888 begins comeback following a difficult year

It has been a tough year for online betting and gaming company 888 (888). There have been board issues at the top of the company – chief financial officer Yariv Dafna is stepping down, and chief executive Itai Pazner left office with immediate effect on the same day that the company disclosed it had suspended VIP accounts in the Middle East due to failures in compliance and anti-money laundering procedures in the region. To make matters worse, the UK gambling commission in March fined businesses owned by William Hill, which 888 bought for £1.95bn last year, a record £19.2mn for compliance failures that happened prior to the deal. Add to this investor concerns about the debt taken on to fund the acquisition, and it is no surprise that the share price has struggled mightily since last summer.

So, the company really needed to deliver something positive here – or at least make sure there was no further bad news – to pacify the market. And that it managed. The shares were marked up by more than 15 per cent on the back of these results as the company made positive sounds on the integration of William Hill, progress on compliance matters (the board expects a relatively small £25-£30mn revenue headwind from the Middle East issue), and movement towards financial targets.

While the acquisition drove the revenue uplift of almost three quarters, the elevated debt levels resulting from the deal remain a big concern given the higher interest rate environment. Net debt has shot up to 5.6-times cash profits and dividends won’t be resumed until it is back below 3-times. On the plus side, the company upped its acquisition cost synergies target from £100mn to £150mn. 

While the board expects 2023 revenues to be lower by low-to-mid single digits, it says cash profits will be “significantly higher” and it has guided for a cash profit margin of “at least” 20 per cent. Management is bullish on hitting its 2025 targets of £2bn in revenues, a margin of 23 per cent, and leverage of less than 3.5 times.

Investec analysts said that “if operations continue to perform in line with expectations in the second quarter, this could prove to be "a turning point in the perception of the stock”. We are nowhere near that bullish, given continuing debt, compliance and governance concerns. But there is enough in these results to keep us where we are. Hold.

Last IC View: Hold, 149p, 12 Aug 2022