We have materially increased our FY17 profit forecasts for Stride (EPS raised by 14%) to reflect the acquisitions of Tarco and 8Ball and a positive trading update. The acquisitions double Stride’s estimated share of the UK online bingo market from 5% to 10% and are earnings accretive from day one. They mark a significant step forward in Stride’s ambition to be a global leader in digital soft gaming verticals. Its considerable progress is not yet reflected in its calendar 2017e EV/EBITDA of 8.3x.
The acquisitions of Tarco and 8Ball (on 31 August) add significant scale to Stride’s multi-branded, online bingo-led offering: it believes it is now the fourth largest online bingo operator in the UK. Both businesses are profitable and offer scope for cost and revenue synergies by leveraging Stride’s platform and marketing expertise. Stride paid £18.2m for Tarco (and its Netboost marketing arm) and £12.0m for 8Ball, with maximum earn-outs of £22m and £18m respectively, dependent on the achievement of aggressive EBITDA targets. The deals follow Stride’s previous move into social casino; it has indicated that it is also interested in other complementary soft gaming verticals such as online lottery and scratch cards.
Stride’s trading update reports that FY16 NGR was “not less than £47m”, implying organic growth of c 30%. We now expect real money gaming (RMG) organic growth of 20% in FY17 (previously 12%) as we believe Stride is successfully taking share from rivals such as Sun Bingo and Mecca in a strong market. Adding in Tarco and 8Ball means that we are increasing our FY17e EBITDA and EPS estimates by 46% and 14% respectively. More synergy benefits should accrue in FY18, post the earnout periods, outweighing the impact of the extension of POC gaming tax to free play from August 2017. With the £21.9m cash element of the initial consideration funded by a £27m share placing, the balance sheet is strong.
Stride has grown very strongly since its formation in 2012 and, while all acquisitions carry an element of execution risk, management’s track record in online bingo gives us considerable confidence. The group has further potential to expand in a consolidating market. On our upgraded numbers, the 2017e calendarised P/E of 11.9x is below the peer group average of 13.2x. The recent successful share placing has widened the institutional shareholder base and increased the free float.