The global online gaming market generated c £40bn of gross gaming revenues (GGR) in 2018 and newly regulating markets (the US) are expected to contribute to 7% CAGR to 2023 (according to H2 Gambling Capital (H2GC)). However, while regulated markets have provided significant opportunities for operators to date, government intervention remains a constant threat and legislation is tightening. Some mature markets (notably the UK) have been raising taxes and implementing regulatory burdens, which increases the cost of business. In our view, success will depend on a combination of scale, diversification, proprietary technology and a strong balance sheet. Many of the 12 operators in this report should benefit from these dynamics and sector valuations remain attractive, at 12.6x P/E, 8.2x EV/EBITDA and 6.0% dividend yield for FY19.
Companies: 888 ACX BETSB ORPH GVC GYS OPAP PTEC RNK WMH
After many months of procrastination, the UK government has finally delivered a verdict on the fixed odds betting terminals (FOBTs), reducing stake limits from £100 to £2. Although not entirely a surprise, this is a disappointing result for the industry and will likely entail more than 3,500 shop closures. Also, while a decision has been made, there is still much uncertainty regarding timing and implementation. For online operators, there is a further blow, in the form of potential increases in gaming taxes at the next budget. This confirms recent speculation and is now widely expected to increase from 15% to 20%.
Companies: Rank Group
Rank’s trading update (13 weeks to 1 April) showed 17% growth in Digital, but the core Venues disappointed, with Mecca down 2% and Grosvenor down 9% on a like-for-like basis. The shortfall was largely due to fewer customer visits, as well as a lower gross win margin from VIPs. The company expects the weaker consumer environment to continue and has now guided to FY18 clean EBIT of £76-78m vs previous consensus of £83m. We have adjusted our forecasts to the lower end of guidance. The stock has dropped sharply on the news and trades at 5.7x EV/EBITDA and 11.8x P/E for CY18e, which is a meaningful discount to peers.
Similar to last year’s trends, Rank reported that total Venues l-f-l revenues declined by 1%, mainly due to lower customer visits. This was offset by a 16% increase in Digital, where Mecca digital has clearly turned the corner. To reflect the lighter result in Venues, we have lowered our FY18 and FY19 revenue estimates by c 2-3%, but improved operational efficiencies mean that our profit forecasts are largely unchanged. The business model remains highly cash generative, with £4m net cash achieved at H118 and the stock’s trading multiples are attractive at 6.8x EV/EBITDA, 13.6x P/E and 8.1% free cash flow yield for CY18.
The 19% growth in digital revenue is the key highlight in Rank Group’s trading update (16 weeks to 15 October). Grosvenor digital was up 34% and, encouragingly, Mecca digital has moved to double-digit growth (up 11% vs 2% in FY17). In a continuation of previous trends, Venues l-f-l revenues declined by 1%, leading to a 2% l-f-l growth in total group revenues. Notwithstanding the decline in Venues, the core business is highly cash generative, enabling progressive dividends, as well as potential M&A. Rank Group does not face any B2 FOBT risk from the triennial review and may even benefit if it is allowed more machines. Despite this, the stock trades at c 6.8x EV/EBITDA for CY18e. Management reiterated its expectations for the full year and our estimates remain unchanged.
Rank Group’s FY17 results highlighted the growth potential of its Digital division. Online revenue grew 15.3%, with an impressive operating margin of 20.4% (vs our 14.2% estimate). By contrast, Venues were slightly light, with like-for-like revenues declining by 0.7%, due to fewer customer visits and tighter due diligence. However, Venues’ KPIs have improved in H2 over H1 and FY18 has started well. Our headline revenue forecasts are broadly unchanged, although we have lowered our FY18 operating profit by 2.2%, as result of higher employment costs in Mecca. We continue to anticipate a move into net cash in FY18, underpinning Rank’s progressive dividend policy. Trading multiples are attractive, with CY18e EV/EBITDA of 6.8x, P/E of 13.7x and free cash flow yield of 8.8%.
