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Entain - rebound in Retail fuels growth

Group revenue rose 19% to £2.1bn at the half year mark, with an 18% increase in net gaming revenue.

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Group revenue rose 19% to £2.1bn at the half year mark, with an 18% increase in net gaming revenue. That was driven by a strong rebound in Retail performance following lockdowns the previous year, which more than offset a decline in Online.

Operating costs jumped 31% higher as Retail reopened and new acquisitions fed into the cost base. Nonetheless, underlying cash profit (EBITDA) rose 17% to £471.0m.

A new dividend policy is being introduced, starting with a total dividend of £100m to be paid this financial year. That'll be split evenly across the halves, so an 8.5p interim dividend has been announced today.

The group remains on track to deliver £925-£975m of cash profit this year.

The shares were up 3.9% following the announcement.

View the latest Entain share price and how to deal

Our view

Following a drop in guidance midway through the half, markets were relieved to see full-year guidance intact despite wider economic uncertainty mounting in the background.

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. 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.

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.

Half Year Results (constant currency)

Online net gaming revenue fell 7% to £1.5bn, off the back of a very strong comparable period last year when much of Europe was in lockdown. Over a three-year basis, performance reflects annualized growth of 13%. Underlying cash profit (EBITDA) fell 22% to £384.7m, driven by lower revenue and an 8% increase in operating costs.

Lockdown free trading meant Retail had a strong rebound, with net gaming revenue more than triple last year at £636.0m. Performance was driven by the two largest regions, the UK and Italy, where volumes were ahead of pre-covid levels in the second quarter. Underlying cash profit moved from a loss of £62.7m to a gain of £141.1m.

BetMGM, the group's joint venture in the US with MGM Resorts, reported NGR of $608m and remains on track to deliver $1.3b at the full year mark. The business remains on track to post a cash profit during the 2023 financial year.

There was a free cash outflow of £101.4m, an improvement from the £255.6m outflow last year. Largely a result of lower acquisition activity. Excluding the impact of BetMGM investment and acquisitions, free cash flow was £191.2m. Net debt was £2.2bn, or 2.3 times cash profit.

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
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: 11th August 2022