GVC Holdings — Update 3 November 2016

GVC Holdings — Update 3 November 2016

GVC Holdings

Katherine Thompson

Written by

Katherine Thompson

Director

GVC Holdings

Dividends resume ahead of schedule

Special dividend/update

Gaming

3 November 2016

Price

690p

Market cap

£2,017m

€1.12/$1.24/£

Net debt (€m) at 24 July 2016

154

Shares in issue

292.3m

Free float

94%

Code

GVC

Primary exchange

LSE (Premium segment)

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(8.3)

3.4

72.2

Rel (local)

(6.1)

0.4

61.5

52-week high/low

769.00p

372.00p

Business description

GVC Holdings is a leading e-gaming operator in both B2C and B2B markets with four main product verticals (sports, casino, poker, bingo). Just under 70% of revenues come from regulated/taxed markets (H116). GVC acquired bwin.party digital entertainment (bwin) on 1 February 2016 for €1.51bn.

Next events

Trading update

January 2017

Final results

March 2017

Analysts

Jane Anscombe

+44 (0)20 3077 5740

Katherine Thompson

+44 (0)20 3077 5730

GVC Holdings is a research client of Edison Investment Research Limited

GVC is returning to the dividend payers list sooner than expected, with a 10c/share special dividend for 2016. This further demonstrates management’s excellent progress integrating bwin and growing the enlarged business. Thereafter, a 50% payout policy implies a yield of over 3% for 2017e. With considerable momentum building in terms of cost-cutting, product enhancements and more focused marketing, we are confident in our growth forecasts (2017e EPS up 80%), on which basis the 2017e EV/EBITDA of 9.5x represents excellent value.

Year
end

Revenue (€m)

EBITDA*
(€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/14

224.8

49.2

41.3

61.4

55.5

12.6

7.2

12/15

247.7

54.1

50.0

76.4

56.0

10.1

7.2

12/16p**

885.0

202.1

102.9

31.3

10.0

24.7

1.3

12/17e

912.0

250.0

188.4

56.2

26.0

13.8

3.4

12/18e

960.0

285.0

234.0

69.0

33.5

11.2

4.3

Note: *Normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Pro forma includes 12 months of bwin.

Special dividend and ongoing dividend policy

GVC had said it would take a 2016 dividend holiday under the terms of its Cerberus loan facility, put in place for the bwin acquisition. That loan will now be repaid shortly before 2 February 2017 (avoiding anniversary fees) and replaced with much cheaper Nomura debt (an initial c 2% versus 12.5%, see our Update note of 4 August). This, and positive trading, has prompted GVC to declare a 10c/share special dividend for 2016, which will be paid in February 2017. GVC has now also announced a policy of distributing 50% of annualised free cash flow (operating cash flow less tax, interest and capex) split c 40%/60% H1/H2. This was broadly in line with our previous expectation; we have marginally increased our dividend forecasts for 2017 and 2018 from 25.0c and 32.5c to 26.0c and 33.5c respectively.

Positive trading update

GVC has announced a 12% increase in net gaming revenue (NGR) for Q316, or 15% at constant currency. On this basis, we have slightly increased our full year revenue forecasts (2016e now €885m, up from €860m) but left our profit forecasts unchanged (some of the excess revenue going towards staff bonusing). Adjusting our cash flow for the higher dividend payments still leaves the group cash neutral by end 2018. Other recent newsflow includes a raft of gaming content deals to further improve the product offering (eg Scientific Games, Realistic, Microgaming).

Valuation: 2017e EV/EBITDA 9.5x

After a very strong run, GVC shares ran into a little profit taking in mid-October, yet today’s news confirms ongoing excellent progress and management confidence. The group should turn strongly cash generative in 2017. GVC’s 2017e EV/EBITDA of 9.5x is only in line with the peer group average despite its above-average growth prospects, and the prospective yield further underpins the share’s attractions.

