TL;DR:

A fairly priced, high yield company GVC Holdings is benefiting from competent management but may never shake off the negative perceptions that surround the online gaming sector.

Background

GVC Holdings began life in 2004 as a speculative venture to take-over the assets of CasinoClub from its private founder. This turned out to be a pretty shrewd move as the platform boasted a solid, profitable and growing audience of German gamblers who enjoyed using the product. On the other hand, as made clear in the AIM admission document, it was a high risk play due to the uncertain regulatory environment, need for a gaming licence and total reliance on Boss Media to provide all software and operations support.

In the five years following this impressive start the company churned out astonishing levels of cash-flow, far in excess of reported profits, and yet after an initial flurry of excitement the stock market remained unconvinced. Logically this might have been down to the unremitting regulatory uncertainty or it might have been because management never pulled their finger out and moved into markets such as Spain and Italy; which is what they'd promised to do on admission. Either way new management signed up in 2007/08 and not a moment too soon as the business began to fall apart in 2010 and headed towards its first ever loss.

The problem with on-line gaming companies, as I understand it, is that it's a cut-throat, and often unregulated, sector where punters have little loyalty. So brands have to be constantly refreshed, new money attracted, eye-catching jackpots financed and competitors repulsed. It's a sign of strength that CasinoClub managed to capitalise on its tailored offering for so long; but by 2010 lack of investment caught up with GVC Holdings with sibling brands Betaland, Betpro and Winzingo failing to take up the slack with their low-margin contribution.

Fortunately, in 2012, management demonstrated their acumen by buying Sportingbet in a huge, all-share acquisition; doubling the size of the business to access new markets and improve the cash generation of firm (having totally failed to achieve this organically). Harking back to the glory days of 2004 this brave decision proved a masterstroke; headline growth has returned to the business, cash-flow has recovered and the previously moribund share-price has more or less tripled in three years. The real question, now that this…

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