The entire UK gaming sector has been stung by recent regulatory changes and, like other operators, Stride’s strategy is to diversify its UK-centric model into international markets. In the UK, the company is gaining market share, with H118 adjusted revenues increasing 14% to £44.9m, driven by 25% growth in the proprietary platform. However, we have lowered our total FY18 and FY19 EBITDA forecasts by 16.6% and 28.7% to reflect increased costs associated with regulatory compliance and international expansion. The stock has fallen 18% year to date and trades at 8.3x EV/EBITDA and 13.4x P/E for CY18e.
Stride Gaming is continuing to gain market share in the UK, with H118 adjusted revenues increasing 14% to £44.9m, driven by 25% growth from the core proprietary platform (66% of revenues), which includes an encouraging £1.0m contribution from the Aspers JV. Adjusted EBITDA declined 1% to £8.7m, as a result of the anticipated £1.7m impact from the point of consumption tax (POCT) on free bets. Unsurprisingly, the social gaming business (InfiApps) has been reclassified as “held for sale”, affecting FY18 revenues by £5m and EBITDA by £0.6m. Including the Aspers JV, our core revenue forecasts decline from £93.6m to £91.4m in FY18 and from £104.5m to £103.1m in FY19.
Rising regulatory costs are now an embedded feature in the industry and, although Stride is well positioned to handle the additional burdens, we anticipate that EBITDA margins will be depressed in the near term. To counterbalance this, Stride is reinvesting into international expansion and higher-growth verticals. Including the impact of the proposed disposal of social, we lower our group EBITDA by 17% in FY18 and by 29% in FY19. Our estimates do not factor in a potential increase in remote gaming duty (RGD); a 5% increase would reduce EBITDA by c 27%.
The stock has fallen 18% this year and trades at 8.3x EV/EBITDA and 13.4x P/E for CY18e, at the lower end of the peer group, and reflects the above average exposure to the UK’s regulator. Nonetheless, core revenues are still growing strongly and the business remains very cash generative. For a re-rating, we expect investors to focus on synergies from the acquired businesses (8ball, Tarco), international growth, cost controls and, ultimately, an uptick in EBITDA.
