JPJ Group plc (JPJ’s) Q2 headline numbers were in line with our expectations, with growth in international markets offsetting weaker UK revenues. The company remains competitively well positioned across all its key markets and is highly cash generative. JPJ has signed a share purchase agreement for the sale of the social business for £18.1m cash, which we estimate had annual revenues of £12m and EBITDA of £3.5m. We have adjusted our EBITDA to reflect the sale, but our profit forecasts would otherwise have been broadly unchanged. The stock continues to trade at a meaningful discount to peers, at 9.8x EV/EBITDA and 8.2x P/E for FY19e.
JPJ reported Q218 revenues of £80.5m, driven by a 39% increase in Vera&John (£24.2m). Jackpotjoy divisional revenues declined by 3%, largely as a result of weakness in the social division (down 31%), but also reflecting ongoing regulatory challenges across the UK online bingo sector. Group Q218 EBITDA of £29.7m was in line with our expectations, also boosted by international growth in the Vera&John division.
JPJ has signed a share purchase agreement for the sale of the social business for £18.1m, with the aim of focusing on the core real money gaming business. We estimate that this business contributes approximately £12m revenues and £3.5m EBITDA annually. Altogether, we have lowered group revenues by c 6% (uncertain UK outlook plus sale of social) and EBITDA is lowered by c 3-4% to reflect the social business sale. We have not included a potential increase in UK gaming taxes in our forecasts, which might occur after the budget (based on FY18 figures, a rise from 15% to 20% would negatively affect EBITDA by c £9m).
The shares have risen 23% in the year to date, but still trade at a discount to peers at 8.2x adjusted P/E and 9.8x EV/EBITDA for FY19e. Although the online bingo sector faces a number of regulatory challenges in the UK, JPJ remains well positioned competitively and is highly cash generative. We continue to expect debt reduction from this point and dividends from next year. Post period, JPJ’s shares were transferred to a premium listing, a further validation of the company’s strengthened corporate governance.