Stride Gaming — Update 2 February 2017

Stride Gaming — Update 2 February 2017

Stride Gaming

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Stride Gaming

Winning market share

AGM update

Travel & leisure

2 February 2017

Price

228.5p

Market cap

£154m

$1.24/€1.16/£

Net cash* (£m) at 31 August 2016
*Excluding player balances of £1.8m

11.3

Shares in issue

67.4m

Free float

31%

Code

STR

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

1.1

(12.5)

(4.2)

Rel (local)

1.3

(15.1)

(17.6)

52-week high/low

288p

218.5p

Business description

Stride Gaming is an online soft gaming operator in the bingo-led and social gaming markets. It uses its proprietary and purchased software to provide online bingo and slot gaming and a social gaming mobile app. It was formed in 2012 and only operates in regulated real money gaming markets.

Next events

Interim results

May 2017

Analysts

Jane Anscombe

+44 (0)20 3077 5740

Katherine Thompson

+44 (0)20 3077 5730

Stride Gaming is a research client of Edison Investment Research Limited

Stride’s AGM statement reports strong organic growth in real money gaming and we believe it is continuing to win market share. Our forecasts are unchanged although we have slightly adjusted the mix. We forecast 11% normalised EPS growth in FY17 and strong cash generation. The FY17 multiples look very low: the P/E is only 10.2x and EV/EBITDA is 7.3x (versus 8.0x for the peer group) despite Stride’s fully regulated status and above average growth.

Year
end

Revenue (£m)

EBITDA*
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

08/15

27.8

7.3

7.2

14.0

0.0

16.3

0.0

08/16

47.8

12.3

11.3

20.3

2.5

11.3

1.1

08/17e

88.8

19.5

18.3

22.5

2.8

10.2

1.2

08/18e

103.3

21.0

19.6

23.6

3.0

9.7

1.3

Note: *Normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. EPS is diluted.

Strong RMG more than offsets weaker social

Stride achieved 31% growth in real money gaming (RMG) in FY16 and we believe the enlarged group (which includes Tarco and 8Ball from 31 August 2016) is continuing to deliver strong double-digit RMG l-f-l growth. Above average performance in a competitive market reflects its experienced management team, highly analytic data-driven approach and multi-brand strategy, as discussed in our Outlook report of 6 December. Against this, we believe that year to date revenues are down in Stride’s social gaming business. The FY16 results had already indicated that its management was focused more on profits than revenue growth during the earnout period (which runs to August 2017) and we believe that the impact of lower player numbers and marketing spend has flowed through to H117.

Our headline forecasts are unchanged

Our forecasts are unchanged, but we have adjusted the expected mix between RMG and social. News that the integrations of 8Ball, Netboost Media and the Tarco assets are progressing well is encouraging, as they were material acquisitions and doubled Stride’s share of the online bingo market from 5% to 10%.

Valuation: FY17 EV/EBITDA only 7.3x

Stride’s shares have fallen from c 280p last September as it has been caught up in adverse sector sentiment around the government’s triennial review of gambling stakes and prizes. However, we do not believe that it will have any material impact on Stride (it does little TV advertising and has no involvement in the betting terminals). The FY17 EV/EBITDA of 7.3x is 9% below the peer group despite Stride being a fully regulated pure online business that is delivering above average growth.

AGM update: Change to forecast mix

Our headline forecasts are unchanged from those published in our Outlook report dated 6 December but our forecast mix has shifted: we now expect lower revenue and EBITDA from the social gaming segment in FY17, offset by a better than expected contribution from RMG, with strong top-line growth and acquisition synergies flowing through. Our split is still somewhat provisional and the interims in May will provide a better guide. The reported H117 results should show very strong growth as they will include 8Ball, Netboost Media and the Tarco assets which were only acquired on the last day of the FY16 financial year.

Exhibit 1: Half-yearly results and estimates

Year end 31 August (£m)

FY15

FY15P*

FY16

FY17e

FY18e

Real money gaming (RMG)

26.7

26.7

35.0

78.3

90.3

Social gaming

1.1

12.6

12.8

10.5

13.0

Net gaming revenue (NGR)

27.8

39.3

47.8

88.8

103.3

COS (POC gaming tax)

(2.8)

(3.6)

(5.4)

(11.8)

(16.7)

% of RMG NGR

10.3%

13.5%

15.4%

15.1%

18.5%

Gross profit

25.1

35.7

42.4

77.0

86.6

Marketing cost

(7.0)

(9.6)

(10.9)

(20.5)

(23.4)

Marketing %

25.2%

24.4%

22.8%

23.1%

22.7%

Other distribution costs

(2.9)

(6.8)

(7.8)

(17.4)

(20.4)

Other distribution %

10.4%

17.4%

16.2%

19.6%

19.7%

Admin costs

(7.8)

(9.5)

(11.4)

(19.6)

(21.8)

Admin %

28.2%

24.3%

23.9%

22.1%

21.1%

Adjusted EBITDA

7.3

9.7

12.3

19.5

21.0

RMG EBITDA

7.0

6.2

8.2

17.0

17.5

Social gaming EBITDA

0.3

3.5

4.1

2.5

3.5

Adjusted EBITDA margin

26.3%

24.7%

25.8%

22.0%

20.3%

RMG EBITDA margin %

26.4%

23.2%

23.5%

21.7%

19.4%

Social gaming EBITDA margin %

24.3%

28.0%

32.0%

23.8%

26.9%

Source: Stride Gaming accounts, Edison Investment Research. Note: Pro forma as if 8Ball, Netboost Media and the Tarco assets (acquired on 31 August 2016) had been owned for the whole year.

