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Entain - weaker outlook for online gaming

Net gaming revenue in the first half grew 18%.

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Net gaming revenue in the first half grew 18%. That reflected a 7% drop in Online as customers returned to stores following periods of lockdown last year. The weaker environment in online gaming meant customers' rate of spend fell and sports wagers fell 3%, which contributed to a drop in guidance. Online net gaming revenue is now expected to be flat, down from previous guidance of a mid-high single digit increase.

The reopening of stores meant Retail sales grew almost 3.5 times, ahead of expectations. Strong performance in gaming and self-service betting terminals pushed second quarter volumes ahead of those seen before the pandemic.

Bet MGM, the joint venture with MGM in the US, is on track for $1.3bn net gaming revenue this year and has a 24% market share.

The shares fell 6.0% following the announcement.

View the latest Entain share price and how to deal

Our view

A drop in guidance for online gaming wasn't particularly well received by markets. Entain called out a weaker environment, in light of mounting costs-of-living, as the reason for a weaker outlook. That highlights some fragility in a customer base that the group suggests are resilient to current conditions.

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 - and that's likely why markets weren't overjoyed to see a worse online outlook.

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 $32 bn 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 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 was 2.4 times cash profit, but we'd expect that to move higher given recent acquisitions. It's not uncomfortably high, especially when you consider the c.£500m in cash on the books and free cash flow expected around £430m this year, but worth keeping an eye on.

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. Worries about the wider macro-environment and the impact that'll have on consumer spending mean the valuations have come down considerably this year. Now trading in line with its longer-term average, we think that may not fully reflect the longer term prospects that the US exposure offers but there are no guarantees.

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.

Acquisition (14 June 2022)

Entain has announced the acquisition of BetCity, one of the Netherlands' leading online sports and gaming operators. The deal's expected to cost €300m in cash at completion, plus up to €550m in further performance-related payments.

The deal's expected to complete in the second half of 2022 and should deliver around €28m in cost savings by the end of 2026. Entain's expecting to fund the deal using cash on hand, plus some of its available credit.

Entain CEO, Jette Nygaard-Andersen, said: ''This acquisition will provide customers with an even better experience as we combine BetCity's local expertise and brand alongside Entain's market leading, customer focused platform. This transaction further underpins our growth strategy of operating in attractive regulated markets.''

Trading Statement (all figures at constant currency, 7 April 2022)

Entain reported a 34% increase in first quarter Group Net Gaming Revenue (NGR), ignoring the effect of currency fluctuations. The return of customers to stores helped Retail return to within 5-10% of pre-covid levels. That helped offset a drop in Online NGR, as the division lapped exceptional demand the previous year.

BetMGM, the joint venture in the US, is now live in 23 markets and remains on track to deliver positive cash profits (EBITDA) in 2023.

CEO, Jette Nygaard-Andersen, said: ''Given the strength and continuing momentum of our underlying business, coupled with our proven ability to grow both organically and through M&A, we remain confident in our financial performance for FY22 and beyond.''

Online Net Gaming Revenue (NGR) was down 6%. That reflected lower volumes in Sports, with wagers down 4%, and a drop of 9% in Gaming. These were expected declines, as some of last year's demand returned to stores. Over a 3-year basis, online NGR has grown at an annualised rate of 14% per year.

Retail benefitted from the reopening of stores reduced restrictions, with performance within touching distance of pre-covid levels despite a smaller store estate. The group had an average of 4,333 shops during the period, compared to 4,662 the previous year.

BetMGM remains the second largest operator in the US with a 24% market share in areas it operates. The business boasts number one status for iGaming, with a 29% market share.

The group completed on 3 acquisitions over the period, Avid Gaming, Klondaika and Totolotek give exposure to Canada, Latvia and Poland.

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: 7th July 2022