The UK government has raised remote gaming duty (RGD) from 15% to 21%. This was better than recent rumours of 25%, but 1% higher than market expectations of 20%. With implementation from October 2019 (rather than April), we raise our FY19e EBITDA by 5%. However, assuming no mitigation, we lower our FY20e EBITDA by £3m to £14.5m. While regulatory pressures are likely to remain a feature of the UK gaming sector, Stride is the number three online bingo-led operator and should benefit from its strong market position. The balance sheet is robust (£20m net cash) and, despite the increased taxes, we expect strong cash flow through synergies and strategic growth. The stock has fallen 58% this year and trades at depressed levels of 3.6x EV/EBITDA and 5.8x P/E for CY19e.
The government’s budget has provided long-awaited clarity on remote gaming duty, which will rise from 15% to 21%. This is marginally higher than the widely expected 20%, but a better result than recent rumours of 25%. The increased duties will affect all online gaming operators (not sports) in the UK from October 2019, but at least the sector now has a degree of certainty. Other ongoing regulatory pressures include social responsibility, anti-money laundering, source of funds, etc. All this is likely to lead to a continued market shake-out, with dominant players set to benefit. We note that as the third largest online bingo-led operator in the UK, Stride is very well positioned.
With almost 100% of revenues derived from the UK, Stride Gaming has been particularly affected by UK regulatory burdens. Factoring in the October 2019 implementation date, we adjust our FY19 tax estimate back to the blended 19% rate (which includes bonus tax) and EBITDA rises from £16.2m to £17.0m. For FY20e, we now assume no mitigation and using a 26% blended tax rate (including bonuses), our EBITDA declines from £17.5m to £14.5m.
The stock has fallen 58% ytd and trades at depressed multiples of 3.6x 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.