Real money gaming

We believe that Stride is achieving strong double-digital growth in l-f-l revenues as it has taken market share from operators such as Sun Bingo and Mecca (both of which have been affected by platform migrations) and probably also GVC’s Foxy Bingo (as management has focused on the bwin integration). The acquisitions doubled its share of the UK online bingo-led market from 5% to 10%, giving it much better scale and liquidity, with its multi-brand strategy enabling it to target broader demographics and cross-sell to lapsing players.

Social gaming (InfiApps)

Stride’s social gaming daily average revenue per paying player (ARPPU) increased by 22% in FY16, yet l-f-l revenues only increased by 1.8% and constant currency revenues slipped 6% implying that player numbers were down. We believe that its management focused more on profitability than revenues during the earnout period, and that the impact of lower player numbers and marketing spend has flowed through into the first half of FY17. The earnout runs to August 2017 (4x FY17 EBITDA will be payable in cash) and we believe that management has already re-energised the marketing. We will have a much better idea of progress in May, but note that the acquisition has already been usefully accretive, having generated £4.1m of adjusted EBITDA in FY16 versus an acquisition cost of £14.4m ($22m) plus cash earnout paid in H117, which we estimate at £3.8m.


Exhibit 2: Financial summary

£m

2014

2015

2016

2017e

2018e

August

UK GAAP

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

8.5

27.8

47.8

88.8

103.3

Cost of Sales

0.0

(2.8)

(5.4)

(11.9)

(16.7)

Gross Profit

8.5

25.1

42.4

76.8

86.5

EBITDA

 

 

1.2

7.3

12.3

19.5

21.0

Operating Profit (norm)

 

 

1.2

7.3

12.0

18.7

20.0

Amortisation of acquired intangibles

(0.3)

(2.5)

(4.2)

(9.0)

(9.0)

Exceptionals

(0.1)

(3.3)

(5.1)

(5.0)

0.0

Share based payments

0.0

(1.0)

(1.9)

0.0

0.0

Operating Profit

0.8

0.4

0.8

4.7

11.0

Net Interest

0.0

(0.1)

(0.7)

(0.4)

(0.4)

Profit Before Tax (norm)

 

 

1.2

7.2

11.3

18.3

19.6

Profit Before Tax (FRS 3)

 

 

0.8

0.4

0.1

4.3

10.6

Tax (reported)

0.0

0.1

(0.5)

(1.2)

(1.6)

Profit After Tax (norm)

1.2

6.2

10.9

17.1

18.0

Profit After Tax (FRS 3)

0.8

0.4

(0.4)

3.1

9.0

Average Number of Shares Outstanding (m)

31.2

43.8

51.5

67.4

70.0

EPS - normalised (p)

 

 

0.0

14.2

21.2

25.3

25.7

EPS - normalised fully diluted (p)

 

 

4.0

14.0

20.3

22.5

23.6

EPS - (IFRS) (p)

 

 

0.0

0.9

(0.8)

4.5

12.9

Dividend per share (p)

0.00

0.00

2.50

2.80

3.00

Gross Margin (%)

100.0

90.1

88.7

86.6

83.8

EBITDA Margin (%)

14.6

26.3

25.8

21.9

20.3

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

14.6

26.1

25.0

21.0

19.4

BALANCE SHEET

Fixed Assets

 

 

0.1

37.1

78.7

77.2

75.5

Intangible Assets

0.0

36.4

73.6

72.0

70.0

Tangible Assets

0.0

0.2

0.7

0.8

1.0

Investments

0.1

0.5

4.4

4.4

4.5

Current Assets

 

 

5.7

11.7

27.1

31.9

38.2

Stocks

0.0

0.0

0.0

0.0

0.0

Debtors

5.7

4.2

5.8

6.4

7.0

Cash

0.0

7.4

21.1

25.5

31.2

Other

0.0

0.0

0.2

0.0

0.0

Current Liabilities

 

 

(1.2)

(7.7)

(26.1)

(20.6)

(19.7)

Creditors

(0.8)

(5.2)

(16.3)

(18.6)

(17.5)

Player balances

(0.4)

(1.4)

(1.8)

(2.0)

(2.2)

Short term borrowings

0.0

(1.1)

(8.0)

0.0

0.0

Long Term Liabilities

 

 

0.0

(10.2)

(10.5)

(15.5)

(10.5)

Long term borrowings

0.0

(8.0)

0.0

(8.0)

(8.0)

Other long term liabilities

0.0

(2.2)

(10.5)

(7.5)

(2.5)

Net Assets

 

 

4.6

30.8

69.2

73.0

83.5

CASH FLOW

Operating Cash Flow

 

 

0.0

4.6

14.4

13.5

19.9

Net Interest

0.0

0.0

(0.6)

(0.4)

(0.3)

Tax

0.0

(0.1)

(0.7)

(1.0)

(1.4)

Capex

0.0

(0.6)

(1.9)

(2.1)

(2.3)

Acquisitions/disposals

0.0

(18.1)

(22.2)

(4.0)

(18.4)

Financing

0.0

10.4

25.9

0.0

10.0

Dividends

0.0

(3.0)

(0.6)

(1.8)

(2.0)

Net Cash Flow

0.0

(6.6)

14.4

4.2

5.6

Opening net debt/(cash)

 

 

0.0

0.0

3.1

(11.3)

(15.5)

Moving in player balances

0.0

1.0

0.0

0.0

0.0

Other adjustments

0.0

2.5

0.0

0.0

0.0

Closing net debt/(cash)

 

 

0.0

3.1

(11.3)

(15.5)

(21.0)

Source: Stride Gaming accounts, Edison Investment Research. Note: Net debt/(cash) excludes player balances.

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 and Sydney. 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 2017 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 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

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 and Sydney. 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 2017 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 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 2017. “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

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

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

Leigh Creek Energy — Update 2 February 2017

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