Jackpotjoy plc’s (JPJ) maiden London-listed results demonstrated the benefits of leading market brands in a profitable and cash generative business. Pro-forma group revenues grew 15% in FY16, with industry leading EBITDA margins of 38%. The stock has suffered from unusually high net debt, a lack of dividend and a complex relationship with Gamesys. However, the revised terms of the contract, together with the end of the major earn-out period, suggest that deleveraging will be on track. 2017 trading multiples of 6.7x EV/EBITDA and 5.9x P/E are far below the sector and, as JPJ continues to demonstrate its market dominance in bingo-led gaming, the stock appears attractive as a turn-around candidate.
JPJ reported robust first results as a UK-listed stock. Pro-forma revenues grew 15% to £269m in FY16, with an adjusted EBITDA of £102.2m, above our estimates of £265m and £98.6m respectively. Operating cash flow conversion was 81% (101% excluding an exceptional transaction). As a market leader in online bingo-led gaming, growth in the Jackpotjoy division was particularly strong, with an EBITDA margin of 45%. In line with JPJ expectations, Q117 revenue grew c 10%.
JPJ’s relationship with Gamesys has been complex and expensive, with Gamesys assuming responsibility for all aspects of the Jackpotjoy division. From this year, however, a significant change is underway, following an amendment to the original terms and the end of the major earn-out period. JPJ is increasing its control over the strategic planning and budget and, from April 2019, we expect the dedicated Jackpotjoy staff at Gamesys to move over to JPJ. Although the expiration of a noncompete clause (April 2019) remains a concern, we believe this is mitigated by growing barriers to entry and meaningful cross-shareholdings.
JPJ continues to trade at a significant discount to its peer group, at 6.7x EV/EBITDA and 5.9x P/E for 2017, reflecting legacy concerns over its relationship with Gamesys, high net debt, the lack of dividend and low stock liquidity. To counterbalance, the investment case rests on JPJ’s strong market positioning and high FCF yield (14.4% and 18.6% in 2017e and 2018e), which should begin to drive value towards equity and further enable cash returns. Key catalysts will be the payment of the earn-out in June, as well as continued evidence of underlying growth, margin expansion and debt repayment.