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Entain - Net gaming revenue flat with retail outperforming online

Group Net Gaming Revenue (NGR) was flat, excluding the effects of exchange rates, in the third quarter with...

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Group Net Gaming Revenue (NGR) was flat, excluding the effects of exchange rates, in the third quarter with growth in retail offsetting a fall in online.

Full year guidance on cash profits of £925-£975m, a growth range of 5-10%, remains intact.

The shares were unmoved following the announcement.

View the latest Entain share price and how to deal

Our view

Following a drop in guidance midway through the first half, markets were relieved to see full-year guidance in the half year report intact despite wider economic uncertainty mounting in the background. This has since been re-iterated in the third quarter update.

The huge boost to online gaming last year as shops were closed was always going to lead to some tough comparisons. It's still positive that some of the increased demand looks to be sticky. When you look over a longer period, gaming revenue has grown significantly.

This is particularly good news, because margins for the online business are a lot better than retail. It costs less to run a website than a shop. Nevertheless, the resurgence of retail is ultimately good news and the boost in revenue more than makes up for slightly lower margins.

BetMGM, Entain's joint venture with US-based MGM, has been a shining light for the group that's expected to start turning a profit in 2023. Entain estimates the North American sports-betting and iGaming market will be worth approximately $37bn. Continued 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 money.

Debt crept up last year, owing largely to the group's acquisitions in Portugal and the Baltics. The group's already been active this year, most notably the BetCity acquisition. At last check, net debt stood at £2.2bn, or 2.3 times cash profit (EBITDA). It's not uncomfortably high when you consider free cash flow's expected around £400m this year. But there are an increasing number of demands on cash, with the revamped dividend the latest addition.

Greater scale should help drive improved efficiency and while regulatory scrutiny remains high, Entain's geographically diverse footprint (over 50% of revenues are generated outside the UK at last count) helps mitigate the risk to some extent.

Entain hit the headlines in August 2022, with a £17m settlement agreed with the British Gambling Commission (the largest ever) for alleged historical licensing breaches. The Group's UK operations remain under a higher level of regulatory scrutiny, and we see this as a key risk to monitor given the UK remains its largest market.

The underlying business looks to be progressing well, with the group finding a good balance between building out its online presence and offering an in-store option. The BetMGM project offers a real growth driver for the future if execution remains on point.

The valuation has moved up in recent months, now ahead of the longer-term average. The group's strong brands and growth opportunities support that move, but it does add extra pressure to deliver.

Entain key facts

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.

Third quarter trading update (constant currency)

Online NGR fell 2%, which was largely driven by a 4% decrease Sports Net Gaming Revenue (NGR), as the total amounts staked on sporting events dropped by 3%. It should be noted that last year the third quarter would have benefitted from the European Cup in football, and in the final quarter of the year we have the World Cup.

Gaming NGR was down 2% for the quarter and 7% year to date

The 10% growth in Retail NGR benefitted from a 4% increase in amounts wagered and a 1.3 percentage point up lift in Sports Betting margin. NGR was up 8% compared to pre-pandemic levels. Year to date retail revenues are up 103%.

The joint venture in the US, BetMGM, saw roughly 90% growth in NGR in the third quarter, which included the start of the important American football season, to $400m.

Entain reports ''healthy momentum'' going into the final quarter, with comparatives easing for online as the effect of prior lockdowns becomes less relevant. The currently closed business in the Netherlands is expected to be licensed and operating before 2022 comes to a close.

The Group's expecting the acquisitions of BetCity (Netherlands) and SuperSport (Croatia) to close before the end of the year and also launch a new venture partnership in Central and Eastern Europe.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 13th October 2022