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JPJ Group plc — Global growth keeps profits intact

JPJ Group plc — Global growth keeps profits intact

JPJ Group plc (JPJ’s) Q2 headline numbers were in line with our expectations, with growth in international markets offsetting weaker UK revenues. The company remains competitively well positioned across all its key markets and is highly cash generative. JPJ has signed a share purchase agreement for the sale of the social business for £18.1m cash, which we estimate had annual revenues of £12m and EBITDA of £3.5m. We have adjusted our EBITDA to reflect the sale, but our profit forecasts would otherwise have been broadly unchanged. The stock continues to trade at a meaningful discount to peers, at 9.8x EV/EBITDA and 8.2x P/E for FY19e.

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Written by

JPJ Group plc

Global growth keeps profits intact

Q2 results

Travel & leisure

14 August 2018

Price

1,014p

Market cap

£753m

Net debt (£m) at 30 June 2018

354.3

Shares in issue

74.3m

Free float

95%

Code

JPJ

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.7

23.5

54.8

Rel (local)

3.2

24.9

48.0

52-week high/low

1,036.0p

655.5p

Business description

JPJ Group plc is a leading online gaming operator mainly focused on bingo-led gaming targeted towards female audiences. Over 70% of revenues are generated in regulated markets.

Next events

Q3 results

13 November 2018

Analysts

Victoria Pease

+44 (0)20 3077 5700

Katherine Thompson

+44 (0)20 3077 5730

JPJ Group plc is a research client of Edison Investment Research Limited

JPJ Group plc (JPJ’s) Q2 headline numbers were in line with our expectations, with growth in international markets offsetting weaker UK revenues. The company remains competitively well positioned across all its key markets and is highly cash generative. JPJ has signed a share purchase agreement for the sale of the social business for £18.1m cash, which we estimate had annual revenues of £12m and EBITDA of £3.5m. We have adjusted our EBITDA to reflect the sale, but our profit forecasts would otherwise have been broadly unchanged. The stock continues to trade at a meaningful discount to peers, at 9.8x EV/EBITDA and 8.2x P/E for FY19e.

Year end

Revenue (£m)

EBITDA*
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Dividend yield (%)

12/16

269.0

102.2

83.5

112.6

0.0

9.0

0.0

12/17

304.7

108.6

78.2

103.9

0.0

9.8

0.0

12/18e

315.3

109.2

89.2

114.5

0.0

8.9

0.0

12/19e

336.2

113.1

98.6

123.7

40.0

8.2

3.9

12/20e

356.5

118.1

104.6

130.7

45.0

7.8

4.4

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

International offsets slower UK

JPJ reported Q218 revenues of £80.5m, driven by a 39% increase in Vera&John (£24.2m). Jackpotjoy divisional revenues declined by 3%, largely as a result of weakness in the social division (down 31%), but also reflecting ongoing regulatory challenges across the UK online bingo sector. Group Q218 EBITDA of £29.7m was in line with our expectations, also boosted by international growth in the Vera&John division.

Sale of social business for £18.1m

JPJ has signed a share purchase agreement for the sale of the social business for £18.1m, with the aim of focusing on the core real money gaming business. We estimate that this business contributes approximately £12m revenues and £3.5m EBITDA annually. Altogether, we have lowered group revenues by c 6% (uncertain UK outlook plus sale of social) and EBITDA is lowered by c 3-4% to reflect the social business sale. We have not included a potential increase in UK gaming taxes in our forecasts, which might occur after the budget (based on FY18 figures, a rise from 15% to 20% would negatively affect EBITDA by c £9m).

Valuation: 8.2x FY19e P/E

The shares have risen 23% in the year to date, but still trade at a discount to peers at 8.2x adjusted P/E and 9.8x EV/EBITDA for FY19e. Although the online bingo sector faces a number of regulatory challenges in the UK, JPJ remains well positioned competitively and is highly cash generative. We continue to expect debt reduction from this point and dividends from next year. Post period, JPJ’s shares were transferred to a premium listing, a further validation of the company’s strengthened corporate governance.

International offsets UK declines

Revenues: Q218 driven by 39% growth in Vera&John

Q218 revenues increased 7% y-o-y to £80.5m, with weakness in the UK fully offset by a 39% growth in Vera&John.

Within the Jackpotjoy division, the company reported a 31% decline in the social business, which now comprises only 5% of divisional revenues. Mandalay was also slightly disappointing and we believe that across the sector, growth in the UK online bingo market is becoming more elusive.

At June 2018, average active customers per month grew 7% to 256,861 vs the prior year and average real money gaming revenue per month increased 15% to £25.0m. This equates to monthly real money gaming revenue per average active customer of £96, a y-o-y increase of 8%.

EBITDA: Q218 in line, boosted by international

In line with our estimates, Q218 group EBITDA was £29.7m, which represents a margin of 37.0% vs 39.9% in the prior year. Vera & John’s EBITDA of £8.4m was above estimates and fully compensated for the lower contribution from the UK. As in the past two quarters, the UK business was affected by the introduction of bonuses into the point of consumption tax (POCT 2) and total gaming taxes were 12.5% of total revenues, vs 11.3% in Q217. In addition, margins were affected by continued marketing campaigns across the group. Total marketing costs were 16.5% of revenues vs 14.4% in the prior year.

