Entain flags regulation threats as it slides to significant loss

Entain's (ENT) shares are down by more than 40 per cent over the past year, as the Ladbrokes owner has been hit by an HMRC investigation into bribery allegations at its legacy Turkish business and a wayward acquisition strategy that contributed to the resignation of chief executive Jette Nygaard-Andersen. Its warning in its full-year results that stake caps on online slot games in the UK and new deposit limits in the Netherlands could damage cash profits by £40mn this year unsurprisingly led to a markdown on the day. But this did obscure some signs of progress as it highlighted a record level of online active customers. 

Net gaming revenue (NGR) rose by 14 per cent to £4.83bn, helped by a notable 35 per cent boost at US joint venture BetMGM. The opportunity in the US, where BetMGM is the third-largest player after Flutter Entertainment's (FLTR) FanDuel unit and DraftKings (US:DKNG), remains enticing. BetMGM delivered positive cash profits in the second half of the year and took 14 per cent market share in the three months to November in the sports betting and iGaming markets where it operates. 

US growth is good news for the business as this is a key driver of future deleveraging. Leverage rose to 3.3 times in 2023, with net debt at £3.29bn. 

Chief financial officer and deputy chief executive Rob Wood told Investors' Chronicle that "deleveraging is a priority for us and the absolute focus is on growing Ebitda". 

Excluding the US, online and retail NGR rose 12 per cent and 9 per cent, respectively. One area of concern is the domestic market, where revenue went backwards as the increasingly burdensome regulatory environment in the UK took its toll. But management thinks an ongoing regulatory review will be beneficial in the long run as a standardised approach to player protection takes hold, despite deleterious short-term impacts. 

The chunky statutory pre-tax loss was driven by a higher expenses burden, which included the £585mn deferred prosecution agreement with HMRC, £255mn of amortisation on acquired intangibles, and an impairment charge of £289mn, mostly on the Australian business and exited B2C operations. 

Shore Capital analysts argue that "progress against the targets to return digital growth to market rates and market share gains at BetMGM would be expected to see the shares re-rate materially". The broker has a valuation of six to seven times cash profits for the core business and two to three times NGR for BetMGM, which is depressed. However, there's a lot to do to rebuild investor confidence. Hold. 

Last IC view: Hold, 1,331p, 10 Aug 2023