- Ladbrokes Coral owner confirms re-brand
- Comes amid pitch as sustainable tech-led company
As a gambling company, GVC is used to sitting on the winning side of bets. But in just a few months this year, the FTSE 100 group lost the sports market it relies on, the ability of its retail stores to open and its long-serving boss, Kenny Alexander, who abruptly quit in July. A post-lockdown rally in the shares quickly lost momentum with news of an HMRC probe into the group’s former Turkish business.
Yet 2020 is set to end with the group’s shares testing their all-time price high. Sporting fixtures are back, governance improvements have been pledged, and investors appear to have embraced recently-appointed chief executive Shay Segev. This culminated last week when the owner of Ladbrokes, Coral and bwin re-branded as Entain (ENT).
Central to this overhaul is a bullish tech-led strategy focused on new markets. “I believe I can double or even triple the size of our business within the next five years,” Mr Segev told shareholders last month.
On the face of it, this seems an odd time to make such a bold call. Though its profits have rebounded, the dividend remains suspended and net debt sits at almost three times’ adjusted cash profits. Entain is yet to decide whether to refund state furlough support for its 14,000 UK retail employees, even after rival William Hill committed to repay the £24.5m it received from government. This suggests the cash management position remains tight.
Nonetheless, analysts seem to share Mr Segev’s belief in the future. Consensus forecasts are for adjusted earnings of 58p per share in 2020, and 112p in 2024.
An assumed compound annual growth rate of 18 per cent rests on the view that Entain can increase or hold its share of markets that are projected to grow, most notably the US. With 93 per cent of online net gaming revenues drawn from markets in which Entain is growing by at least 10 per cent a year, the group clearly has momentum.
According to Mr Segev, the company’s proprietary-owned technology gives it the edge to on-board customers faster and more cheaply than competitors, all while expanding margins.
Though mobile gambling is now ubiquitous in the UK, this digital push is in its infancy elsewhere. Outside the UK, 81 per cent of Entain’s online revenues come from markets in which digital penetration is less than a fifth of the total gambling market. E-sports gaming and emerging markets like Africa and Latin America are all touted as potential next phases of growth.
This fresh international push comes just as the UK launches a wide-ranging and long-delayed review into the 15-year-old Gambling Act, during which time campaigners believe online betting has been left to run wild.
Entain says it plans to embrace updated regulatory oversight, bucking past form by pledging to operate solely in regulated markets by 2023. By the end of this month, 99 per cent of that job will be complete. “I don’t want to grow at any cost,” says Mr Segev.
Again, the company believes its technology can help it steal a march on competitors here. Citing the recruitment of several academics and psychologists, and the launch of a new programme that assigns a “dynamic risk rating” to each player, Entain claims it can now take a more scientific approach to gambling, and that this means it is a sustainable business. “Our technology allows us to understand problem gambling,” argues Mr Segev.
A cynic might conclude that Entain’s re-brand simply piggy-backs this year’s two hottest themes in investing: ESG and tech. Peel away the new veneer and you still have a company expanding in a contentious and politically-fraught industry – a point only highlighted by the wide range of safe gambling initiatives to which Entain plans to funnel £100m over five years.
Investors should be wary of any claim that algorithms and data science will be enough to placate regulators. That should be clear enough to anyone who has followed the recent travails of Facebook (US: FB) and Google.
None of this means that the business cannot double or triple in the next five years, particularly given the enormous market opportunity in the US. Yet investors should not bank on the shares absorbing a sudden ESG-based premium. Hold at 1,095p.
Last IC View: Hold, 784p, 13 Aug 2020
