888 Holdings

888 Holdings PLC (888) is an online gaming operator. The company provides virtual online gaming and entertainment solutions over the internet. 888 offers a range of online casino, bingo, poker, sport, social and mobile gaming, and skill games to end users and to its business partners through its business to business unit, Dragonfish. The company’s operations are differentiated in two operating segments: B2C (Business to Customer) and B2B (Business to Business).

Trading Update
As new customer acquisition was up by 20% year on year due to the release of the Orbit Casino platform and increased marketing investment, revenue increased by 6% on a like for like basis (2% increase on a reported basis). The company's growth has continued across several group's global regulated markets driven by Sport which was increased by 29% and Casino surged by 13%, though partly offset by Bingo which remained flat and challenging Poker declined by 28%. The company had continued to achieve encouraging growth during the period in the UK market. Revenue surged by 18% on a like-for-like basis or 8% on a reported basis.

Financial Highlights (FY 2018, in $m)
 
(Source: Company Filings)

In the financial year 2018, revenue before VAT accrual release declined by 2% to $529.9 million, highlighting the weakness in the UK market due to increased regulatory scrutiny and challenging market. EBITDA for the period was $129.1 million (2017: $41.2 million) with a margin of 24.4%, and adjusted EBITDA rose by 6% to $107.1 million (2017: $100.7 million) to report an increase of 160bp in the margin to 20.2%.  Profit before tax was $108.7 million (2017: $18.8 million) while adjusted profit before tax rose by 11% to $86.7 million (2017: $78.3 million). Basic earnings per share increased to 26.3 cents (2017: 3.5 cents) and adjusted basic earnings per share increased to 20.2 cents (2017: 20.1 cents). Bringing the total dividends for the year to 12.2 cents per share (2017: 15.5 cents), the company proposeda final dividend of 6.0 cents per share (2017: 5.9 cents per share), in addition to one-off 2.0 cents per share.

Valuation Methodology 
Method:  Price/Earnings Approach (NTM)


Share Price Commentary

Daily Chart as at July-17-19, before the market closed (Source: Thomson Reuters)
 
On 17 July 2019, at the time of writing (before the market closed, GMT 10:20 am), 888 shares were trading at GBX 159.50, down by 0.25% against the previous day closing price. Stock's 52 weeks High and Low is GBX 260.20/GBX 126.70. The company's stock beta was 1.00, reflecting the same volatility as compared to the benchmark index. Total outstanding market capitalisation was around £593.46 million, with a dividend yield of 5.85 per cent.

Conclusion
The company remained confident of posting full-year results in line with its expectations, underpinned by continued growth across several regulated markets, primarily in Continental Europe. The company has a unique platform to report continued growth in the dynamic global online gaming industry and as a diversified operator that owns its own technology, it continues to base its success on its unique technology-edge and diversification across products and markets.

Keeping in mind the decent prospects of the company, and supported by valuation done using the above method, we have given a “SPECULATIVE BUY” recommendation at the closing price of GBX 159.90 (as on 16 July 2019) with single-digit upside potential, based on 13.95x NTM Price/Earnings (approx.) on FY19E Earnings per share (approx.).
 

AO World

AO World PLC (AO) is a Bolton, United Kingdom-headquartered online white goods and electricals retailer which delivers products via its in-house logistics business and few selected third parties. The company has operations in Germany and the Netherlands as well and owns the most sophisticated fridge recycling plant in Europe. The company also sells end-of-line and professionally refurbished goods directly to the public through its bricks and mortar outlet shops. The company’s operations are differentiated in two segments, namely UK and Europe.

Financial Highlights (FY 2019, in £m)

(Source: Company Filings)

As the company leveraged the competencies that it has created and diversified the categories that it offers to its customers, it continued to grow its businesses in the UK and Europe during the year to deliver revenue increase of 13.3% to £902.5m. Total gross profit increased by 7.5% to £152.3m, while gross margin for the group reduced to 17.0% for the reporting period.  With the UK adjusted EBITDA surged by 20.9% (including the newly acquired mobile phones business) and by 14.3% (excluding mobile phones business), adjusted EBITDA losses for the period improved to £0.4m (2018: loss of £3.4m). Operating loss was £15.2m for the current period and declined by £1.0m against the prior year and adjusted operating loss was £7.9m and loss before tax was £18.9m (2018: loss of £13.5m). Diluted loss per share was 3.78p and basic loss per share was 3.78p.

Share Price Commentary

Daily Chart as at July-17-19, before the market closed (Source: Thomson Reuters)
 
On 17 July 2019, at the time of writing (before the market closed, GMT 10:50 am), AO shares were trading at GBX 78.3, up by 0.77% against the previous day closing price. Stock's 52 weeks High and Low is GBX 156.00/GBX 68.62. The company's stock beta was 0.11, reflecting considerably less volatility as compared to the benchmark index. Total outstanding market capitalisation was around £369.93 million.

Conclusion
During the financial year 2019, the adjusted EBITDA in the UK improved by over 20%, the company achieved over 30% in Europe, and it delivered double-digit revenue growth in the UK. However, the ability of the company to maintain sales growth might be affected by dampening of consumer confidence in a continuingly competitive market. It faces a risk of inflation and uncertainty in the UK economy due to the referendum as expected to impede its growth. Moreover, while the group has been expanding into new territories as a key part of its strategy, it has faced challenges in Europe over the past year, particularly with product margin. Additionally, the debt has increased over the year to fund the acquisition, while less progress has been made in terms of the ongoing cash requirements, negatively impacting the finances and limiting the long-term growth.

Based on the headwinds faced by the company, we have given a “WATCH" recommendation at the closing price of GBX 77.7 (as on 16 July 2019), while we look for any upcoming catalysts.
 
*The speculative buy recommendation is valid for the current price as covered in the report (as on July-17-19)
*All forecasted figures and peers have been taken from Thomson Reuters.

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