The UK government’s budget has provided long-awaited clarity on remote gaming duty, which will rise from 15% to 21%. This compares to the 20% that was widely expected, but is a better result than recent rumours of 25%. The increased duties will affect all online gaming operators (not sports) in the UK from October 2019 (rather than April), but at least the sector now has a degree of certainty. Other ongoing regulatory pressures include social responsibility, anti-money laundering, source of funds etc. All this is likely to lead to a continued market shake out, with dominant players likely to benefit. We note that as the largest online bingo-led operator in the UK, JPJ is particularly well positioned. 

The UK comprises c 63% of JPJ’s total revenues and the increase in RGD (from 15% to 21%) will have a c £12m annual impact on group EBITDA. At this stage we have not factored any mitigation into our forecasts and we also assume limited market growth due to the variety of regulatory burdens. Including the tax increase, our EBITDA estimates decline by 7% in FY19 and by 14% in FY20. Our FY19 and FY20 EPS forecasts decline by 9% and 16% respectively

As a reflection of the uncertain UK regulatory environment, JPJ shares have fallen by c 40% since June and now trade at only 5.6x P/E, 7.9x EV/EBITDA and 15.5% free cash flow yield for FY19e. Despite the regulatory challenges, the online bingoled business model remains highly cash generative and we anticipate annual operating cash flow of over £90m. Continual debt reduction should lead to a 2.5x net debt to EBITDA ratio at YE19 (vs 3.4x at H118) and we forecast dividends from next year.