Stride is gaining market share with strong organic growth in real money gaming (RMG). In its FY17 pre-close trading update, the company expects to meet the upper end of consensus and we have increased our FY17 and FY18 EBITDA forecasts by c 2.5%. The 8Ball earnout is now complete, with the Tarco earnout period ending in December. Stride has invested heavily in technology and operational leverage should kick in as acquired customers migrate to the higher-margin proprietary platform. The stock trades at 7.0x CY18e EV/EBITDA, a meaningful discount to peers.
On the back of robust organic growth and strong trading from acquired assets, Stride expects to meet the upper end of consensus for FY17, and we have nudged up our FY17 revenue forecast to £89.5m (from £88.8m) and our FY17 EBITDA goes from £19.5m to £20.0m. For FY18, our headline revenue remains unchanged, although we have altered the mix in favour of RMG (vs social gaming) and we have increased EBITDA by 2.7%. FY18 and FY19 EPS have been lowered by c 3.5% to reflect an increased share count. We anticipate further information on all verticals at the FY17 results on 21 November.
Stride Gaming acquired two bingo assets in August 2016 and the earnout payment for 8Ball has now been agreed at £13.1m (vs a total possible £18m), split between £4.0m cash and the issuance of 4.1m new shares. The Tarco earnout period ends in December, with a maximum payment of £22.0m. Post both earnouts, Stride believes it can achieve £2.5m of cost synergies and £3m of revenue synergies, as customers migrate to the higher-margin proprietary platform. In addition, the final $1.2m earnout consideration for the social gaming business InfiApps has been settled.
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 7.0x CY18e EV/EBITDA is below the peer group average. In our opinion, a demonstrable success in integrating the recent acquisitions, post all the earnouts, is key for a re-rating.