LON:ENT | My StockSlam Choice - GVC Now Entain (ENT) At 873p Then - Now 1717p

25th Oct '18 by Maddox

9 comments 3293 reads

Great StockSlam event last night, great fun and nice to meet some first-timers pitching some very interesting ideas: a wonderful variety of choices, many with high 90+ StockRanks but credit to Neville pitching eServeGlobal on a SR of zero!

My StockSlam choice is online gambling company GVC Holdings (LON:GVC) (Gaming VC as it was originally called). They have just reported excellent H1 results and Q3 update. They are in the midst of integrating their audacious takeover of Ladbroke Coral, and despite the obvious potential for distraction, they state:

Lads integration “couldn’t be going any better”;
They are taking market share in all their key markets; and
Growth is accelerating (Q3 over H1), online net gaming revenue (NGR) +28% .

So, extremely impressive performance.

However, the really interesting feature is they have tied-up a twenty-five year 50:50 JV agreement with MGM the leading casino operator in the US market. We’ve been waiting a long time for the US online gambling market to open up and it’s happening right now.

Over the next five years the US market is predicted to become the largest regulated online gambling market globally. It is estimated that there is c. $150bn illegal underground gambling market in the US. IMHO I cannot foresee any other outcome than the MGM/GVC JV being the leading player in this market.

Clearly, execution risk is the biggest concern but GVC have an excellent track record of taking over much larger businesses and executing the integration perfectly:

Sportingbet (March 2013)
BWIN (Feb 2016)
Ladbrokes Coral (March 2018)

So, frankly I cannot see them cocking up this huge opportunity.
And you might expect GVC to be expensive, but no: p/e 11, PEG 0.5 and yield 4.12%. So they are extremely good value and with the exciting US market opportunity ahead they present a compelling proposition.

Disclosure: Maddox is long GVC

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Glen Keedy

25th Oct '18

Hi Maddox
I've traded in and out of GVC Holdings (LON:GVC) for 5 years now and it's been a great stock for me. All the acquisitions made sense to me until Ladbrokes. For such an internet based company why add bricks and mortar? You've got all the retail high street woes. FOBT & government grandstanding. All the other businesses were pure internet plays and have been integrated successfully, but is this the one that gives Kenny Alexander the CEO bad indigestion? What are your thoughts on why Ladbrokes and what the integration will look like in a years time?

BTW - check out Kenny Alexander's picture on the GVC website - I wouldn't want to be on the wrong side of him ;-)
https://gvc-plc.com/about/corporate-governance/board-of-directors/

Maddox

Hi Glen,
I take your point, the retail estate is an issue but GVC successfully leveraged the FOBT review to their advantage to reduce the acquisition price. However, I don't think that the focus has changed just look at
H1 Online performance reported:
Sports brands NGR +19% (cc +21%)
• GVC brands +23% (cc +26%)
• Ladbrokes.com +7%
• Coral.co.uk +12%
• Ladbrokes.com.au +24% (cc +31%)
• Eurobet.it +36% (cc +32%)

The Ladbrokes and Coral brands are leading brands with excellent online potential - whereas it would costs a fortune to achieve the same brand brand recognition with GVC's existing brands; that are leading brands but in different markets.

One additional benefit, is that in markets where gambling advertising is restricted or banned, the retail network branding gives you continued prominence and awareness. This without the advertising spend and without your online competitors.

Nevertheless, you are correct and the FOBT impact on the profitability of the retail shops will be significant. Unless GVC find some creative way of replacing the lost revenue I would expect there will be a shrinkage of the network. Might they be, for example, cabled-up with superfast broadband and become eGaming venues?

As to Kenny's picture - yep I've met him when he's not happy - and no it wasn't a joyous occasion! On the other hand, listen to him on his recent market updates - and he's clearly supremely confident and very happy with life!!

