The global online gaming market generated c £40bn of gross gaming revenues (GGR) in 2018 and newly regulating markets (the US) are expected to contribute to 7% CAGR to 2023 (according to H2 Gambling Capital (H2GC)). However, while regulated markets have provided significant opportunities for operators to date, government intervention remains a constant threat and legislation is tightening. Some mature markets (notably the UK) have been raising taxes and implementing regulatory burdens, which increases the cost of business. In our view, success will depend on a combination of scale, diversification, proprietary technology and a strong balance sheet. Many of the 12 operators in this report should benefit from these dynamics and sector valuations remain attractive, at 12.6x P/E, 8.2x EV/EBITDA and 6.0% dividend yield for FY19.
For online gaming, there is a very wide spectrum of regulatory frameworks in place; these have largely determined market size, the number of participants and the level of illegal gambling. Legislation ranges from the explicitly prohibited (black) to licensed markets that are fully open to commercial operators (white). Additionally, there are many jurisdictions that have yet to legislate for online products and the framework remains ambiguous (grey). Europe comprises 54% of global online GGR, with many EU members paving the way in terms of regulation. The US is still a nascent market, but is expected to boost sector growth in the medium term. Tax rates, online penetration and other regulatory requirements vary widely and we provide a geographic overview of different licencing regimes on page 7.
In regulated (and soon to be regulated) markets, legislation has continued to evolve, which has generally had the impact of increasing costs and barriers to entry. These specifically include rising gaming taxes, consumer protection initiatives and advertising restrictions. We expect that the more technologically advanced, internationally diversified players will continue gaining share, as small players are subsumed or exit the industry altogether. Consolidation is likely to remain a theme in the sector, with players vying for top positions in attractive markets. This has been amply evidenced by high-profile M&A, such as GVC/Ladbrokes, TSG/Sky Betting & Gaming, as well as other deals in the UK, US Australia and Europe.
The gaming industry is subject to government intervention and therefore the sector’s investment risk is relatively high. Nonetheless, the online model continues to be characterised by structural growth, attractive margins and strong free cash flow generation, with a sector average dividend yield of 6.0%. The leading operators should continue to benefit from these dynamics, as their market share gains should offset rising costs. Ultimately, the best positioned are those with scale, diversity and ability to continue consolidating the market (as shown by GVC, TSG, Playtech). Regarding the smaller players, we expect that they will seek consolidation in some form, in order to remain relevant in the long run.