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Entain - online gaming boosts profits

Full year net gaming revenue (NGR) grew 8%, ignoring the effect of exchange rates, to £3.9bn.

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Full year net gaming revenue (NGR) grew 8%, ignoring the effect of exchange rates, to £3.9bn. That came as Retail volumes recovered to over 90% of pre-covid levels, and online posted its ninth successive year of double-digit growth.

Higher costs meant underlying cash profits (EBITDA) grew more slowly than sales, at 5% to £881.7m. That was at the top end of guidance.

In 2022, the group sees ''retail heading towards pre-Covid levels and online performing inline with expectations against tough prior year comparables.''

The board has not proposed a final dividend.

The shares rose 4.3% in early trading.

View the latest Entain share price and how to deal

Our view

Entain's online offering, with the likes of Foxy Bingo, Ladbrokes and partypoker has continued to strengthen with another year of double-digit revenue growth.

We expect that growth to slow from here on, as conditions get back to normal and punters can return to stores. But, crucially, some of that increased online demand is likely to be permanent. 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.

A return to in-person gambling will also likely be positive for Entain, and we saw a sizeable jump in Retail net gaming revenue in the fourth quarter as shops reopened. But as online is more profitable, a major shift back to bricks-and-mortar could see overall margins come under pressure.

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 $32bn over the long term. 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 slowly upward from the start of the year, owing largely to the group's acquisitions in Portugal and the Baltics. The group's already been active in 2021 with four purchases to date, in a move to build out a presence in less mature regions. At last check it was 2.4 times cash profits, not uncomfortably high, but worth watching.

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. 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.

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. With a price / earnings ratio some way ahead of the long-term average, it looks like markets share the optimism. This is a vote of confidence, but could increase near-term volatility in the event of any missteps.

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.

Full Year Results (constant currency)

Online net gaming revenue (NGR) grew 13% to £3.1bn, reflecting strong growth in all key markets except Germany and the Netherlands where regulatory changes are impacting the market. Sport wagers increased 21% to £14.2bn, with sport margins steady at 12.7%. Despite a 15% increase in operating costs, reflecting acquisitions and inflation, underlying cash profits grew 12% to £899.0m.

In Retail, NGR fell 7% to £791.1m as lockdowns continued to impact trading, especially in the first half. Sport wagers fell 9% to £2.3bn but NGR from machines grew 12% as ''in-person gaming experience is difficult to replicate online''. A 2% improvement in operating costs was more than offset by the fall in NGR and underlying cash profits fell 32% to £66.9m, largely because of the higher number of fixed costs in physical retail.

BetMGM, the group's joint venture in the US with MGM Resorts, reported NGR up nearly 5 times to $850m. In the fourth quarter, the group's market share across sports betting and iGaming rose to 23% within the states where it operates. It's now live in 21 markets, reaching 37% of the US adult population. The group's expecting the joint venture to deliver revenue over $1.3bn in 2022 and reach positive cash profits in 2023. Losses associated with BetMGM totalled £161.9m for the year, in line with expectations.

Entain had a free cash outflow of £137.7m compared to an inflow of £451.2m the prior year. That was largely down to the investment in BetMGM and the acquisitions of Enlabs, Bet.pt, Impala and UNIKRN - without which underlying cash flow was £537.3m.

Net debt at the end of the period, including leases, was £2.1bn or 2.4 times cash profits. That was up from £1.8bn the previous year, largely due to lower cash and cash equivalents.

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: 3rd March 2022