Cheers Maddox

Snoo

They seem to be carrying £1.6bn in loans, and also have issued £500m of bonds. Most of its assets are intangibles, and I don't think the brands are worth that much, because there is very little loyalty in sports betting. It would not be very common that a seasoned punter would turn down odds of 2.0 at Betfair to have the same bet at 1.80 at Ladbrokes, just because they liked the colour of the website. Yet the same parallel happens all the time with branded/non-branded goods.

I think that a reason behind consolidation in the industry is that is very difficult to produce organic growth in betting, so one way to get this is to buy someone and take the synergies. The rapid growth of the mainstream books here is down to FOBTs, but that now seems to have come to an end.

26th Oct '18

Hi Snoo,

Yes the debt has been taken on for the acquisition of Ladbrokes and they (and MGM) are putting in $100m into the JV. They have done this previously for acquisitions and paid the debt down on an accelerated basis. Yes, most of the assets are intangibles as is the case with online retail.

Your point regarding loyalty is certainly logical - however, GVC is growing strongly suggesting net customer acquisition is positive. Nevertheless, a good cautionary point to further explore.

Cheers Maddox

jwebster

27th Feb '19

Interesting, GVC has since dropped and is 669p today. I'm not a big chartist, but I note the price bounced off the 600p level which was the low recorded in Jan 2017. So this looks like a support level.
Certainly cheaper than the 873p level last October. Fairly undemanding PE at 8.84x and good dividend yield of 4.82%. Red light is the debt which at £1.7B is more than 3x earnings (which is usually a cut-off for me)

5th Mar '19

Hi Guys,,

Just got off the Webcast - what a spectacularly great set of results - I'll start with a few key quotes:

"Very strong growth with market share gains in all key territories" "We are growing faster than all our competitors"

"Ladbrokes integration- couldn't be going any better"

"Triennial Review - £2 FOBT - we're ready and we will take market share"

US Market - Kenny - even more bullish now. "We expect to be the market leader - anything else will not be acceptable"

Debt - 3x is comfortable - cost of debt is 4% and debt horizon for refinance is 2022. "GVC is highly cash generative and hence the guidance on dividend policy" Which is 10% p.a. growth on top of the 7% increase this year. Debt leverage will be taken down 0.5x each year going forward.

Hat's off to Kenny and team - absolutely perfect execution - made some key promises also on his intention to lead the market on corporate responsibility.

Regards, Maddox

tiswas

29th Apr '20

Just looked at the chart for GVC.

Jeez, fell from £9 to £3 and now back to £7.50, all within a month.

What volatility, what an opportunity!

28th Apr '21

GVC has been renamed Entain (LON:ENT) (ENT) this is to mark the change to its focus only on regulated gambling and betting markets. The execution of its strategy to attack the US market, as it opens up to online sports betting and gaming, is going exceedingly well.

BetMGM their joint venture is experiencing explosive growth - it achieved 1Q 2021 net revenue of $163m but forecasting $1bn for 2022. They have increased their long-term US market share target to 20 -25% (from 15% - 20%) and long-term EBITDA target margin of 30-35% (by 2025).

They are performing strongly against the competition and look highly likely to achieve a top-three market share, if not better. They are currently operating in 12 US States and have gained regulated access to 24 so far.

I would strongly recommend anyone interested in Entain (LON:ENT) watch the recent BetMGM Capital Markets Day recording.

Obviously, the race to establish market share is expensive and absorbing a lot of cash - $450m budgeted for 2021, but cash positive trading is forecast for 2023.

I'll be very interested to get your thoughts?

Bluesky Ventura

Hi Maddox,

Entain (LON:ENT) amazing to think this was £3.30 in march 2020 and now trading at £17. The growth from the existing markets has continued and the exceptional growth of MGMBET its 50% JV with MGM has been staggering.

If MGMBET achieves it stated 20-25% market share of the North American market of $32 Billion, then this could worth significantly more. (my private estimate is a £90 share price by 2025 ).

BSV

My StockSlam Choice - GVC now Entain (ENT) at 873p then - now 1717p

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Maddox

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