GVC gets off to strong start ahead of FOBT hurdle

Sports betting and gaming group GVC Holdings reported underlying profits at the top end of its full-year guidance and got off to a strong start to 2019 as its extracted benefits from its acquisition of Ladbrokes Coral.

Underlying earnings before interest, tax, depreciation and amortisation of £755.3m in the calendar year were up 13% on the previous year on a pro forma basis, as net gaming revenue increased 9% to £3.57bn. NGR had been revealed in the pre-close update, along with guidance for £750-755m of EBITDA, which was ahead of analysts expectations at that time.

On a reported basis, the acquisition lifted NGR 265% and EBITDA 200%, but resulted in a £56.4m loss after tax due to £434.2m of charges, including £322.5m relating to the non-cash amortisation of acquired intangibles.

Adjusted diluted earnings per share soared 75% to 76.3p and the board confirmed a second interim dividend of 16.0p per share that takes the full year dividend to 32.0p, an increase of 7% on the prior year.

Adjusted net debt ended the year at £1.9bn, two and half times underlying EBITDA.

The new year has started well, with group NGR in the period to 24 February 11% ahead of last year, with online NGR up 22%, European retail 9% ahead and UK retail like-for-like LFL NGR down 2%.

"This represents an excellent start to the year, and at this early stage, the board is confident of delivering EBITDA and operating profit in-line with expectations," said chief executive Kenneth Alexander.

He added: "2018 was a transformational year for the Group with the completion of the Ladbrokes Coral acquisition in March making the Group the largest online-led sports-betting and gaming operator in the world. Excellent operational execution, effective marketing and a good World Cup helped both the legacy GVC and the acquired Ladbrokes Coral businesses perform ahead of expectations and materially ahead of the market, delivering market share gains in all our major territories."

From the first day of next month, the UK government will impose its new limit on the maximum stake that punters can place on fixed-odds betting machines in betting shops, cutting the limit to £2 from on £100. This is forecast to result in profits falling in 2019.

With the company's proven online operating model and the benefit of being a "truly global scale operator", with the expected £130m cost synergies and £30m capex synergies from the integration of Ladbrokes Coral by 2022 and opportunities from the joint-venture in the USA with MGM Resorts, Alexander said that the board is confident the group is "well-placed" to absorb the impact of the new FOBT stake limit and associated tax increases in 2019, "and deliver strong EBITDA growth in future years".

On Brexit, he said GVC has implemented plans or prepared detailed plans that involve moving parts of the business under Malta online gambling licenses and locating servers hosting online gambling platform in the Republic of Ireland.

GVC shares rose 1.4% to 660p in early trading on Tuesday.

GVC has had a "great start" to the year, said broker Peel Hunt.

"If we were a little further through the year, we would be upgrading forecasts. YTD trading represents an acceleration, in Q418 total Online NGR was up 15% with Sports Brands sports wagers up 18%. Today’s results press release refers to 'Markets share gains in all key territories'; the success is broad-based."

Shore Capital analyst Greg Johnson said net debt and the dividend were in line with expectations and while he expects GVC to be cash generative although the debt/EBITDA is likely to increase modestly in the near term to 3x reflecting the negative impact from the impending reduction in FOBT stake levels.

With regulatory and tax changes estimated at £190m for 2019, including a circa £135m from reduced FOBT stake limits, with the group guiding to some 1,000 shop closures, partly offset by some £20m of Ladbrokes synergies and a target for double-digit NGR growth, ShoreCap maintained it 2019 forecast for EBITDA of £639m, which adjusting for regulatory headwinds and synergies requires a circa £55m increase in underlying profitability, including around a 10% increase in online NGR.

Assuming no changes to depreciation and interest this equates to PBT of £396m and EPS of 60p - though this excludes losses from the US joint venture.

George Salmon at Hargreaves Lansdown agreed that while the lower FOBT limit means profits are likely to fall in 2019, "the group’s trump card remains its online business", which means GVC "looks well-placed to take the FOBT hit in its stride and deliver strong growth in 2020 and beyond", with an attractive dividend yield of just over 5%.

He added a word of caution: "Of course, there’s no guarantee the US venture will pay off, and regulatory change remains a constant threat. With debts stacking up following the Ladbrokes Coral deal, the group’s balance sheet would look more stretched if the government followed up its FOBT changes with tighter rules online, for instance."