GVC's digital growth provides comfort amid FOBT crackdown
GVC Holdings reported slower but still strong growth in online gambling in the first three months of the year while its Ladbrokes bookmaking shops were flat ahead of the fixed-odds betting machine crackdown and Saturday’s Grand National.
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After the maximum stakes of 'B2' games on gambling machines was slashed from £100 to £2 on 1 April, chief executive Kenneth Alexander said he expected it would be "several weeks before we can start to assess the impact", but was confident of delivering 2019 EBITDA and operating profit in line with expectations.
Analysts currently expect EBITDA of around £645m for the year, down from £755.3m in 2018 as they foresee a net drag of £170m from the regulatory changes and had pencilled in quite conservativepredictionss for digital revenues.
While the FOBT changes are predicted to result in a significant number of the group's 2,500-or so Ladbrokes and Coral betting shops being closed down, the Q1 results showed GVC has other strong strings to its bow, even with its US joint venture with MGM yet to kick in.
The ongoing growth of online performance meant that even though the UK retail arm saw like-for-like over the counter betting revenue down 6% in the quarter with machines NGR up 4% for a flat quarter, total group net gaming revenue increased 8% in the quarter to 31 March, or 9% at constant currency rates.
Online sports betting NGR swelled 16% as sports wagers were up 19% and sports betting margins flat. This was down from the 21% constant currency growth in 2018, and compares with the 22% in the first eight weeks of 2019.
Stronger 20% growth in gaming NGR meant total online NGR was up 17% or 18% at constant currencies, with "continued strong volume growth" reported in all major territories.
The European retail business, including Italy, Belgium and Ireland, grew NGR 2%, or 3% at constant currencies, with sports wagers up 13% but margin down 1.8 percentage points.
Alexander said the impact of soft gross win margins in Italy and the UK was offset by improved margins in other territories, "demonstrating the benefit of both geographic and product diversification across the group", while UK and European bookmakers saw improved sports wagering growth helped offset softer sports gross win margins.
With good volume growth across all major online brands and territories, Alexander said the board was "very confident" of achieving the target of double-digit online NGR growth for the full year.
"This trading update reflects a continuation of the strong trends reported on 5 March 2019, and represents an excellent start to the year," he said.
HURDLES AHEAD
GVC's shares, which fell by over 20% last month after Alexander and chairman Lee Feldman sold around £2bn-worth of shares, were struggling for direction on Friday, initially falling then rising and roughly flat at 587.5p after almost two hours of trading.
For the coming weekend, the Aintree jumps meeting is one of the most lucrative in the sporting calendar, though popular Irish horse Tiger Roll is favourite to win for the second year in a row and has received so much backing that a win could continue to squeeze the bookies' win margins as seen in the first quarter.
Independent analyst Nick Bubb noted that the Grand National is often hard on favourites, so it will "probably be best to assume that the admirable Tiger Roll will not win again", doubling up as a betting tipster to suggest three to follow as outsider Valtor plus Irish runners Rathvinden and Jury Duty.
But with Tiger Roll looking set to go off as the shortest-priced favourite in Saturday's Grand National since Red Rum in 1975, Russ Mould at AJ Bell said "bookmakers may take a bashing" but this paled in comparison to the challenge from the new FOBT legislation and other UK and Australian legislation
He noted that trials of the new £2 limit last month in Birmingham prompted "all sorts of dark rumours", with one suggesting a 55% drop in gross winnings for bookmakers in shops where the new limit was applied.
But GVC and its UK peers are all expected to face a profit plunge in 2019, not just as a result of the cut to FOBT stakes but also as the government has increased Remote Gaming Duty from 15% to 21% to compensate for tax revenues that will be lost thanks to the drop on takings on gaming machines.
Shore Capital analyst Greg Johnson said Q1 trading was "comfortably ahead" of his full year expectations in digital, with UK retail also surprising on the update but very difficult to foresee due to the FOBT restrictions.
Roberta Ciaccia at Berenberg noted that digital revenue growth had slowed down in the last five weeks of the quarter mainly due to higher bonusing and softer betting margins, though the almost 20% growth in NGR "still puts GVC at the top of industry levels, and validates its geographical diversification strategy, in our view".
For the year ahead, she noted that the City consensus still expects only just above 10% yoy growth in digital revenues on a proforma basis. "While it is still relatively early in the year, we think that, should these levels of growth be confirmed in coming months, there is upside risk to consensus expectations."
George Salmon at Hargreaves Lansdown said the announcement was brief but "important" for GVC as market confidence had been rocked by the share sales last month: "With the group still cantering towards its targets of double-digit online revenue growth, we think these numbers are generally reassuring.
"One blot on the copybook is that win margins are lower, meaning customers have had a comparatively good run recently. But the bookie always wins in the end. Punters often recycle a significant chunk of their winnings into another bet, and bookmakers can count on time taking its toll on a gambler’s roll.“