Stride’s FY18 results statement was dominated by the impact of recent regulatory news, as well as by the decision to significantly increase cash payouts. Our FY19 estimates now reflect a £7.1m fine for procedural failings (vs £4m previously), as well an additional five months of higher remote gaming duty (RGD), which equates to a one-off hit of £2.5m. None of this affects FY20 and, given Stride’s competitive positioning, we believe it should achieve market share gains and we raise our FY20 EBITDA from £14.5m to £16.0m. A special dividend of 8p has been announced, and going forward, Stride intends to pay out at least 50% of adjusted net earnings. The stock has bounced from its lows, but still trades at 5.0x EV/EBITDA and 8.0x P/E for CY19e.
As reported in the September trading update, FY18 adjusted NGR increased 8.7% to £89.0m, with an EBITDA of £16.1m. Despite the numerous regulatory burdens, the online, bingo-led business remains highly cash generative and Stride’s underlying cash conversion was c 88%, with £22.1m net cash at FY18. The company has announced a special dividend of 8p per share, as it intends to distribute £6m from the proceeds of the QSB disposal (Spanish bingo). The future dividend policy will be to distribute at least 50% of adjusted net earnings. Including the special dividend this equates to 12.4% dividend yield for FY19e.
The regulatory challenges in the UK have been well documented and, with c 96% of revenues derived from the UK, Stride Gaming has been particularly affected. We adjust our FY19 estimates to reflect the £7.1m fine by the regulator, as well as the one-off additional £2.5m in remote gaming duties. As another side effect of the higher tax regime, the company has taken a £9.8m impairment on its Tarco and 8Ball assets. Looking ahead, however, we expect the market to resume growth in FY20 and for Stride to take market share within the disrupted industry. Our FY20 NGR growth of 12% leads to a 10% increase in our FY20e EBITDA.
The stock has bounced from recent lows, but still trades towards the bottom of the peer group at 5.0x EV/EBITDA and 8.0x P/E for CY19e. Given the company’s superior technology, high cash conversion and new dividend policy, 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.