Entain eyes US profits after MGM deal disappointment

Investors in Ladbrokes and Coral owner Entain (ENT) got some bad news last month. The chief executive of MGM Resorts International (US:MGM), which had been rumoured to be keen on making another bid for the company after the eventual release of the long-awaited UK gambling white paper, confirmed on an earnings call that the idea is dead in the water.

Bill Hornbuckle said on the call that “it’s time to be definitive and give a little direction. The simple answer on Entain is no, we’ve moved on”.

This wasn’t what the market had been hoping to hear, given the increasing pivot of the listed gamblers towards the US after the Supreme Court overturned a ban on sports betting in 2018. The US is now the main revenue driver at competitor Flutter Entertainment (FLTR), for example, which is currently pondering a listing across the Atlantic.

Entain’s shares were marked down by 14 per cent after Hornbuckle’s statement. And they lost further ground after the release of these annual results. While underlying cash profits of £993mn came in at the upper end of the board’s latest guidance, statutory pre-tax profits fell by almost three-quarters as higher costs and foreign exchange losses took their toll.

Revenue growth was driven by retail sales offsetting a weak online performance. Retail revenues were up 66 per cent to £1.28bn against a lockdown-impacted comparative, with customer volumes in the UK and Italy ahead of pre-pandemic levels. Online revenues, on the other hand, fell by 2 per cent to just under £3bn as regulatory challenges buffeted the business. UK net gaming revenues fell by 9 per cent due to stricter affordability measures.

The US looks key for the company. Entain has significant exposure to that market through BetMGM, its sports betting joint venture with MGM. The US currently drags down earnings – BetMGM contributed a £194mn loss to Entain’s books in 2022 – but things are moving in the right direction. Annual net gaming revenues of over $1.4bn (£1.2bn) were up 71 per cent against 2021 and management expects positive cash profits in the second half of this year.

Investment in BetMGM was one reason that net debt jumped from £2.1bn to £2.8bn. Another was the five acquisitions made, with one completed after the year-end. Analysts expect leverage of 2.8 times to come down quickly, however.   

Shore Capital analysts think the market is discounting Entain’s US opportunity. The broker rates Entain shares at a fair value of over £18 a share, which they think would be “a base to build from”. The company is making headway across the Atlantic, but question marks remain. Hold.

Last IC view: Hold, 1,381p, 11 Aug 2022