Gamesys Group PLC – Overstretched after maiden dividend declaration.

Gamesys Group PLC (LON: GYS) is a FTSE 250 listed online software development and gaming business. It is a leading operator of online bingo and casino-led brands.

In October 2020, the Company expects to release Q3 FY20 results.

Recommendation Rationale - Sell at GBX 1,128.00

• Net profit and Return on Capital Employed (ROCE) declined significantly in FY19 against FY18. ROCE fell to 4.44% in FY19 from 8.28% in FY18.
• EV/Sales and Price/Book multiples of the Company is quite overvalued as compared to the corresponding multiples of the Consumer Cyclicals industry.
• GYS’s Debt/Equity in FY19 was 1.19x against the industry median of 0.77x, reflecting that the Company has more debt obligations with relatively highly leveraged capital structure.
• Technical Indicator: 30-Day RSI reflects overbought position while the stock is close to a 52-week high, reflecting a likelihood of a short-term correction.

Key Risks

• The Covid-19 pandemic posing a significant threat to the global economy, and thus, the discretionary spending of customer base.
• Change in policies regarding licensing, taxes, and regulatory guidelines could adversely impact the operations.
• Increasing competition can impact the market-leading position of the Company and can also put the pressure over margins.

Financial Highlights (for the six months ended 30 June 2020)

 (Source: Annual Report, Company Website)

As per the H1 FY20 report released on 11 August 2020:

• The Company delivered excellent operational execution and financial performance, which led to a Pro-forma revenue jump by 27% year-on-year.
• Reported revenue soared by 101% year-on-year due to the strong growth in the UK and Asia.
• Cash conversion rate stood at 106% from adjusted EBITDA, with a robust operating cash flow of £100.7 million.
• As of 30 June 2020, cash balance was £136.0 million while adjusted net debt was £391.7 million, with Adjusted net leverage ratio of 2.27x (reduced from 2.83x reported at the end of H1 FY19).
• It also declared an inaugural interim dividend of 12 pence per share, which is scheduled to be paid in October 2020.

One Year Share Price Chart

1-Year Daily Chart as on 4 September 2020, before the market closed (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Conclusion – Take Profits Off the Table

The Company has delivered an excellent performance in H1 FY20; however, the macroeconomic uncertainty created by the COVID-19 pandemic cannot be overlooked as the situation of the pandemic is continually evolving and unprecedented. Consequently, the management is unable to provide any concrete financial guidance. Therefore, it is advisable to book profit now and reinvest the amount of principal and gains at the right time and price.

Stock's 52 weeks High is GBX 1,182.00 and Low is GBX 482.50. From the technical standpoint, 30-day RSI is currently in an overbought zone, which means there is a likelihood for a short-term correction in the stock price.

Based on the risks associated and factors discussed above, we have given a “Sell” recommendation on Gamesys Group PLC at the current price of GBX 1,128.00 (as on 4 September 2020, before the market close at 9.10 AM GMT+1) while we will look forward to reinvesting at the right time when the due corrections are done. 

Benchmark Holdings PLC – Restructuring the business after posting losses in FY19

Benchmark Holdings PLC (LON: BMK) is a FTSE AIM 100 Index listed Company, which is an aquaculture supplier of solutions in genetics, health, and specialist nutrition.

Recommendation Rationale - Sell at GBX 45.35

• Bottom-line items of the income statement declined significantly in FY19. Moreover, the Company reported operating loss and net loss. Therefore, net income was in negative 55.1% against the industry median of positive 8.2%.
• Over the past year, BMK has significantly underperformed the benchmark index with the positive return of merely 3.20% against 8.16% delivered by FTSE AIM 100 Index.
• Technical Indicator: 30-day RSI signalling overbought situation, while the stock price is close to a 52-week high, short-term consolidation can be expected.

Key Risks

• The shrimp market continues to be challenging and will continue the trend even in FY21.
• There is a financial risk arising from volatile currency and interest rate movements.
• The Company reported enormous losses in FY19, and it is going through a restructuring phase amid recessionary economic conditions, which can pose a liquidity risk.

Recent News

31 July 2020: BMK completed the disposal of the vaccine manufacturing facility at Braintree to the Cell and Gene Therapy Catapult for the consideration of £16 million in cash.

Q3 FY20 Trading Update (for the three months ended 30 June 2020)

 (Source: Annual Report, Company Website)

The key highlights of Q3 FY20 results released on 28 August 2020, were as follows:

• Due to continued strong performance in Genetics and Advanced Nutrition, revenues from continuing operations jumped by 8% year-on-year.
• With higher revenues and higher margins, Adjusted EBITDA from continuing operations was £0.3 million, as compared to the loss of £1.4 million in Q3 FY19.
• During Q3 FY20, BMK completed five disposals and exits, which raised up to £44 million in total.
• As of 27 August 2020, the liquidity following the disposals was nearly £84 million with Pro forma net debt of £36 million.

One Year Share Price Chart

1-Year Daily Chart as on 4 September 2020, before the market closed (Source: Refinitiv, Thomson Reuters) 

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion – Take Profits Off the Table

Following the disinvestment, the Company is in a solid position to streamline the core business.  However, the conditions in the shrimp market continue to be challenging, and the Company reported massive losses in FY19. In such a scenario, when the stock is already trading close to 52-week high and raising doubts on the upside potential, it is advisable to book profit now and reinvest the amount of principal and gains at the right time and price. Given the continually evolving nature of the pandemic, the management is unable to provide any financial guidance.

Stock's 52 weeks High is GBX 50.44 and Low is GBX 24.00. From the technical standpoint, 30-day RSI is currently in an overbought zone, which means there is a likelihood for a short-term correction in the stock price.

Based on the risks associated and factors discussed above, we have given a “Sell” recommendation on Benchmark Holdings PLC at the current price of GBX 45.35 (as on 4 September 2020, before the market close at 9.18 AM GMT+1) while we will look forward to reinvesting at the right time when the due corrections or restructuring activities are completed.  

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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