Flutter Entertainment Plc

Flutter Entertainment PLC (FLTR) is a United Kingdom-based international, multi-channel sports betting and gaming operator, with a market in the United Kingdom, Ireland, Australia, the United States, and internationally. The company primarily operates five sports betting and gaming brands under four divisions: Online, Australia, Retail and US. The company was previously known as Paddy Power Betfair PLC.

Financial Highlights – H1 Financial Year 2019 (£, million)

(Source: Interim Report, Company Website)

For the first half of the financial year 2019, the company’s revenue surged by 18 per cent to £1,020 million from £867 million in the H1 FY2018. The increase in the revenue was driven by a surge in online sales and strong geographical performance from Australia and US businesses for the period. The company’s gross profit for H1 FY2019 stood at £719 million versus £657 million in the H1 FY2018. The underlying EBITDA declined by 10 per cent from £217 million in the H1 FY2018 to £196 million (pre IFRS 16) in H1 FY2019. The company’s underlying operating profit declined by 17 per cent to £145 million (pre IFRS 16) in H1 FY2019 from £174 million in the H1 FY2018. The PBT (Profit before tax) declined by 24 per cent from £106 million in the H1 FY2018 to £81 million in H1 FY2019. The company’s underlying earnings per share declined by 15 per cent to 148 pence in H1 FY2019 from 173.60 pence in the H1 FY2018. The dividend per share remained flat at 67 pence for the H1 FY2019.

Share Price Performance

Daily Chart as at 25th September 19, before the market close (Source: Thomson Reuters)

On 25th September 2019, Flutter Entertainment Plc shares were trading at GBX 7,490 at the time of writing before the market close (at 11:08 AM GMT), down by 0.64 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 7,604.00/GBX 5,390.00. The group’s stock is reflecting lower volatility as against the benchmark index based on the company’s beta of 0.10.

Valuation Methodology
 

Conclusion
Although the company’s top-line performance has improved, the bottom-line performance has declined for the period. The company may not be able to meet its liquidity requirement as it operates in a highly competitive market, which requires continuous investment.

The company’s operations can be affected negatively due to ongoing uncertainties created over the Brexit, as it would disturb the supply chain. As the company operates inmultiple geographies, its profits can be impacted negatively due to foreign exchange rate fluctuations.

The group faces a risk of fines and investigations which can impact the future growth as it operates in an industry which is subject to the adverse regulatory headwinds, breaches of which can be potentially fatal for the group. The company further expects its underlying EBITDA losses of around £55 million from its US business.

The company’s P/E multiple is significantly higher as compared to the industry multiple, reflecting overstretched valuations.

 
Based on the risks associated and support from valuation done using the above method, we have given a “Sell” recommendation at the closing price of GBX 7,538 (as on 24th September 2019) based on 23.00x NTM Price to earnings (approx.) on FY19E earnings per share (approx.).
 

Entertainment One Ltd

Entertainment One Ltd. (ETO) is a media company based out of Canada and involved in the business ranging from production and development to sales and distribution of entertainment content. Through its global reach and expansive scale, the group delivers content to the world, which spans across film, television, music, digital content and live entertainment.

Trading Update
On 24th September 2019, Entertainment One Ltd. announced its trading update from April 1st, 2019 to September 23rd, 2019. Although the preschool merchandise market remained competitive, the company’s revenue form Family & Brand division to be at a consistent pace with last year. The company had nearly 1,600 live merchandising and licensing contracts worldwide. The company expects its revenue from Film, Television & Music business to be on the lower side for the period.

On 22nd August 2019, Entertainment One announced the signing of an acquisition agreement with the Hasbro, Inc.

Financial Highlights – Financial Year 2019 ending 31^st March (£, million)

(Source: Annual Report, Company Website)
 
For the financial year ending 31^st March 2019, the company’s reported revenue declined by 9 per cent to GBP 941.2 million as compared to GBP 1,029 million in FY2018, driven by poor performance from Film, Television & Music segment for the period. Reported underlying EBITDA was GBP 197.6 million, an increase of 21 per cent as compared with GBP 163.6 million in the financial year 2018. The Underlying EBITDA margin rose by 510bps to 21 per cent against the 15.9 per cent in FY2018. Reported operating profit declined by 29.79 per cent to GBP 70.7 million as compared with the FY18 data of GBP 100.7 million. The company’s reported PBT (Profit before tax) declined to GBP 36.8 million in FY2019 from GBP 64.9 million in FY2018. Reported profit of the year declined from GBP 68.8 million in FY2018 to GBP 15.3 million in FY2019. Reported basic earnings per share declined to 2.5 pence in FY2019 against the 12.4 pence in FY2018.Reported diluted earnings per share declined to 2.5 pence in FY2019 against the 12 pence in FY2018.

Share Price Performance

Daily Chart as at 25th September 19, before the market close (Source: Thomson Reuters)

On 25th September 2019, Entertainment One Ltd shares were trading at GBX 568.00 at the time of writing before the market close (at 11:50 AM GMT), up by 0.09 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 616.00/GBX 333.06. The group’s stock is reflecting lower volatility as against the benchmark index based on the company’s beta of 0.54.

Valuation Methodology
 

Conclusion
On a reported basis, the company’s financial performance had declined for the period. Both the top-line and the bottom-line performance have declined in the financial year 2019. The company’s profitability margins remained stagnant or declined for the current period.

The company operates in a tough environment which requires constant financing, sometimes at the cost of profitability, to remain at the forefront of competitors. Moreover,the company is trading near its 52-week high, raising doubts at its upside potential at current prices.

Being a media company, the ETO needs to invest heavily in innovation and system maintenance and, any failure to do so will impact the brand loyalty and may affect the company’s financial performance.
The company’s P/E and EV/EBITDA multiples are significantly higher as compared to the industry multiple, reflecting overstretched valuations.

Based on the above rationale and support from valuation done using the above method, we have given a “Sell” recommendation at the current price of GBX 568 (as on 25th September 2019, before the market close) based on 19.69x NTM Price to earnings (approx.) on FY20E earnings per share (approx.).
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.
*The “Sell” recommendation is valid for the current price as covered in the report (as on 25^th September2019).

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