Final major earnout paid

The bingo-led business is characterised by high cash conversion and JPJ produced £24.5m of operating cash flow in the quarter, in line with our expectations. Despite the payment of the last major earnout to Gamesys, JPJ ended the quarter with an unrestricted cash balance of £29.5m. Adjusted net debt was £362.9m, which equates to 3.4x annualised adjusted net debt/EBITDA. This compares to 3.6x at December 2017. With yearly operating cash flow of £100m, we believe this ratio will decline to 2.8x by year end 2018 and 2.1x by year end 2019.

Outlook and forecast changes; adjusting for social

JPJ has signed a share purchase agreement for the sale of the social business for £18.1m, with the aim of focusing on the core real money gaming business. We estimate that this business contributes approximately £12m revenues and £3.5m EBITDA annually. Altogether, we have lowered group revenues by c 6% (largely due to the uncertain UK outlook) and our EBITDA is lowered by c 3-4% to reflect the social business sale. Since growth should be derived globally where gaming taxes are often lower (or non-existent), a shift away from the UK is expected to enhance EBITDA margins. We have not included a potential increase in UK gaming taxes in our forecasts, which might occur after the budget (based on FY18 figures, a rise from 15% to 20% would negatively affect EBITDA by c £9m).

Jackpotjoy (72% of revenues)

Jackpotjoy divisional Q218 revenues declined 3% to £56.3m vs the prior year, largely as a result of a weaker performance in social and a continuing decline in Mandalay. As highlighted by peers, the UK online bingo market is facing a number of regulatory challenges and we believe that significant growth domestically will be more difficult to achieve across the sector. To compensate for less momentum in Jackpotjoy UK, Starspins (UK) and Botemania (Spain) now comprise approximately 25% of divisional revenues, suggesting 27% growth vs the prior year.

In terms of profit, divisional EBITDA was £23.7m (42.1% margin) and compares to 47.6% margin in the prior year. The margin decline was due to rises in UK gaming taxes and the ongoing marketing campaign. Helpfully, the Spanish gaming taxes have now been lowered from 25% to 20%.

We have removed the social business from our forecasts on a pro-forma basis from FY18, which has the impact of lowering revenues by £12m and EBITDA by £3.5m.

Vera&John (28% of revenues)

JPJ has continued its impressive growth trajectory in international markets and Vera&John Q218 revenues increased by 39% y-o-y to £24.2m, equating to 36% in constant currency. As the business continues to scale and gain momentum in international markets, Q218 adjusted EBITDA of £8.4m represented an EBITDA margin of 34.6% (vs 29% in the prior year).

Cash flow and balance sheet

Following the £63.5m earnout and milestone payments in June, JPJ ended the quarter with an unrestricted cash balance of £29.5m and adjusted net debt of £362.9m. Unadjusted net debt was £354.3m (excluding £8.6m contingent consideration). EBITDA cash conversion of 86% produced a post-interest total operating cash flow of £24.5m and is in line with our yearly estimates of c £100m.

As discussed above, total contingent consideration has decreased from £59.6m at FY17 to £8.6m and adjusted annualised net debt/EBITDA ratio was 3.4x at Q218 vs 3.6x at FY17. Including the £18.1m cash for the social business, we forecast unadjusted net debt of £292m in 2018, with an adjusted net leverage of 2.8x, reaching the company’s target of less than 2.0x during 2019.

Exhibit 1: Changes to estimates

Revenue (£m)

EBITDA (£m)

EPS (p)

Old

New

% chg

Old

New

% chg

Old

New

% chg

2018e

334.5

315.3

(5.7)

113.6

109.2

(3.8)

120.4

114.5

(4.9)

2019e

358.7

336.2

(6.3)

116.5

113.1

(2.9)

128.1

123.7

(3.4)

2020e

382.0

356.5

(6.7)

122.0

118.1

(3.2)

135.8

130.7

(3.7)

Source: Company accounts, Edison Investment Research

Exhibit 2: Financial summary

£m

2015

2016

2017

2018e

2019e

2020e

December

PROFIT & LOSS

Revenue

 

 

194.6

269.0

304.7

315.3

336.2

356.5

Cost of Sales

(101.4)

(130.7)

(147.5)

(159.1)

(176.3)

(186.6)

Gross Profit

93.3

138.3

157.2

156.2

160.0

169.9

EBITDA

 

 

70.4

102.2

108.6

109.2

113.1

118.1

Operating Profit (before amort. and except.)

