GVC Holdings Plc

GVC Holdings Plc (LON: GVC) is an Isle of Man-incorporated Sports-betting and Gaming Group. On 21 January 2021, the Company will publish the Q4 trading update.

Rationale for Valuation – Sell at GBX 996.40

• On a trailing twelve months, the Company’s Price/Cash Flow and Price/Earnings multiples are significantly higher as compared to the Hotels & Entertainment Services industry multiple, reflecting overstretched valuations.
• Presently, the Group is trading near the 52-week high, raising doubts at the upside potential at the current price level.
• The Company’s Return on equity was in the negative zone in the last four periods.
• As per the restrictions and guidelines on retail stores, the Company had to close the stores in England, Wales, Republic of Ireland, Italy and Belgium, which will have an impact on EBITDA of £37 million (currently required retail closures). If all retail outlets were required to be closed for a whole month (November 2020), then it will have an impact of around £43 million.
• From the technical standpoint, the 20-day simple moving average price is currently at GBX 1,004.5, which is higher than the current price and reflecting a downtrend in the near term.

Key Risks

• The Company’s liquidity may be impacted because of the ongoing circumstances related to COVID-19 pandemic.
• For the various activities, the Company holds multiple licences from regulators globally. The loss of any of these licences may adversely impact on the operations, revenues, and reputation of the Company.
• The uncertainty about macroeconomic factors and change in consumer disposable income might impact the share of income which consumers would spend over leisure activities.

Recent News

On 2 November 2020, the Company has warned that the new lockdown restrictions imposed on the UK and Europe will cost at least £37 million. Further, if all the operations were closed for a month, then EBITDA level would be impacted by around £43 million.

On 22 October 2020, the Company announced the appointment of two new Directors to the Board: David Satz (as an Independent Non-Executive Director) and Robert Hoskin (as an Executive Director).

Q3 FY20 Trading Update (for the period from 1 July to 30 September 2020, as on 8 October 2020)

(Source: Company Website)

• In Q3 FY20, the Company delivered a decent performance, with an increase of 12% in net gaming revenue (NGR) and 26% in Online NGR.
• In Australia, the Company continued strong performance, with an increase of 64% at constant currency.
• The Company also stated that it has agreed to acquire Bet.pt in Portugal. This acquisition would extend the business across Iberia.
• Led by a busy sports schedule, the online sports wagers were well ahead of the prior year.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

In the US, the Company’s full-year net revenue is expected to be ahead of expectations at around US$150 million to US$160 million. Despite the significant challenges created by COVID-19, the Company has delivered a decent performance (on a year to date basis). For FY20, EBITDA will be in the range of £770 million to £790 million. Due to the new restrictions, all the operations had to be closed for a month. From the closure of retail outlets, the Company expects EBITDA level would be impacted by approximately £43 million. From a technical perspective, RSI is indicating a bearish setup for the stock, and it is not financially viable to take a fresh position currently. Therefore, it is advisable to book profit as of now, considering global headwinds persisting currently due to COVID-19 pandemic. The stock made a 52-week low and high of GBX 292.70 and GBX 1,156.50, respectively.

Based on the risks associated and factors as discussed above, we have given a “Sell” recommendation on GVC Holdings at the current price of GBX 996.40 (as on 6 November 2020, before the market close at 8:08 AM GMT), while we will look forward to reinvesting at the right time when the market dynamics become favourable.

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

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

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