

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 more profitable than running physical shops.

As of 12 April, Entain's shops have been open which is translating 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 come under pressure. 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. That's behind the decision to double investment in its gaming studios.

Given the online momentum, we can't rule out closures 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. It's also recently 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.

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 that's well above the long run average. However, it'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 : 27.0
  • Ten year average Price/earnings ratio: 11.2
  • Prospective dividend yield (next 12 months): 2.0%

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 (15 April 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 - Bet.pt in Portugal and Enlabs in the Baltic region.

Find out more about Entain 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 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.

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