GVC Holdings PLC (GVC) is an Isle of Man-incorporated sports-betting and gaming groups. The company owns some of the leading brands in the gaming industry and is one of the largest sports-betting and gaming groups in the world. The company operates a unique proprietary technology platform across all of its product verticals and is focused on regulated markets, with now over 90 per cent of its revenues derived from the regulated and/or taxed markets. The company holds licences in more than 20 jurisdictions with offices and betting outlets across five continents, helping it to generate revenues of over GBP 3 billion annually with a workforce of around 28,000 employees and contractors.
Two years after the acquisition of the online operator, bwin.party digital entertainment plc, in 2016, the company on 28 March 2018 completed the acquisition of Ladbrokes Coral Group PLC, the first move by the company into retail operations, helping the group to expand rapidly in recent years. The recent expansion of the group has been led by a combination of organic growth and M&A. In addition to owning some of the leading brands of the gaming industry as well as games-led brands, the company offers online gaming services on a B2B basis to a number of third-party operators.

Key Statistics


Management

Lee Feldman is the Non-executive Chairman of the group, and he was appointed on September 2008. Kenneth Alexander is the Chief Executive Officer of the group. He is supported by Rob Wood, who is the Chief Financial Officer of the group.

Segments

The company’s operations are differentiated in five operating segments, namely Online, UK Retail, European Retail, Other and Corporate. The online segments comprise of gaming and betting activities from mobile and online operations. Gaming Brands include partypoker, PartyCasino, Gioco Digitale, Gala, Foxy Bingo, and CasinoClub, while Sports Brands include bwin, Coral, Crystalbet, Sportingbet, Ladbrokes, Eurobet. UK Retail includes betting activities in the shop estate in Great Britain, Northern Ireland and Jersey, while European Retail includes all retail activities in Spain (JV) shop estates, Italy, Belgium and the Republic of Ireland. Other segments comprise activities primarily related to Intertrader, on course pitches, Betdaq, Stadia, and telephone betting.

Top Shareholders

 
(Source: Thomson Reuters)

Trading Update

During the period from 01 January to 31 March 2019, total group’s net gaming revenue was up by 8% and 9% on a constant currency basis. European Retail net gaming revenue rose by 2% while it grew by 3% on a constant currency basis, as sports wager increased by 13%.Continuing the strong volume growth in all major territories, online net gaming revenue was up by 17%, helped by a 19% rise in sports wager.The company anticipates delivering operating profit and EBITDA in-line with expectations.

Key Financial Highlights (FY 2018, in GBP mn)

 
(Source: Company Filings)

Reflecting the impact of the nine months of trading for the Ladbrokes Coral business post acquisition and the continued growth in the legacy GVC business, reported revenue increased by around 272% to GBP 2,935.2m, while proforma revenue of GBP 3,523.6m was 8% ahead of the last year helped by a strong performance in Online and European Retail. Operating profit post separately disclosed items of GBP 67.3m was GBP 71.7m ahead of the previous year and underlying operating profit of £520.8m was 208% ahead of last year, while proforma underlying operating profit increased by 19% to GBP 610.1m, with underlying operating profit margin improved to 17.1% from 15.6% last year.

Proforma underlying EBITDA increased by 13% to GBP 755.3m, driven by shop closures in UK Retail, the delivery of synergies from the acquisition of Ladbrokes and Coral, and good cost control.

Driven by good underlying growth in all markets and also by a positive World Cup, online growth was robust with net gaming revenue (NGR) in the online segment was 19% ahead to GBP 1,915.1m, while on a reported basis, the total revenue of GBP 1,668.4m was 115% ahead of last year. Reflecting continued growth in the legacy GVC business, online underlying EBITDA of GBP 443.4m was 87% ahead of last year, while proforma underlying EBITDA of GBP 485.7m was 19% ahead from last year data.

UK Retail like-for-like net gaming revenue at GBP 1,328.0m was 5% behind the last year on a total basis, while on a reported basis, revenue was GBP 1,014.9m. Underlying reported EBITDA stood at GBP 193.4mand proforma underlying EBITDA was GBP 251.7m, down by 2%. European Retail net gaming revenue of GBP 278.8m was 16% ahead of last year, while on a reported basis, revenue was GBP 211.7m. Proforma underlying operating profit of GBP 49.6m was 29% ahead, and proforma underlying EBITDA of GBP 65.4m was 35% ahead, whereas reported underlying operating profit was GBP 37.7mand reported underlying EBITDA was GBP 49.1m. Diluted loss per share rose to 12.2 pencefrom a loss of 11.6 pence in FY 2017, while a final dividend of 16 pence per share was announced by the company, taking the total 2018 dividend to 32 pence.

