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Entain - limited organic growth, provision set aside for bribery

Entain reported first-half net gaming revenue (NGR) of £2.4bn, excluding BetMGM the US joint venture.

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Entain reported first-half net gaming revenue (NGR) of £2.4bn, excluding BetMGM the US joint venture, which reflected growth ignoring currency moves of 11%. Excluding new acquisitions, organic growth was 3%.

Online NGR saw organic growth of 1%, but affordability measures in the UK and a tricky German market weighed on performance. In the Retail business, organic growth of 8% was supported by good trading in the UK and Italy.

BetMGM saw NGR up 55%, with Entain's share of losses narrowing from £108.6m to £48.5m. The business reached a milestone and delivered positive cash profit (EBITDA) over the second quarter.

The group has set aside £585m in preparation for the resolution of HMRC's investigation into bribery at the legacy Turkish business. Excluding that charge and other one-off items, underlying operating profit rose 25% to £307.4m, largely a result of lower losses from BetMGM.

The period ended with net debt, including leases, of £2.6bn and Entain generated £231m of free cash flow.

The board proposed a dividend of 8.9p, up 5%.

The shares fell 2.1% in early trading.

View the latest Entain share price and how to deal

Our view

First half results didn't really have too much to shout about. Organic growth was limited, with acquisitions doing their job to plump up the top line. When you chuck in a £585m provision to cover a likely fine relating to the ongoing bribery investigation with regards to the Turkish business that was sold in 2017, it was a mixed set of results.

As Entain themselves point out, this investigation relates to actions taken by a different management team, a long time ago, and much has changed since. But it still highlights the governance risk that exist in this sector.

Retail was the surprise, with growth continuing despite some of the easier comparable periods fading into history. The higher margin online business is where we see the future of Entain, and there's a few hurdles to overcome in the near term. Fresh affordability checks in the UK, and a German market that's seeing new regulation like stricter deposit limits, are all weighing on performance.

Debt costs are creeping up, owing mainly to the group's continued spend on acquisitions. It's something to keep an eye on, but expansion remains a key growth driver, the acquisition of STS in Poland being a prime example. This deal was funded with equity, rather than debt, which was probably prudent. The recent capital raise should leave around £150m left over once the cash part has been settled, which we're told will be used for further acquisitions in the near term.

BetMGM, Entain's joint venture with US-based MGM, has been a shining light for the group. It's finally started to enter profit making territory, a big milestone for a business that's been a drag on the bottom line up to now. North America is a potential treasure trove and we see a lot of potential for this asset.

The valuation remains well ahead of its longer-term average, though a large part of that is the potential growth from BetMGM. We support a premium, given the size of the opportunity in North America and the strength of the core operations. But plan for ups and downs, quick expansion is risky and with a looming economic downturn, punters could start to keep hold of their hard-earned cash.

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.

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
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 10th August 2023