Stride reported net gaming revenue (NGR) growth of 18% to £89.9m in FY17, driven by an impressive 39% organic growth in the core real money gaming (RMG). Adjusted EBITDA of £20.2m was slightly above our recently raised estimates. Stride has invested heavily in technology and operational leverage should kick in as acquired customers migrate to the higher-margin proprietary platform. A small investment into the Indian rummy market could also lead to diversified revenue growth. Strong cash flow and £17.4m net cash leaves the company well positioned to pay the final Tarco earnout. The stock trades at CY18e 8.2x EV/EBITDA and 12.0x P/E, slightly below peer group averages. Profitability in the core business should offset potential investment losses and our estimates remain largely unchanged.
Stride operates over 100 bingo sites and has c 12% share in the UK online bingo market. FY17 pro-forma NGR increased 18% y-o-y to £89.9m with adjusted EBITDA increasing 24% to £20.2m. The highlight was 39% growth in RMG to £48.6m from the in-house proprietary platform. Non-proprietary platform revenues (Tarco and 8Ball) grew 16% to £33.1m and, as expected, social gaming NGR declined 37% to £8.1m. Key RMG operational highlights were a 26% increase in deposits to £147m and a 29% increase in yield per player to £147. Our revenue and EBITDA forecasts remain largely unchanged.
Stride reported operating cash flow of £14.3m, with net cash of £17.4m at end August, positioning the company well for further acquisitions and/or investments. An increased contingent consideration (due to better than expected EBITDA) of £17.4m (from £5.6m) for the Tarco assets (51% cash/49% shares) should be comfortably met with internal resources. Additionally, as part of its diversification strategy, Stride has announced a £3m investment for a controlling stake in Passion Gaming, a rummy-focused online gaming business in India. This is included in our RMG forecasts and, importantly, there is no future earnout obligation.
Stride is fully regulated, successfully increasing market share, growing well ahead of the sector average and generating cash, with a progressive dividend policy. However, its 8.2x EV/EBITDA and 12.0x P/E for CY18e remain below the peer averages of c 9x and 13x. In our opinion, demonstrable success in integrating the recent acquisitions, following all the earnouts, is key for any significant re-rating.