Rank Group aims to be the UK’s leading omni-channel gaming operator and, as outlined at its capital markets day, the strategies for its Venues and Digital verticals are clearly interlinked. With an open architecture platform, Digital is well positioned to leverage the existing retail customer base and a single wallet (piloting in autumn 2017) could be a game changer for Grosvenor digital. Meanwhile, the core Venues businesses are being reinvigorated and remain highly cash generative. With its progressive dividend policy and potential online upside, Rank’s calendar 6.9x 2017e EV/EBITDA appears low.
In line with expectations, l-f-l revenues (46 weeks to 14 May) increased 1%, with a 13% growth in digital offsetting a slight revenue decline in Grosvenor Casinos’ and Mecca’s venues. Earlier platform issues have been resolved and we expect digital revenue growth to accelerate, with the H118 introduction of a single wallet fuelling market share gains. The core business is highly cash generative, enabling progressive dividends, as well as potential M&A. Despite this, the stock trades at a calendar 2017e 6.5x EV/EBITDA, a 30% discount to peers. Our estimates are unchanged.
Rank has a unique opportunity to leverage leading UK high street casino and bingo brands online. With platform issues resolved, its digital casino is growing strongly and the introduction of a single wallet later this year could be a game changer. Economic pressures are weighing on venues’ results, but they are highly cash generative. An expected move into net cash by end FY18 underpins a progressive dividend policy and gives Rank plenty of firepower to participate in industry M&A as opportunities become available. The calendar 2017e EV/EBITDA of 6.6x looks very low.
Interims reflected high street cost pressures (EBITDA -5%) and we have trimmed FY17e EPS by 2%. However, Digital’s 11% revenue growth was very encouraging, with an acceleration in Q2 as platform problems were ironed out. The core argument for Rank remains intact: scope to materially grow in Digital via better cross-sell of its land-based brands. Despite a lacklustre short-term profits outlook, the group remains highly cash generative, which underpins a progressive dividend policy and FY17e yield of 3.7%. The FY17e EV/EBITDA is only 6.2x, 37% below the peer average.
Rank has reported flat revenue for the first 15 weeks, against a strong 2015 comparative. Mecca digital has just been relaunched, supported by a new TV campaign, and better cross-sell remains a key opportunity for Rank. We expect profits to be H2 weighted, and with a slightly uncertain consumer outlook we have trimmed full year estimates, but Rank remains strongly cash generative. This underpins its progressive dividend payout and leaves it flexible to take advantage of acquisition opportunities.
A weak Q416 left final results a tad below our forecasts despite good results in Mecca venues and Grosvenor digital. However, cash generation was strong and the dividend was lifted by 16%. The organic growth strategy (focusing on multi-channel development) remains intact and while the failure to progress what would have been a transformational acquisition of William Hill (with 888) was a disappointment, it demonstrates the scale of management’s ambitions. We suspect that future accretive opportunities will arise within the consolidating online gambling space.
Rank’s 10-month IMS showed a solid performance in its venues and strong growth in Grosvenor digital, an important growth driver for the group. News of softer trading in Mecca digital since the recent platform migration is slightly disappointing, but it is early days and Rank has good organic growth prospects as it moves towards a true multi-channel offering, potentially augmented by acquisitions if the right opportunities arise. Our profit estimates are unchanged and the balance sheet is very strong. The 2016e EV/EBITDA of only 7.3x looks too low
The successful launch of its new digital platform, on time and budget, marks a key milestone for Rank and a major step towards its goal of a full omni-channel gaming product offering. Digital channels are the key growth driver for Rank and the new platform already offers new products and functionality, enabling Rank to further leverage its strong land-based gaming brands. After recent profit taking the FY16e EV/EBITDA is only 7.8x, yet the group is delivering good growth and strong cash flows.
