Stride Gaming — RGD marginally higher than expected

Stride Gaming — RGD marginally higher than expected

The UK government has raised remote gaming duty (RGD) from 15% to 21%. This was better than recent rumours of 25%, but 1% higher than market expectations of 20%. With implementation from October 2019 (rather than April), we raise our FY19e EBITDA by 5%. However, assuming no mitigation, we lower our FY20e EBITDA by £3m to £14.5m. While regulatory pressures are likely to remain a feature of the UK gaming sector, Stride is the number three online bingo-led operator and should benefit from its strong market position. The balance sheet is robust (£20m net cash) and, despite the increased taxes, we expect strong cash flow through synergies and strategic growth. The stock has fallen 58% this year and trades at depressed levels of 3.6x EV/EBITDA and 5.8x P/E for CY19e.

Analyst avatar placeholder

Written by

Stride Gaming

RGD marginally higher than expected

Budget announcement

Travel & leisure

30 October 2018

Price

103.5p

Market cap

£78m

Net cash (£m) at April 2018

19.8

Shares in issue

75.8m

Free float

35%

Code

STR

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

9.5

(18.5)

(57.3)

Rel (local)

17.5

(10.3)

(54.3)

52-week high/low

259.0p

83.5p

Business description

Stride Gaming is a leading online gaming operator in the UK. It uses its proprietary and purchased software to provide online bingo and slot gaming. It was formed in 2012 and only operates in regulated real money gaming markets.

Next events

FY18 results

21 November 2018

Analysts

Victoria Pease

+44 (0)20 3077 5730

Katherine Thompson

+44 (0)20 3077 5730

Stride Gaming is a research client of Edison Investment Research Limited

The UK government has raised remote gaming duty (RGD) from 15% to 21%. This was better than recent rumours of 25%, but 1% higher than market expectations of 20%. With implementation from October 2019 (rather than April), we raise our FY19e EBITDA by 5%. However, assuming no mitigation, we lower our FY20e EBITDA by £3m to £14.5m. While regulatory pressures are likely to remain a feature of the UK gaming sector, Stride is the number three online bingo-led operator and should benefit from its strong market position. The balance sheet is robust (£20m net cash) and, despite the increased taxes, we expect strong cash flow through synergies and strategic growth. The stock has fallen 58% this year and trades at depressed levels of 3.6x EV/EBITDA and 5.8x P/E for CY19e.

Year
end

Revenue* (£m)

EBITDA
(£m)

PBT**
(£m)

EPS**
(p)

DPS
(p)

P/E
(x)

Yield
(%)

08/16

47.8

12.3

11.3

20.3

2.5

5.1

2.4

08/17

89.9

20.2

18.9

25.8

2.7

4.0

2.6

08/18e

89.0

16.1

14.2

17.1

2.9

6.0

2.8

08/19e

85.0

17.0

15.7

18.5

3.0

5.6

2.9

08/20e

93.5

14.5

13.8

16.2

3.1

6.4

3.0

Note: *Adjusted revenue excludes social from FY18, and includes Stride’s share of Stride Together (including Aspers JV). **PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

21% RGD to commence in October 2019

The government’s budget has provided long-awaited clarity on remote gaming duty, which will rise from 15% to 21%. This is marginally higher than the widely expected 20%, but a better result than recent rumours of 25%. The increased duties will affect all online gaming operators (not sports) in the UK from October 2019, but at least the sector now has a degree of certainty. Other ongoing regulatory pressures include social responsibility, anti-money laundering, source of funds, etc. All this is likely to lead to a continued market shake-out, with dominant players set to benefit. We note that as the third largest online bingo-led operator in the UK, Stride is very well positioned.

Tax increase to affect FY20 figures

With almost 100% of revenues derived from the UK, Stride Gaming has been particularly affected by UK regulatory burdens. Factoring in the October 2019 implementation date, we adjust our FY19 tax estimate back to the blended 19% rate (which includes bonus tax) and EBITDA rises from £16.2m to £17.0m. For FY20e, we now assume no mitigation and using a 26% blended tax rate (including bonuses), our EBITDA declines from £17.5m to £14.5m.

Valuation: 3.6x EV/EBITDA and 5.8x P/E for CY19e

The stock has fallen 58% ytd and trades at depressed multiples of 3.6x EV/EBITDA and 5.8x P/E for CY19e. Given the company’s superior technology, high net cash and continued strong cash generation (despite the regulatory environment), this seems unjustified, in our view. For a meaningful re-rating, we expect investors to focus on synergies, cost controls and, ultimately, an uptick in EBITDA.

Exhibit 1: Financial summary

£m

2015

2016

2017

2018e

2019e

2020e

August

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

NGR

 

 

27.8

47.8

89.9

85.5

80.0

86.0

Adjusted Revenue (inc Stride Together)

27.8

47.8

89.9

89.0

85.0

93.5

Cost of Sales

(2.8)

(5.4)

(11.6)

(15.4)

(15.2)

(22.1)

Gross Profit

25.1

42.4

78.3

70.1

64.8

63.9

EBITDA

 

 

7.3

12.3

20.2

16.1

17.0

14.5

Operating Profit (norm)

 

 

7.3

12.0

19.4

15.0

15.7

13.3

Amortisation of acquired intangibles

(2.5)

(4.2)

(7.8)

(7.0)

(7.0)

(7.0)

Exceptionals

(3.3)

(5.1)

(36.1)

(3.7)

0.0

0.0

Share based payments

(1.0)

(1.9)

(1.8)

(1.4)

(1.4)

(1.4)

Operating Profit

0.4

0.8

(26.2)

3.0

7.3

4.9

Net Interest

(0.1)

(0.7)

(0.5)

(0.9)

(0.5)

(0.5)

Contribution from jvs/assocs.

