Stride’s FY18 trading update confirms the widely reported headwinds facing the UK bingo-led market, with a c 3% decline in real money gaming (RMG) in H218. More positively, FY18 RMG EBITDA appears to be in line (or slightly better) than our recently reduced estimate. Importantly, Stride’s high-margin proprietary platform is a key differentiator and the company remains well placed to gain market share. The balance sheet is strong and we expect strong cash flow through synergies and strategic growth. The stock has fallen 60% this year on the back of downgrades and a UKGC fine (which appears to be c £4m) and now trades at depressed levels of 5.8x P/E and 3.3x EV/EBITDA for CY19e.
Stride’s FY18 net gaming revenues (excluding social) increased by c 4% to at least £85m, which reflects a c 3% decline in H218 and confirms the continued stagnation of the overall online bingo-led market. However, due to tight cost controls, FY18 EBITDA is in line with our recently reduced expectations, with core RMG EBITDA estimated at 5% ahead. As highlighted in our May update, the market is expecting a further increase in remote gaming duty after November’s budget (from 15% to 20%). This is now included in our forecasts from April 2019 and, as a consequence, we have lowered our FY19 and FY20 EBITDA by 1.2% and 13.4%.
Stride’s proprietary platform is a key differentiator in the online gaming market, enabling better KPIs and cost controls compared to peers. In addition to extracting synergies from its recent acquisitions, the technology is being deployed for organic expansion in UK gaming (B2C and B2B casino), as well as cost-effective international B2B. We estimate that the Stride Together B2B division contributed £3.5m to FY18 adjusted net revenue. The balance sheet is robust and we note that Stride will make a provision of £4m (c 20% of end April net cash) for the recently announced fine from the UKGC (August 2018).
The stock has fallen 60% year to date and trades at depressed multiples of 3.3x EV/EBITDA and 5.8x P/E for CY19e. Given the company’s superior technology, high net cash and continued strong cash generation (despite the regulatory environment), this seems unjustified in our view. For a meaningful re-rating, we expect investors to focus on synergies, cost controls and ultimately an uptick in EBITDA.