Despite the deluge of negative news across the UK gaming sector, JPJ Group plc (JPJ) has produced another strong quarter, with gaming revenue growth of 8% to £77.8m and an EBITDA margin of 37%. The strategy to expand beyond the UK is clearly paying off; Vera&John revenues increased 40% and international now represents 44% of total revenues. Net debt is reducing rapidly, helped by Q318 operating cash flow of £33m, as well as the £18m cash from the disposal of the social business, and we anticipate dividends from next year. JPJ shares have fallen by c 30% ytd June and now trade at only 5.2x P/E, 7.0x EV/EBITDA and 16.6% free cash flow yield for FY19e.
Q318 revenues increased 8% to £77.8m, driven by a 40% growth in the Vera & John division, which offset a 3% decline in Jackpotjoy revenues. International now comprises 44% of total revenues, as a result of JPJ’s strategy to expand beyond the UK. Q318 adjusted EBITDA grew 13% to £28.8m, demonstrating strong operational discipline, as well the benefits of the Vera&John proprietary platform. Management has stated it is comfortable with consensus expectations for FY18 and our forecasts remain broadly unchanged.
As discussed in our October Update, the gaming sector in the UK faces a number of regulatory headwinds and the latest burden is the increase in remote gaming duty (RGD) (15% to 21%), which starts in October 2019. For JPJ, this is expected to reduce EBITDA by £12m, but we note that smaller players (with more reliance on bonuses etc) will feel a greater impact and JPJ remains competitively very well positioned. JPJ has announced it will not renew its anti-compete clause with Gamesys – this makes sense to us as JPJ’s market leadership in the current environment is unlikely to be challenged by the launch of new brands.
As a reflection of the uncertain UK regulatory environment, JPJ shares have fallen by c 30% ytd and now trade at only 5.2x P/E, 7.0x EV/EBITDA and 16.6% free cash flow yield for FY19e. Despite the regulatory challenges, the online bingo-led business model remains highly cash generative and from next year 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 3.0x at Q318) and we forecast dividends from next year.