0.0

0.0

0.0

0.1

0.5

1.0

Profit Before Tax (norm)

 

 

7.2

11.3

18.9

14.2

15.7

13.8

Profit Before Tax (FRS 3)

 

 

0.4

0.1

(26.7)

2.1

6.8

4.4

Tax (reported)

0.1

(0.5)

1.1

(0.6)

(0.6)

(0.6)

Profit After Tax (norm)

6.2

10.9

18.2

13.8

15.1

13.2

Profit After Tax (FRS 3)

0.4

(0.4)

(25.6)

1.6

6.2

3.9

Average Number of Shares Outstanding (m)

43.8

51.5

67.3

74.5

76.0

76.0

EPS - normalised (p)

 

 

14.2

21.2

27.1

18.5

19.8

17.4

EPS - normalised fully diluted (p)

 

 

14.0

20.3

25.8

17.1

18.5

16.2

EPS - (IFRS) (p)

 

 

0.9

(0.8)

(38.1)

2.1

8.2

5.1

Dividend per share (p)

0.00

2.50

2.70

2.90

3.00

3.10

Gross Margin (%)

90.1

88.7

87.1

82.0

81.0

74.3

EBITDA Margin (%)

26.3

25.8

22.5

18.8

21.2

16.9

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

26.1

25.0

21.6

17.6

19.6

15.4

BALANCE SHEET

Fixed Assets

 

 

37.1

78.7

61.1

62.1

55.8

49.6

Intangible Assets

36.4

73.6

57.8

51.5

45.0

38.5

Tangible Assets

0.2

0.7

0.7

0.9

1.1

1.3

Investments

0.5

4.4

2.7

2.7

2.7

2.7

Assets Available for sale/other

0.0

0.0

0.0

7.0

7.0

7.0

Current Assets

 

 

11.7

27.1

36.5

34.1

46.6

55.3

Stocks

0.0

0.0

0.0

0.0

0.0

0.0

Debtors

4.2

5.8

9.9

7.0

8.0

8.0

Cash

7.4

21.1

26.2

26.6

38.1

46.8

Assets Available for sale/other

0.0

0.2

0.5

0.5

0.5

0.5

Current Liabilities

 

 

(7.7)

(26.1)

(35.7)

(19.8)

(17.6)

(17.6)

Creditors

(5.2)

(16.3)

(31.3)

(17.3)

(15.0)

(15.0)

Player balances

(1.4)

(1.8)

(2.4)

(2.5)

(2.6)

(2.6)

Short term borrowings

(1.1)

(8.0)

(2.0)

0.0

0.0

0.0

Long Term Liabilities

 

 

(10.2)

(10.5)

(7.1)

(6.5)

(6.5)

(6.5)

Long term borrowings

(8.0)

0.0

(4.4)

(4.0)

(4.0)

(4.0)

Other long term liabilities

(2.2)

(10.5)

(2.6)

(2.5)

(2.5)

(2.5)

Net Assets

 

 

30.8

69.2

54.9

69.9

78.3

80.7

CASH FLOW

Operating Cash Flow

 

 

4.6

14.4

14.3

14.5

15.3

13.1

Net Interest

0.0

(0.6)

(0.6)

(0.9)

(0.5)

(0.5)

Tax

(0.1)

(0.7)

(1.4)

(0.6)

(0.6)

(0.6)

Capex

(0.6)

(1.9)

(2.0)

(2.0)

(2.0)

(2.0)

Acquisitions/disposals

(18.1)

(22.2)

(1.9)

(22.5)

5.0

0.0

Financing/other

10.4

25.9

(0.5)

16.2

(3.5)

1.0

Dividends

(3.0)

(0.6)

(1.8)

(2.1)

(2.2)

(2.3)

Net Cash Flow

(6.6)

14.4

6.1

2.7

11.4

8.7

Opening net debt/(cash)

 

 

0.0

3.1

(11.3)

(17.4)

(20.1)

(31.5)

Moving in player balances

1.0

0.0

0.0

0.0

0.0

0.0

Other adjustments

2.5

0.0

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

3.1

(11.3)

(17.4)

(20.1)

(31.5)

(40.2)

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 Stride Gaming 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. 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 2018. “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.

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

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

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 Stride Gaming 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. 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 2018. “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.

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

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

GVC Holdings — Budget not as bad as feared

The Budget has provided long-awaited clarity on a number of gaming-related issues. The implementation of the £2 FOBT stake reduction will begin in October 2019, at the same time as a 600bp increase in remote gaming duty (RGD), from 15% to 21%. This is 1% higher than market expectations, but lower than recent rumours of 25%. We now include a £30m annual EBITDA impact in our forecasts. Also adjusting for an earlier implementation of the FOBT stake limit, we have lowered our FY19e EBITDA by 7%. Our FY20e EBITDA declines by 4%. The stock has fallen c 22% since August and trades at 9.8x EV/EBITDA and 13.0x P/E for FY19e.

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free