GVC expects more synergies from Ladbrokes after solid start

GVC Holdings reported a good start to the year and said it expects more cost synergies from its acquisition of Ladbrokes Coral.

Total group net gaming revenue increased 7% over the 20-week period since the start of 2018, as UK retail sales were hit by adverse weather but total digital revenue increased 17%.

The online gaming specialist, which completed the takeover of bookmaker LCL on 28 March, said it now was confident of extracting £130m of synergies by 2021 versus the £100m expected at the time of the deal. GVC also revealed that it was in mutually beneficial discussions with FTSE 250 group Playtech to update the existing service arrangement with Ladbrokes, estimated to be worth around €40m of revenue, and potentially extend it past 2021 with extra content from GVC's non-core brands.

In the 20-week period, UK bookmaking shops saw NGR fall 5% with over-the-counter revenue down 8%, blamed on weather as 12% of all planned horse racing fixtures were cancelled during the period. Volumes were adversely impacted by lower levels of bet recycling at the start of the period due to the exceptionally strong gross win margins at the end of 2017, with OTC gross win margin of 18.3% marginally ahead of last year's 18.1%.

After the government's Triennial Review announcement on 17 May that maximum stakes on fixed-odds betting machines will be cut to £2 will see regulation enacted later this year.

After preparation made by LCL for such an event, GVC said it expects to be able to reposition the business within two years following implementation, with an anticipated fully mitigated impact of around £120m on group EBITDA secured by the end of this period, with an impact of £160m in the first full year the impact. "Therefore, we expect to retain a profitable and highly cash generative UK retail estate."

With perfect timing for the industry, the US Supreme Court judgement to repeal the ban on sports betting, which GVC said "presents the potential for a significant expansion" for the company, which through its Stadium unit is already a leading business-to-business provider of sportsbook technology in Nevada, whilst in New Jersey GVC technology supports MGM online casino and poker offerings.

"The group continues to evaluate a number of potential opportunities to expand its presence in the US through a disciplined approach," GVC added, with rival Paddy Power having agreed this week to merge its US operations with a US-based specialist.

Shares in the company topped £10 for the first time on Friday, capping a fourfold rise in five years.

Broker Shore Capital saw the update as "highly encouraging", with digital revenue growth is strong, ahead of full year expectations of circa 12%, "with the improving performance at Ladbrokes.com reassuring, the business is geographically diverse and synergy targets have been increased".

ShoreCap currently forecast pro-forma 2018 EBITDA of £748m, equivalent to EPS of circa 77p with the triennial review worth circa 18p per share.

Canaccord said it was a "generally strong start", with "slightly mixed messages around retail" and an "impressive" online growth, with the increased synergy targets from the acquisition "as expected" but analysts confident this will be raised further.

"Overall, we would expect to see modest downgrades to group FY18 EBITDA on weak retail, but upgrades to FY19, as retail becomes less relevant (£2 max stakes forecast from July 1st) and synergies kick in."

Numis said its FY18E forecasts assume 11.3% growth in online NGR, "and therefore we see upside risk to this division".

However, previous assumptions for flat retail revenue "looks stretched", with guidance on the phasing of synergies "implies £2m additional savings from FY19, rising to £28m in FY21 and £30m in FY22" so analysts expect to see "small underlying upgrades this year, but this will be complicated by a change in reporting structure and currency from EUR to GBP".