Ladbrokes owner Entain hit by bribery impairment provision

Historic issues at its former Turkish business have come back to bite Entain (ENT), as the Ladbrokes and Coral owner fell to a significant half-year loss after recording a bigger-than-anticipated £585mn provision relating to an HMRC investigation into alleged bribery at online gambling company Sportingbet. Management said any potential settlement would be paid over four years, adding that “judicial approval [of the ongoing deferred prosecution agreement with the Crown Prosecution Service] will be sought during Q4 2023”.

This took the shine off an otherwise steady set of results, demonstrated by the 89 per cent rise in underlying profits to £288mn. Revenue growth was driven by the performance in the company's European markets, as UK sales fell slightly, with the digital performance helping underlying cash profits rise by 6 per cent to £499mn. Retail net gaming revenue (NGR) growth of 12 per cent was better than expected, helped by what management called Entain's "enhanced digital in-shop experience", while a record number of online active customers was flagged.

The importance of the US market to gambling operators was made apparent by competitor Flutter Entertainment’s (FLTR) pivot to profit there earlier this week. Entain operates in that market through BetMGM, a sports betting joint venture with MGM Resorts International (US:MGM). Progress was made here, with BetMGM delivering year-on-year NGR growth of 55 per cent and narrowing its operating loss significantly from £109mn to £49mn. Guidance is for positive cash profits in the second half of this year, with a long-term margin of 30 to 35 per cent. The market is watching this closely.

Elsewhere, net debt was down by around £200mn from the year-end to sit at £2.6bn. This doesn't include the cash for the proposed £750mn acquisition of Polish operator STS, expected to complete in the third quarter, which the company argued "unlocks the significant opportunity across the Central and Eastern European region".

Shore Capital analysts said that “we see the first-half performance as [a] potential inflection point for both BetMGM and Entain, with the move into profitability providing an anchor for valuation and reducing the investment requirements from its parents; at some point we see dividends being upstreamed”.

A forward price/earnings valuation of 18 times, according to FactSet, compares favourably with the rating of 28 times at Flutter Entertainment, although it is chunkier than the seven times and 10 times on offer at 888 (888) and Playtech (PTEC), respectively. We like what we see with momentum in the US, but there isn't enough value here for an upgrade as things stand. Hold. 

Last IC View: Hold, 1,309p, 9 Mar 2023