Jackpotjoy plc (JPJ) has market-leading brands in female-oriented gaming. Our forecast 2017/18 EBITDA growth is 6% pa, underlying cash flows are strong and leverage should reduce rapidly after a major earn-out is paid this June. The rating is very low given its regulated bias (78%) with a 2017e P/E of only 6.6x. With a new, highly experienced UK management team and debt finance now in place, we expect a re-rating towards the sector 2017e P/E average of 12.1x, which would imply a valuation of c 900p per share.
JPJ’s key competitive advantage is its market-leading position in online bingo, particularly in the UK (23% share). While mature, the UK business is highly profitable and cash generative. Overseas, JPJ is expanding in the Nordics and Spain and new territories such as Latin America offer significant potential. JPJ (formerly Intertain) was assembled in 2014/15 through four acquisitions and grew extremely rapidly. In 2016 it undertook a strategic review (prompted in part by a short seller report). With a new, highly experienced UK management team and an organic growth strategy, the new name and move to the LSE marks a fresh start.
We expect JPJ to move to reporting in pounds sterling and forecast 6% EBITDA growth in 2017 and 2018, although higher interest dampens 2017e PBT. A December 2016 debt raise was an important milestone: it funded a £150m earn-out prepayment (to Gamesys) and secured extended operating and non-compete terms with this important platform provider. Future earn-out commitments (est. £128m) should be comfortably funded out of cash flow and we expect adjusted leverage (which includes earn-outs) to fall to 2.8x in 2018 and reach management’s 2x adjusted EBITDA target in 2019 (end 2016e: 3.5x).
JPJ’s 2017e P/E of 6.6x is little more than half the sector average of 12.1x and the EV/EBITDA of 7.1x stands at an 11% discount (indicative JPJ share price based on Intertain @ C$9.84). Legacy issues have been addressed and the UK listing should be the catalyst for a re-rating as the group demonstrates a lengthening track record as a 78% regulated, cash generative gaming operator in a growing and consolidating marketplace. A 10x 2017e P/E would imply a share price of 908p and a 9.2x 2017e EV/EBITDA, still slightly below larger peers such as 888. Our DCF comes in higher than this at 1,088p/share (range of 941p to 1,293p).