Rank has reported a good start to the year, with revenue up 7% and Grosvenor Casinos performing particularly well. Our recent initiation report highlighted Rank’s opportunity to leverage its brands with an improved multi-channel offering. Digital revenues continue to grow at c 20% with migration to the new IT platform on schedule for early 2016. Our estimates are unchanged, with the potential for organic growth to be augmented by acquisitions at some stage given the group’s balance sheet strength. Yet the FY16e EV/EBITDA is still undemanding at 8.5x.
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FY20 results report EPS slightly ahead (4%) of our previous forecast. Net debt (pre-IFRS 16) was also slightly better than expected at £6.9m (N+1SE: £7.5m). The Group had a very strong start to FY21, achieving PBT of £6.0m in Q1 and trading is expected to be strongly ahead of budget in May. The order book for June is also encouraging. This is an impressive result against the significant challenges posed by COVID-19 for the aviation industry. Performance in H2 will likely depend upon the recovery in activity levels in Private Jets and Safety & Security, but Air Partner is already seeing some signs of recovery here. We believe the Group is well placed to achieve a strong full year result given the diversity of its model and the strength of the balance sheet.
Companies: Air Partner
Unsurprisingly, the limited business progression in H1 19/20 and the pandemic outbreak towards the end of the year have resulted in a significant FY profit contraction.
However, the unprecedented pandemic crisis seems to be dragging all the industry to the same starting line, in terms of market transformation. In particular, after the group showed a better than expected cash position after additional RCF and CCFF and substantial cost-savings, this gives new hope to the market.
Companies: Marks And Spencer Group
After launching a £1bn recapitalisation by way of a rights issue at a price with a heavy discount, the UK-based restaurant and (the largest) hospitality group, Whitbread, saw its share price plummet by 13%. The market movement reflects investors’ concern about the uncertain duration of Whitbread’s business downturn.
Whitbread was on our list of issuers likely to be wrongfooted by the crisis the day before the rights issue announcement.
In FY20, prior to COVID-19, management delivered on its four key proof points, including growing group EBITDA and membership at Roadside. The business model is proving resilient during COVID-19 and we have reduced our FY21 EBITDA forecast by only 7% since the outbreak began – much less than most.
Companies: AA Plc
H1 (to end of March) adj. PBT of £1.2m is in line amidst difficult trading. COVID-19 and closing all stores has seen April’s sales decline 80% y/y. There are promising signs with online sales 3x pre-COVID levels and management is being very pro-active in adapting and re-opening stores, such that the entire estate could be open on a controlled entry basis by the end of June. Liquidity at c.£14m remains comfortable and should rise by £10m in June as additional CLBILS funding becomes available. We move to BUY and present a scenario for FY20E in this note. We will publish formal forecasts when Topps next reports in early July.
Companies: Topps Tiles
After communicating a depressed industry outlook and calling for a huge amount of recapitalisation of £2bn, the leading contract caterer, Compass, saw it share price fall by 3.4% yesterday. Considering the smaller rivals’ weaker profitability and the capacity of equity fundraising from the capital markets, the share prices of other sector participants are also being penalised by the news.
Companies: Compass Group
2019 finals are a smidgen ahead at the EBITDA level. The company executed well in expanding the estate by 10% and collaboration with food aggregator Pyszene.pl (takeaway.com) has proved positive. DPP finished the year with £3.5m of net-cash and importantly, management today signal that this provides sufficient liquidity on a 12m view. COVID-19 to date has had relatively little impact with sales holding up robustly. A strong online presence and a delivery model means the business has continued to operate through the lockdown. Recent easing of restrictions to allow restaurants to open and some cost deflation are welcome developments also. New CEO, Iwona Olbrys, has proven F&C experience, most recently at Telepizza Poland which moved into profitability under her leadership. Whilst no major strategic review type commentary today, there is reference to self-help initiatives to drive the top line, lower costs and enhance the online platform. With little 2020 visibility management has removed financial guidance. N+1 Singer currently has no formal forecasts in the market and will initiate coverage in due course Overall, looking through the current uncertainty, we feel that with a proven new CEO at the helm and an online focused business model, DPP should ultimately reward investors with a move into profitability and value creation.