Exhibit 1: Financial summary

€m

2014

2015

2016p*

2017e

2018e

Year end 31 December

(IFRS)

(IFRS)

(IFRS)

(IFRS)

(IFRS)

PROFIT & LOSS

Net gaming revenue

 

 

224.8

247.7

885.0

912.0

960.0

Cost of Sales

(101.5)

(112.4)

(426.3)

(442.3)

(470.4)

Gross Profit (contribution)

123.3

135.4

458.7

469.7

489.6

EBITDA

 

 

49.2

54.1

202.1

250.0

285.0

Depreciation and amortisation

 

 

(5.5)

(1.4)

(35.0)

(38.0)

(41.0)

Operating Profit (norm)

 

 

43.7

52.7

167.1

212.0

244.0

Amortisation of acquired intangibles

0.0

0.0

(52.2)

(45.0)

(40.0)

Exceptional/ one-off items

0.0

(24.5)

(145.0)

(5.0)

0.0

Share based payments

(0.7)

(0.4)

(15.0)

0.0

0.0

Operating Profit

42.9

27.7

(45.1)

162.0

204.0

Net finance charges (interest plus fees)

(0.1)

(2.2)

(64.2)

(23.6)

(10.0)

Other financial expense

(1.6)

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

41.3

50.0

102.9

188.4

234.0

Profit Before Tax (FRS 3)

 

 

41.3

25.5

(109.4)

138.4

194.0

Tax

(0.7)

(0.8)

4.0

(7.5)

(11.7)

Profit After Tax (norm)

40.6

49.2

97.8

180.9

222.3

Profit After Tax (FRS 3)

40.6

24.7

(105.4)

130.9

182.3

Average Number of Shares Outstanding (m)

61.1

61.3

292.0

292.0

303.0

EPS - normalised fully diluted (c)

 

 

61.4

76.4

31.3

56.2

69.0

EPS - (IFRS) (c)

 

 

66.4

40.2

(36.1)

44.8

60.2

Dividend per share declared (c)

55.5

56.0

10.0

26.0

33.5

Dividend per share paid (c)

55.0

56.0

0.0

27.0

31.5

Gross Margin (%)

54.8

54.6

51.8

51.5

51.0

EBITDA Margin (%)

21.9

21.8

22.8

27.4

29.7

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

19.4

21.3

18.9

23.2

25.4

BALANCE SHEET

Fixed Assets

 

 

159.2

159.2

1,681.5

1,685.5

1,689.5

Intangible Assets

154.3

155.2

1,660.0

1,660.0

1,660.0

Tangible Assets

1.1

1.4

20.0

24.0

28.0

Deferred tax asset

3.8

2.6

1.5

1.5

1.5

Current Assets

 

 

49.5

72.6

535.0

425.0

416.0

Stocks

0.0

3.8

0.0

0.0

0.0

Debtors

31.7

40.6

140.0

150.0

160.0

Cash

4.8

13.4

285.0

155.0

126.0

Customer balances

13.0

14.8

110.0

120.0

130.0

Current Liabilities

 

 

(50.4)

(81.0)

(320.0)

(450.0)

(385.0)

Creditors

(46.4)

(77.3)

(290.0)

(300.0)

(310.0)

Short term borrowings

(4.1)

(3.7)

(30.0)

(150.0)

(75.0)

Long Term Liabilities

 

 

(8.8)

(22.6)

(480.0)

(180.0)

(130.0)

Long term borrowings

(3.1)

(19.8)

(400.0)

(100.0)

(50.0)

Other long term liabilities

(5.7)

(2.8)

(80.0)

(80.0)

(80.0)

Net Assets

 

 

149.5

128.1

1,416.5

1,480.5

1,590.5

CASH FLOW

Operating Cash Flow

 

 

48.5

62.5

26.5

207.5

260.0

Tax

(0.5)

(0.7)

(4.6)

(15.0)

(18.0)

Net Interest

(0.1)

0.0

(46.7)

(23.6)

(10.0)

Capex

(5.3)

(6.2)

(40.0)

(40.0)

(40.0)

Acquisitions/disposals

(8.0)

(2.4)

(1,510.0)

0.0

0.0

Financing

0.9

(24.5)

1,439.7

0.0

0.0

Dividends

(33.6)

(34.3)

0.0

(79.1)

(95.4)

Net Cash Flow

1.9

(5.6)

(135.0)

49.8

96.6

Opening net debt/(cash)

 

 

4.3

2.4

10.2

145.0

95.0

HP finance leases initiated

(0.6)

(1.5)

0.0

0.0

0.0

FX/ Other

0.7

(0.7)

0.2

0.2

(0.5)

Closing net debt/(cash)

 

 

2.4

10.2

145.0

95.0

(1.0)

Source: GVC accounts, Edison Investment Research. Note: *2016p is pro forma, including bwin.party for 12 months (reported will include it from the date of acquisition, 1 February 2016).

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. 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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by GVC Holdings 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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.
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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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. 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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by GVC Holdings 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent. The research analyst primarily responsible for the preparation of this report personally holds an equity position in the company of less than 1%.

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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