The shares are underpinned by a slew of analyst upgrades
Thursday 17 Oct 2019 Author: Martin Gamble

Buy into the momentum at gambling group GVC (GVC) after recent upgrades for the group.

Management boosted its earnings guidance on 15 August 2019 citing strong operational performance driven by online revenue growth of 17% amid market share gains across all major territories.

It raised earnings before interest, tax, depreciation and amortisation (EBITDA) guidance by an extra £10m or 3%. Then at the third quarter results on 9 October the company raised guidance by another 2%, demonstrating confidence that the improvements were sustainable.

This prompted some brokers to lift their estimates and call a trough in the company’s fortunes. This is significant because analysts were expecting a full period (implemented on 1 April 2019) of trading impact from the fixed odds betting terminals limit falling to £2 and the tough comparisons from last year’s football World Cup.

Then there is the US opportunity where a number of states are opening-up their markets to online gambling which the company has described as the largest opportunity to emerge over the last 20 years.

GVC was founded in 2004 as an e-gaming operator and has since grown rapidly through acquisitions. In 2016 it bought the Austrian gaming company Bwin.party for €1.5bn and in 2018 it purchased Ladbrokes for £3.1bn.

It owns a number of leading brands including Ladbrokes, Coral, Eurobet, Sportingbet, Foxy Bingo, and Gala. It also has a 50:50 joint-venture with MGM resorts in the US.

It is important to note that 92% of revenue comes from regulated or regulating markets which impose taxes.

THE SHAPE OF THE BUSINESS TODAY

Online

GVC is currently the world’s largest online gambling company. It generates £1.9bn of sales globally through 19 established consumer brands or roughly 52% of its £3.6bn total revenues.

It is very diversified by product type with 56% coming from gaming and 44% coming from sports betting. Again, this is spread across a number of sports and perhaps surprisingly football only represents a fifth of the pie.

UK

Having consolidated the UK market through acquisition GVC is the leading operator in the UK where it generates £1.3bn of revenues and holds around 14% of the online market versus 6% for its nearest rival.

Profitability of the retail stores has been severely impacted by stricter regulation which the company is tackling through the selected closure of loss making stores and investment in new self-service betting terminals (SSBTs) which are designed to bring the app experience into  the shops.

The performance of the UK shops has so far been better than initially expected because the company is seeing higher levels of substitution of fixed odds betting to over the counter bets while SSBTs have seen like-for-like growth in wagers 40% above last year.

At the interim stage over the counter bets were 2% higher compared with last year and up 4% on a like-for-like basis. This is being driven by offering new products and higher staff interaction with customers. The net effect is that the company now sees a lower drag from the closure of 900 shops leading to a £25m improvement in EBITDA from 2020 onwards.

Once the estate is considered to be the right size management see it as a core asset in the drive to increase online traffic.

Europe and the rest of the world

Through its takeover of Bwin the company is the leading online betting company in Austria, Germany, Belgium, France, Italy and Spain. Recent trading showed revenues 7% ahead of last year with over the counter wagers 11% ahead.

The regulatory position in Germany has been in flux and it now looks like re-regulation might not happen before mid-2021, although this will not prevent the company from operating its business as usual, subject to the constraints in place.

The market has been subject to the same regulatory pressures as the UK has seen in recent years. There are mixed views from analysts, but the worst case is that the market will become uneconomic for the major players and at best will migrate to a fully compliant online market.

GVC also operates in Brazil, which is expected to regulate in 2020/21.

SOCIALLY RESPONSIBLE GAMING

This area has become a bigger burden for all gambling companies and GVC has tried to take the higher ground by launching the GVC global foundation which is tasked with making a positive impact on societies and communities.

The company has announced that it is actively looking for a successor to the current chairman to comply with the UK corporate governance code.

ANALYSTS PLAY CATCH-UP

This year started with a lot of potential headwinds as analysts were expecting a tough year of transition from the Ladbrokes integration and as the company digested the new fixed-odds betting restrictions.

It seems that the strength of the company’s brands and good cost control has given the business sustainable momentum as we approach 2020.

We see sentiment towards the sector improving and the recent proposed tie-up between Flutter Entertainment (FLTR) and the Stars group as a positive catalyst for increased investor interest.

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