Jackpotjoy plc (JPJ) has produced another set of robust quarterly earnings, with Q217 revenues increasing 17% to £75.2m and a 39.9% EBITDA margin. The core Jackpotjoy division grew 18% and is gaining market share. Q3 has started well, management has reiterated its expectations for FY17 and our forecasts remain unchanged. The stock trades at a significant discount to peers, with 2018e multiples of 7.2x EV/EBITDA, 6.1x P/E and 15.0% free cash flow yield. The balance sheet is simplifying following a major earn-out payment and, as the company continues to demonstrate its market dominance, we would expect a re-rating in the shares.
Q2 revenues grew by 17% to £75.2m, primarily driven by an 18% increase in the core Jackpotjoy division. Mandalay has reversed the decline in Q117 and is up 10% sequentially. Benefiting from currency, Vera&John grew 30% vs Q216. Average LTM active customers increased 13% to 243,896 vs the prior year and average real money gaming (RMG) per month grew 16% to £21.8m. The Q2 adjusted EBITDA margin of 39.9% is expected to decline in H217, with the impact of higher gaming taxes as well as a significant marketing campaign. Our forecasts remain unchanged.
Following the £94.2m earn-out payment to Gamesys, JPJ ended the quarter with an unrestricted cash balance of £24.0m and net debt of £325.3m. The most significant remaining obligation is a c £44m earn-out payment in June 2018 (for Botemania). Adjusted net debt/EBITDA remains high at 3.6x, but underlying cash conversion in Q217 was 99% and JPJ currently generates c £20-25m operating cash flow per quarter. We forecast net debt of £290.2m in 2018, with an adjusted net leverage of 2.7x, reaching the company’s target of 2.0x during 2019.
Since its LSE listing, JPJ has produced three sets of robust quarterly reports. The stock trades at a meaningful discount to its peer group, at 7.2x EV/EBITDA, 6.1x P/E and 15.0% free cash flow yield for 2018. The valuation reflects legacy concerns over the Gamesys relationship, high leverage, the lack of dividend and low stock liquidity. In our view, cash generation should lead to demonstrable debt reduction from 2018 and we would expect a re-rating as the market regains confidence in the business.