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Entain - punter-friendly sports results hurt the bottom line

Entain reported a 5% drop in organic net gaming revenue, excluding the benefit of the US joint venture.

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Entain reported a 5% drop in organic net gaming revenue, excluding the benefit of the US joint venture. The fall reflected declines in both online and retail NGR, down 6% and 4% respectively. Performance was in line with recently downgraded expectations.

BetMGM, the US joint venture, saw a 15% uptick in NGR to around $458m. The business remains on track to deliver full-year NGR at the top end of the $1.8-$2.0bn guidance range, and deliver positive cash profit (EBITDA) over the second half.

Plans are underway to exit non-core operations and focus on expanding in high-growth markets, while pushing on in core areas like UK, Australia, Italy, Germany and the Baltics.

Unfavourable sports results have seen sports margins come under pressure, expected to hit cash profit by around £45m. Nevertheless, Entain continues to expect full-year cash profit of £1.00-£1.05bn.

The shares fell 3.4% on the day.

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Our view

Entain's third-quarter trading update was mixed, to say the least. But markets had already been warned to expect weakness in certain areas. A string of punter-friendly sports results hurt performance, along with weaker volumes in Italy, Brazil and Australia.

These aren't new challenges; organic growth's been limited of late, with acquisitions picking up the slack back at the half-year mark. Fresh affordability checks in the UK, and a German market that's seeing new regulations like stricter deposit limits, are all weighing on performance.

Retail has been a positive surprise, with relatively robust performance despite some of the easier comparable periods fading into history. But it's the higher margin online business where we see the future of Entain.

Along with third-quarter trading, we also heard more details about the next phase of Entain's strategic evolution. Following a spree of acquisitions, it looks like organic growth is coming back into focus. We're expecting to see Entain exit some non-core markets, with investment funnelled into high-growth areas like the US and Brazil, along with the core regions like the UK.

Margin expansion is also on the cards, with 'Project Romer' expected to deliver £70m of cost savings to the online operation by 2025 (c. 6% of 2022 operating costs). These initiatives sound great, but we're not getting too excited until some results start to come through.

In the here and now, BetMGM, Entain's US-based joint venture, has continued to be 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 room to run for this asset.

Recent weakness means the valuation sits below its longer-term average. We can understand the sentiment - regulation is a key risk and one we're seeing have an increasing impact on performance, and organic growth needs to find its footing once more. Still, the opportunity in the US is huge and one that's perhaps not fully reflected in the valuation.

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: 3rd November 2023