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 earlier known as Paddy Power Betfair PLC.

Q1 FY19 Trading Update (as on 2^nd May 2019)
Driven by strong growth in both Australia and the US, Q1 revenue grew by 17% year-on-year to £478m. For Betfair, the company continued to make good progress on the technology development work, while underlying momentum remained healthy for Paddy Power with 22% growth in the average daily actives.

Financial Highlights (FY2018, £ million)

(Source: Annual Report, Company Website)

For the Financial year 2018 ending 31 December, the reported revenue increased by 7 per cent to £1,873 million from £1,745 million for the same period of last year, as the group made progress in improving its position in core markets and boosted investment in new growth opportunities, especially the newly opened US betting market. The company’s reported underlying EBITDA in 2018 declined by 5% to £451 million, mainly because of investments in the budding US sports betting market where the company has secured an early leading position. The company’s underlying operating profit stood at £360 million for FY 2018 as compared to £392 million in FY 2017. Profit before tax reported a decline of 11% in FY 2018 to £219 million as compared to£247 million in FY 2017. Underlying earnings per share also decreased by 5% in 2018 to 379p. During the year, the company declared dividends and share buybacks worth £584 million. Dividend per share remained flat at 200p per share as compared to the last year data.

Share Price Performance

Daily Chart as at July-03-19, before the market closed (Source: Thomson Reuters)

On 3rd July 2019, at the time of writing (before the market close, GMT 3:23 PM), FLTR shares were trading at GBX 6,824 and increased by 11.25% against the previous day closing price. Stock's 52 weeks High and Low is GBX 8,590/GBX 5,390.

Valuation Methodology


Conclusion
Through a combination of investment in new growth opportunities and continued profitable growth in existing markets, the group is well positioned to deliver robust and sustainable returns. The company’s scale and in-house capabilities will enable it to capitalise on the broad array of market opportunities available globally as ongoing industry evolution is increasingly advantageous to large-scale online operators. With a CAGR of 11% in 5 years to 2018, the global online betting and gaming market is growing at a high pace and still has a long way ahead even in a more mature online market such as the UK as spending continues to migrate online. This trend is expected to continue in 2019 and beyond due to recent regulatory changes in retail.

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 is planning to make an investment in foreign markets through mergers and acquisitions. There had been significant investment in technology development to increase international growth. The company would be able to invest in substantial growth opportunities as it is backed by a steady ongoing cash generation within its core markets and strong balance sheet.

Based on the decent fundamentals and the valuation done using the above method, we have given a “BUY” recommendation at the closing price of GBX 6,134 (as on 2nd July 2019) with lower double-digit upside potential based 2.65x NTM EV/Sales (approx.) on FY19E sales (approx.).

HomeServe PLC

HomeServe plc (HSV) is a Walsall, the United Kingdom-based company, which is involved in providing repair, heating installation and home emergency services. The company’s operations are differentiated into five segments being UK, USA, France, Spain and New Markets. The group designs a range of water, heating and electrical related home assistance products. The Company also provides connected home solutions. The company has long-term contractual relations with utility industry providing entry to households under affinity partner households.

Financial Highlights (FY2019, £ million)

(Source: Annual Report, Company Website)

The company’s reported total revenue increased by 12 per cent to £1,003.6 million as compared with the financial year 2018 of £899.7 million. The operating profit surged by 13 per cent to £152.6 million against the £135 million in FY18. The company statutory profit before tax rose by 13 per cent to £139.5 million as compared with the financial year 2018 of £123.3 million, due to further strong growth in North America and the performance of the group individual businesses was considered in the operating review. Profit for the year 2019 stood at £108.3 million, an increase from the previous year data. Basic earnings per share increased by 8 per cent to 32.7 pence as compared with the financial year 2018 of 30.2 pence.

The Board is proposing a final dividend per share was 16.2 pence, bringing the total ordinary dividend per share for the year 2019 at 21.4 pence, a surge of 12 per cent as compared with the financial year 2018 of 19.1 pence. The company’s board operates an advanced dividend policy and future dividend cover under the range of 1.75-2x across the medium term. Total customers at the year 2019 stood at 8.4 million with the retention rate of 82 per cent.

Share Price Performance

Daily Chart as at July-03-19, before the market closed (Source: Thomson Reuters)

On 3rd July 2019, at the time of writing (before the market close, GMT 2:18 PM), HSV shares were trading at GBX 1,199 and increased by 1.524% against the previous day closing price. Stock's 52 weeks High and Low is GBX 1,275/GBX 847.50. The company’s stock beta stood at 0.57, reflecting lower volatility of the stock as compared to the benchmark index.

Valuation Methodology


Conclusion
The group expects to deliver more decent growth in the financial year 2020, with surged P&L investment in Home Experts division expected to be offset by solid performance in the membership, mainly in North America. The company surged its P&L investment in the New Markets division and Home Experts division to £9.8 million in the financial year 2019 as compared with the financial year 2018 of £4.4 million and expected to surge in the range of £12-£15 million over these two areas in the financial year 2020.

The company expects the full year results to be ahead of the management’s expectations. In the longer term, being a cyclical company, there is a strong relationship between demand for company’s products and levels of economic activity. Any downturn in global economic activity can have an adverse impact on the company’s performance. The company has an excellent opportunity to tap on this fundamental shift. The group expects to continue experiencing robust end markets in North America, which is supplemented by the group’s strategy of organic growth and helped by targeted bolt-on acquisitions. The UK market is more mature and competitive, but the company is in a strong position to make the best of market conditions.

The company continues to perform well in improving end markets. The company’s growth prospects look favourable as innovations and acquisitions have been made to cut down on costs and expand to new markets.
Based on the decent fundamentals and the valuation done using the above method, we have given a “BUY” recommendation at the closing price of GBX 1,181 (as on 2nd July 2019) with single-digit upside potential based 6.21x NTM Price to Book Value (approx.) on FY20E book value per share (approx.).
 
*All forecasted figures and peers have been taken from Thomson Reuters.
*The “Buy” recommendation is valid for the current price as covered in the report (as on July-03-19).

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