Driven by an impressive 42% organic growth in the Vera&John division, JPJ reported FY18 revenue growth of 10% to £319.6m with an EBITDA margin of 35.3%. International now comprises 43% of revenues and we expect this to increase as the company diversifies away from the UK. Cash generation remains strong and adjusted net debt/EBITDA has fallen from 3.6x in FY17 to 2.7x in FY18. Management is committed to a progressive dividend policy (once the ratio is sustainably below 2.5x) and would also consider share buybacks at that point. The stock is trading at the bottom of the peer group at 6.7x P/E and 8.2x EV/EBITDA for FY19e.
In line with the recent trading update, FY18 revenues increased 10% to £319.6m and EBITDA grew 9% to £112.7m. The growth was driven by a 42% increase in Vera&John revenues, as JPJ is successfully diversifying its business into international markets. At FY18, the UK comprised 57% of revenues, with other notable markets including Japan (13%), Spain (10%) and Sweden (8%). Following the sale of Mandalay, we expect the group to concentrate on its core Jackpotjoy brand in the UK, as well as further expand internationally. Management has reported double-digit revenue growth for the first two months of FY19 and trading is in line with expectations. Our forecasts remain unchanged, although we believe there could be upside from organic growth internationally.
Similar to prior periods, JPJ’s 94% cash conversion led to operating cash flow of £105.9m and the company ended the year with unrestricted cash of £84.4m. All the major earnouts have now been paid and net debt is reducing rapidly – the adjusted net debt/EBITDA ratio was 2.68x at FY18 vs 3.57x in FY17. Once this ratio is comfortably below 2.5x, management remains committed to introducing a progressive dividend policy and has further stated that it will consider share buybacks at that point. Our forecasts include dividends from this year.
As a reflection of the uncertain regulatory environment, the UK gaming sector fell sharply in 2018 and JPJ is c 35% off last year’s highs. The shares now trade at only 6.7x P/E, 8.2x EV/EBITDA and 13.2% free cash flow yield for FY19, towards the bottom of the peer group. Given the international growth prospects, combined with steady net debt reduction, this seems unjustified in our view.