Stride’s AGM confirmed that trading for the current financial year has been broadly in line, despite well documented regulatory headwinds. To counterbalance rising gaming taxes and other sector pressures, the group is implementing numerous cost-cutting initiatives, which will be key to hitting our FY19 EBITDA estimate. Looking ahead, we expect growth to resume in FY20 (once many regulatory burdens have been lapped) and we believe Stride will take market share within a disrupted industry. Cash conversion is c 90% and the new payout policy leads to a 15.0% yield in FY19 (including the special dividend). The stock continues to trade at a meaningful discount to peers, at 3.7x EV/EBITDA and 6.5x P/E for CY19e.
Stride has confirmed that trading since the start of FY19 has been broadly in line with its expectations, despite continued regulatory challenges. As we detailed in our November update, the government is raising the point of consumption tax from 15% to 21% from April 2019 and the entire sector has been pressured by an array of regulatory burdens (social responsibility, AML, source of funds etc). To mitigate the impact, Stride is implementing numerous cost cuts (including office closures, headcount reduction), while still leveraging its proprietary technology to drive synergies. Looking ahead, we expect growth to resume in FY20 and we believe Stride will take market share within a disrupted industry. Our forecasts remain unchanged, although we note that the pace of cost-cutting will be key to hitting our FY19 EBITDA forecast. We expect more information at the H119 results in May
Despite the sector challenges, the online gaming business remains highly cash generative and Stride’s cash conversation rate is c 90%. Net cash at end FY18 was £22.1m and Stride has stated that it will now distribute at least 50% of adjusted net earnings in dividends. In addition, a further c 8.0p per share will be distributed as a special dividend in 2019, following the sale of QSB (YoBingo) to Rank Group.
The stock continues to trade towards the bottom of the peer group at 3.7x EV/EBITDA and 6.5x P/E for CY19e. Given the company’s superior technology, high cash conversion and new dividend policy (leading to a 15.0% FY19e dividend yield), this seems unjustified, in our view. However, for a meaningful re-rating, we expect investors to focus on synergies, cost controls and ultimately an uptick in EBITDA, which we only anticipate in FY20.