Entain plc (ENT) Eur0.01

Entain reported a 3% fall in first-quarter organic net gaming revenue (NGR), reflecting drops from both online and retail channels. The UK & Ireland saw NGR down 7% as new regulations took hold, while Croatia and Poland were the standout regions. Performance was slightly ahead of expectations.

Bet MGM, the US joint venture, reported a 2% rise in NGR despite unfavourable betting results. The group has a 14% market share in its operating markets.

The shares rose 1.2% in early trading.

Our view

First-quarter results provided investors with a small amount of relief. Organic revenue declines have eased since the final quarter of last year and performance from higher growth areas looks promising. But regulatory headwinds remain a challenge and there’s still a vacant permanent CEO seat that needs filling.

Regulation for Entain isn’t a new challenge, but several headwinds have come at the same time. Affordability checks in the UK and a German market that's seeing new regulations like stricter deposit limits, are expected to continue to weigh on performance. A recent vote in the Netherlands also paves the way for a potential ban on online gambling advertising. All in, regulatory headwinds were expected to be a £40mn drag on cash profit this year.

Retail has been a positive surprise, with performance hanging on despite easier comparable periods now being behind us. But we see Entain's future in the higher-margin online business.

Following a spree of acquisitions, organic growth is back in focus. We're expecting to see Entain exit some non-core markets like Chile and Peru, 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' on track to deliver £70mn of cost savings to the online operation by 2025 (c.6% of 2023 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 is a shining light for the group. It's now in profit-making territory, a big milestone for a business that's historically been a drag on the bottom line. With many states still new to online betting, North America in a potential treasure trove. BetMGM’s now live in Nevada, the home of Las Vegas, making it the only top three operator with a licensed app in the state. We see a lot of room to run in this market, but it's starting to run up against tougher competition - so it's an area to follow closely.

The valuation’s ahead of the longer-term average on a price-to-earnings basis, largely because earnings estimates have been cut. In reality, it’s been under pressure of late. We can understand the sentiment, with regulatory headwinds, no permanent CEO and increased US competition. With a longer-term view, we feel the growth prospects are being overlooked and the opportunity in the US will come through over time - though there are no guarantees.

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