Once again, a strong performance in international markets has fully offset the well-flagged regulatory challenges in the UK. Q119 revenues increased by 13% to £83.3m, driven by a 62% growth in the Vera&John division. Operating leverage from the proprietary platform contributed to a 16% increase in adjusted EBITDA (£29.0m vs £24.9m). Net debt/EBITDA has fallen below 2.5x and management will provide an update on plans to return cash to shareholders in August. For FY20 the stock trades at 6.5x P/E, 8.0x EV/EBITDA, with an estimated dividend yield of 6.4%.
Given the regulatory challenges in the UK, many operators are concentrating on international diversification and JPJ now derives less than 50% of revenues from the UK. The geographic mix reflects trends prevalent in global gaming sector: Japan has grown from 12% to 25% of revenues and is a fast-growing, unregulated market (no taxes), whereas Swedish revenues fell from 8% to 5% of the total, as the newly regulated market has attracted intense competition. In Spain, revenues were flat, as quarterly revenues can be lumpy and Q119 was curtailed by a higher than typical number of VIP winners. We are leaving our headline forecasts broadly unchanged, although we believe there could be upside from the more volatile international markets.
In the core UK market, Q119 results continue to be affected by regulatory measures that were introduced during 2018; Jackpotjoy UK (c 40% of total revenues) continued single-digit decline. However, once the impact of closed accounts (from high value VIPs) begins to annualise in H219, we believe the UK business should return to single-digit revenue growth. In terms of margins, the rise in remote gaming duty from April 2019 (from 15% to 21%) will impact EBITDA by c £10m a year.
JPJ is successfully concentrating on higher-growth markets and continues to deliver strong results with high cash flow. However, the stock still trades towards the bottom of its peer group, at 6.5x P/E, 8.0x EV/EBITDA and an estimated dividend yield of 6.4% for FY20. Given the international growth prospects, combined with steady net debt reduction, this seems unjustified in our view.