Driven by the market-leading Jackpotjoy division, Q1 gaming revenues rose 11% to £71.4m with an EBITDA margin of 40.9% and underlying cash conversion of c 100%. Q2 trading has started well across all divisions. Adjusted net debt/EBITDA of c 4.0x remains high, but Jackpotjoy plc (JPJ) is comfortably positioned to pay a major c £95m earnout in June and we expect significant deleverage from 2018. The market is pricing in a high degree of execution risk, with 2017 trading multiples of 6.9x EV/EBITDA and 6.1x P/E. Despite regulatory headwinds, we forecast continued strong underlying growth and we would expect a re-rating as debt repayments begin to drive value to equity.
JPJ’s strong Q1 results were bolstered by the Jackpotjoy division, which grew 14% with an EBITDA margin of 51.2%. Q2 trading has started well across all divisions and management expects revenue growth in line with the wider market. At March 2017, average LTM active customers increased 15% to 239,452 vs. the prior year and average real money gaming (RMG) per month grew 17% to £20.9m. Our EBITDA forecasts are broadly unchanged, although we have adjusted our revenue figures to reflect a shift in mix. We introduce 2019 forecasts, which continue the 2018 trend of single-digit revenue growth, progressive taxes in key markets (notably Sweden in 2019) and lower finance charges.
The major Gamesys earnout period finished in March and payments are due in June (c £95m) and 2018 (c £44m for Botemania). With £112m unrestricted cash balance in Q1 and an ongoing quarterly operating cash flow of c £25m, JPJ is comfortably positioned to internally fund its future obligations. We forecast stable net debt levels this year (£307.5 m in 2017), falling to £214.2m at FY2019. During 2019, we expect JPJ to reach its target 2.0x adjusted net debt/EBITDA and the company would then be in a position to commence dividend pay-outs.
Despite its market dominance, JPJ trades at a meaningful discount to its peer group, at 6.9x EV/EBITDA, 6.1x P/E and 15% free cash flow yield for 2017. The valuation reflects legacy concerns over the Gamesys relationship, high leverage, the lack of dividend and low stock liquidity. In our view, cash generation should lead to demonstrable debt reduction from 2018 and we would expect a re-rating as the market regains confidence in the business model.