Don’t be fooled by the gambler’s recent share price slump as the future looks much brighter
Thursday 20 Jun 2019 Author: Martin Gamble

The tough regulatory backdrop has seen shares in the largest London-listed gambling sector names fall by an average 43% over the past 12 months. We believe investors may have overreacted and are therefore missing out on some good opportunities, one of which is online gambling specialist 888 (888) where the market hasn’t fully recognised significant changes to the way it does business.

888 has reshaped itself from a focus on high rollers and business-to-business revenue (B2B) to a mass-market player in casino and sports betting. The ambition is to become the dominant casino player and a top tier sports operator, by scaling its proprietary technology platform.

Its shares trade on 11.4 times forecast earnings for 2020 and an EV/EBITDA (enterprise value-to-earnings before interest, tax, depreciation and amortisation) ratio of 6.4. In comparison, the average of the online gambling peer group is 12.2-times and 9.7-times respectively, according to investment bank JP Morgan.

The global casino market is still fragmented with online penetration of only 6%, compared with 44% in the UK. 888 intends to scale-up its mass market offering to grab market share, leveraging its heritage brand and best-in-class technology.

What this means in practice is that the company will be able to enter new jurisdictions with speed and the flexibility to add new features. For example, utilising its unique in-house studio, the company can offer differentiated games to fill specific gaps in the market.

At a recent capital markets day, management said that its games generate 1.46 times more bets per play than third party equivalents.

According to JP Morgan analyst Ted Nyhan, and based on year-to-date numbers, 888 is seeing implied like-for-like growth of 45% in casino revenue.

The global market for sports betting is expected to grow by 7.2% over the next five years and 888 is well positioned to capture market share thanks to its end-to-end infrastructure, which allows it to be more efficient in its marketing.

The recent BetBright acquisition enables a more effective pricing strategy and personalisation. For example  cost per customer acquisition has fallen by 13% since the first quarter of 2017 and 8% since the first quarter of 2018.

While the legacy poker and B2B units are expected to remain a drag on earnings for the current year, analysts then expect a full recovery in the UK and structural growth in global casino and sports betting.

Adjusted pre-tax profit is forecast to be $65m in 2019 (2018: $87m) before progressing to $73m in 2020 and $87m in 2021.

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