Companies: DP Poland
AFC Energy is a global leader in the fuel cell sector. It has a proven fuel cell technology which it is commercialising through its H-Power™ product, an off-grid electric vehicle charging system which is run on hydrogen and produces no emissions. The company's core fuel cell technology is a liquid alkaline fuel cell called HydroX-Cell(L)™. The company is also developing a solid alkaline fuel cell called HydroX-Cell(S)™ , the critical component of which is a is a solid electrolyte which upon validation will be marketed under the AlkaMem™ trademark. We expect the AlkaMem™ product to have multiple electro-chemical applications outside of fuel cells. The purpose of this note is to compare AFC Energy's products, markets and business strategy against its listed peers Ceres Power and ITM Power. The note also assesses the state and outlook of the hydrogen market in addition to the proton exchange membrane market, which is relevant for AFC Energy's AlkaMem™ product. As a reminder, we believe AFC Energy has a fair value of 27p/sh.
Companies: AFC AFC AFC
Inchcape has announced a trading update indicating impact of COVID-19 hit most markets in April, but we note the Group is now open in 25 markets vs. 14 on 7 April. Balance sheet liquidity has improved through the eligibility of the CCFF scheme. A through review of costs will now take place, and we are likely to get more colour on this at H1 results.
The Fulham Shore Plc (“FUL”) released interim results for the 6m period ended 29 September 2019 in-line with expectations as strength in the Franco Manca portfolio more than offset weather-related contraction at The Real Greek. We make minimal changes to our underlying forecasts and introduce a forecast for 2021. Nine restaurants have been opened so far in this financial year (year end March 2020) and the Company is now guiding a further eight to ten in the next financial year. We note that the financials now incorporate IFRS 16 for Leases which came into effect on January 1 2019. IFRS 16 does not impact cash balances but does lead to some material changes to the presentation of the financial statements.
Companies: Fulham Shore
The travel bans and quarantines due to COVID-19 have had a significant impact on PPHE since mid-March and are likely to continue to do so. We now expect a deeper and longer downturn than previously and a slower recovery, so we reduce our forecasts for occupancy for FY20, while holding our prior EBITDA margin assumptions reflecting cost cutting and a high level of government support on key costs. We downgrade FY20 revenue by c 32% and EBITDA by c 29%. The shares are trading at a c 54% discount to the last-quoted EPRA NAV of 2,546p per share.
Companies: PPHE Hotel Group
Boohoo Group has raised £197.7m in new equity as is readies itself to take advantage of M&A opportunities expected to emerge in the global fashion industry over the coming months. Following the fundraise we estimate the Group to have c.£500m in cash, giving it significant firepower to rapidly execute attractive brand acquisitions as they arise.
Motorpoint is the UK’s largest independent vehicle retailer, operating out of 11 sites throughout the UK. The company has a good track record of growth and roll out potential. Despite this, we believe the franchised dealers have a more diversified business model and Motorpoint’s performance will prove more cyclical. Given the asset backing and greater diversity of the listed, we see better opportunities elsewhere in the sector.
Companies: Motorpoint Group
Card Factory is a deep value retailer, offering a core product at 99p that retails for twice that at high street competitors. Despite the wide price gap, management is adamant that it does not need to raise prices to maintain profitability, with a range of actions in progress to optimise both top line and cost structure. The share price has fallen steeply, but this could present an opportunity as there are a number of potential catalysts.
Companies: Card Factory
Motorpoint has this morning released a solid set of interim results achieving adjusted PBT for the first half of £10.5m, in line with our forecasts, which we updated following a positive trading update in October. We leave our forecasts unchanged for the full year and expect adj. PBT of £20.3m in FY18E. The company has also announced this morning a £10m share buyback programme, signaling confidence in the future prospects of the business. While Motorpoint continues to trade at a premium to the franchised dealers, the company has a robust balance sheet, good underlying cash generation and confidence in the near-term earnings.