70.1

101.6

108.2

108.7

112.6

117.6

Intangible Amortisation

(50.6)

(55.5)

(62.6)

(62.0)

(62.0)

(62.0)

Exceptional and other items **

(109.7)

(80.3)

(104.9)

(20.4)

1.0

1.0

Share based payments

(2.9)

(2.3)

(1.4)

(0.7)

(1.0)

(1.0)

Operating Profit

(93.1)

(36.5)

(60.8)

25.6

50.6

55.6

Net Interest

(24.0)

(18.1)

(30.0)

(19.4)

(14.0)

(13.0)

Profit Before Tax (norm)

 

 

46.1

83.5

78.2

89.2

98.6

104.6

Profit Before Tax (FRS 3)

 

 

(114.2)

(36.7)

(65.8)

8.2

36.6

42.6

Tax

(0.5)

0.1

(0.7)

(3.0)

(5.0)

(5.0)

Profit After Tax (norm)

45.5

83.6

77.5

86.2

93.6

99.6

Profit After Tax (FRS 3)

(114.8)

(36.7)

(66.5)

5.2

31.6

37.6

Average Number of Shares Outstanding (m)

61.2

71.2

73.9

74.6

75.0

75.5

EPS - normalised (p)

74.4

117.3

104.9

115.6

124.8

131.9

EPS - normalised and fully diluted (p)

 

73.1

112.6

103.9

114.5

123.7

130.7

EPS - (IFRS) (p)

(187.6)

(51.5)

(90.0)

6.9

42.1

49.8

Dividend per share (p)

0.0

0.0

0.0

0.0

40.0

45.0

Gross Margin (%)

47.9

51.4

51.6

49.5

47.6

47.7

EBITDA Margin (%)

36.2

38.0

35.6

34.6

33.6

33.1

Operating Margin (before GW and except.) (%)

36.0

37.8

35.5

34.5

33.5

33.0

BALANCE SHEET

Fixed Assets

 

 

674.3

652.3

595.9

537.4

478.9

420.4

Intangible Assets

668.8

648.8

589.0

527.0

465.0

402.9

Tangible Assets

0.2

0.9

1.3

4.8

8.3

11.9

Other long term assets

5.3

2.6

5.6

5.6

5.6

5.6

Current Assets

 

 

63.9

139.0

93.2

85.4

99.6

101.3

Stocks

0.0

0.0

0.0

0.0

0.0

0.0

Debtors (incl swaps)

25.6

62.0

26.0

28.0

30.0

32.0

Cash

31.8

68.5

59.0

47.4

58.6

57.3

Player balances

6.5

8.6

8.2

10.0

11.0

12.0

Current Liabilities

 

 

(54.3)

(154.9)

(98.5)

(44.3)

(40.3)

(38.3)

Creditors

(23.1)

(41.3)

(46.3)

(40.0)

(38.0)

(36.0)

Short term borrowings

(25.2)

(26.7)

(0.3)

(0.3)

(0.3)

(0.3)

Contingent consideration

(6.0)

(86.9)

(51.9)

(4.0)

(2.0)

(2.0)

Long Term Liabilities

 

 

(394.8)

(397.1)

(386.7)

(343.5)

(291.5)

(241.5)

Long term borrowings

(189.3)

(347.4)

(369.5)

(339.5)

(289.5)

(239.5)

Contingent consideration

(203.6)

(33.3)

(7.7)

(2.0)

0.0

0.0

Other long term liabilities

(2.0)

(16.4)

(9.4)

(2.0)

(2.0)

(2.0)

Net Assets

 

 

289.0

239.4

204.1

235.1

246.8

241.9

CASH FLOW

Operating Cash Flow

 

 

23.3

84.2

102.0

97.2

104.1

109.1

Net Interest

(24.0)

(17.5)

(30.9)

(19.4)

(14.0)

(13.0)

Tax

(0.5)

(1.2)

(1.0)

(3.0)

(5.0)

(5.0)

Capex

(2.5)

(2.5)

(3.2)

(4.0)

(4.0)

(4.0)

Acquisitions (inc earnouts)

(355.6)

(156.3)

(94.2)

(52.4)

(5.0)

(5.0)

Financing

203.7

(29.6)

22.2

0.0

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

(14.9)

(33.4)

Net Cash Flow

(155.6)

(122.9)

(5.2)

18.4

61.3

48.7

Opening net debt/(cash)

 

 

27.1

182.7

305.6

310.7

292.3

231.1

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

0.0

Other

0.0

0.0

0.0

(0.0)

0.0

0.0

Closing net debt/(cash)

 

 

182.7

305.6

310.7

292.3

231.1

182.4

NPV of outstanding earnouts/other

 

209.5

140.8

76.6

10.0

5.0

0.0

Currency swaps

 

 

(4.7)

(38.2)

0.0

0.0

0.0

0.0

Adjusted net debt

 

 

387.5

408.1

387.3

302.4

236.1

182.4

Source: Company accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by JPJ Group plc and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by JPJ Group plc and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. 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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: Healthcare

Paion — Progressing towards filings in US and Japan

Paion and partner Cosmo took an important step towards a US filing for its ultra-short-acting sedative/anaesthetic remimazolam, with the completion of a successful pre-NDA meeting in July. Filing in Japan (via partner Mundipharma) is expected before the end of 2018. Paion took a step towards its goal of self-commercialising remimazolam in Europe with the initiation of a Phase III study in general anaesthesia (GA) in July. The company is funded beyond top-line data from the EU Phase III trial expected in 2019. We lift our valuation to €283m or €4.44 per share.

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