Key Performance Indicators

Net Gaming Revenue, which measures revenue before deducting VAT, rose to GBP 3,571.4m to post a growth of 9%. Contribution, which measures revenue less betting taxes, payment service provider fees, software royalties, revenue share and marketing costs increased from GBP 1,872.8m a year earlier to GBP 1,939.8m, with UK Retail accounting for GBP 948.3m of the total. Sports Wagers also rose to GBP 14,907.3m, as online sport wager rose by 13% to GBP 10,251.4m.

Financial Ratios
 
(Source: Thomson Reuters)

The bottom-line profitability margins of the company improved in the financial year 2018, as net and operating margin were better than the last year and have shown gradual improvement but were below the industry median. However, gross and EBITDA margin slightly fell during the year but were above the industry median. Though the current ratio declined during the year, it was still more than the industry median. The company became more leveraged in 2018, but its leverage ratios were still below or near the industry level. The asset turnover ratio showed considerable improvement during the year.

Valuation Methodology
Method 1:EV/EBITDA Multiple Approach (NTM)
 
To compare GVC with its peers, EV/EBITDA multiple has been used. The peers are Playtech PLC(NTM EV/EBITDA was 4.29), Greek Organisation of Football Prognostics SA(NTM EV/EBITDA was 8.27),Kindred Group PLC(NTM EV/EBITDA was 8.92) and Flutter Entertainment PLC(NTM EV/EBITDA was 13.97). The mean of EV/EBITDA (NTM) of the company’s peers was 8.86x (approx.).

Method 2:Price/Earnings Multiple Approach (NTM)



To compare GVC with its peers, P/E multiple has been used. The peers are Playtech PLC(NTM P/E was 8.59), Rank Group PLC(NTM P/E was 10,12),Kindred Group PLC(NTM P/E was 12.66), William Hill PLC(NTM P/E was 13.41) and Greek Organisation of Football Prognostics SA(NTM P/E was 15.27). The mean of P/E (NTM) of the company’s peers was 12.01x (approx.).

Share Price Commentary

 Daily Chart as at July-15-19, before the market closed (Source: Thomson Reuters)

On 15 July 2019, at the time of writing (before the market closed, at 12:25 pm GMT), GVC shares were trading at GBX 594.3, down by 0.93 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 1,184.00/GBX 504.00. The company's stock beta was 0.54,reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £3.49 billion, with a dividend yield of 5.33 per cent.

Growth Prospects and Risks Assessment

The company applies central marketing expertise alongside local operational execution and leverages its proprietary technology and product development capability, which is highly flexible and enables it to release new features and products quickly and make rapid changes to the customer experience. This model is proving highly effective as at minimal incremental cost, the company has the capacity to manage significant increases in volume. The opportunities provided by the integration and migration of Ladbrokes Coral and the joint-venture in the US with MGM Resorts onto the GVC technology will bring these benefits to the broader group by helping to execute the operational delivery and grow the business. The company is exposed to the risk that personal data could be wrongfully obtained through illegal methods as it processes sensitive personal customer as part of its business and is therefore exposed to the risk of prosecution. There can be a material adverse effect on the amount of tax payable by the company if additional taxes are levied by concerned authorities, thereby increasing the cost of the product.

Conclusion

The company has put up sufficient security arrangements and systems to be prepared for potential risks. Moreover, the company is well positioned to capture the growth in the betting industry, and the board is confident of delivering strong EBITDA growth in future years.
 
Based on the decent prospects and supported by valuation done using the above two methods, we have given a “BUY” recommendation at the closing price of GBX 600 (as on 12 July 2019) with lower double-digit upside potential based on 8.86x NTM EV/EBITDA(approx.) on FY19E EBITDA(approx.) and 12.01x NTM Price/Earnings Value (approx.) on FY19E earnings per share (approx.).
 
*The buy recommendation is also valid for the current price as covered in the report (as on July-15-19).
*All forecasted figures and Peer information have been taken from Thomson Reuters.

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