Gamesys (OTCPK:JKPTF) has been a little left behind by the stock market in recent times and I think an exceptionally strong Q2 result causing significant 2020 estimate upgrades should wake up investors and help to increase the overall valuation that remains low. This is a relatively recent FTSE250 entrant that isn’t particularly well owned by many UK investor institutions, only a couple of new institutional holders could make a decent difference to the share price.
Why 2Q results should be very strong
There is very clear evidence that with the lockdown, people have spent more time online and spent more money online, and there is little reason to doubt online gaming/gambling should be any different.
The best example so far is 888 (OTCPK:EIHDF) which reported a pre-close trading update in late June around their business. (Pre-Close Trading Update). On 24th March, 888 indicated 18% growth rates YTD. On 26th June they said ‘average daily revenue in the year to date has been 34% higher…’ This means that the trading period between these two update comments has seen like-for-like growth in the 50%+ region to pull up the year to date number from +18% to +34%YTD just reported. Whilst not a perfect extrapolation to Gamesys, there are very significant cross-overs for their businesses.
For 1Q, Gamesys reported 19% like-for-like growth but kept full year guidance in place and no analyst changed their numbers. Full year numbers are built around circa 8% organic growth rates, not easy to see in reported figures as we have not yet annualized the consolidation of the two companies. Bloomberg average revenue for 2020 sits at 605.9m which compares to proforma for 2019 at 565.3m, hence +7.2%. If 1Q is +18% and 2Q somewhere near the +50% type area like 888 (or even close) then full year earnings estimates must rise significantly. Management has also said they have stopped various advertising campaigns during the lockdown which ought to mean costs are benefitting from reduced expenditure. It’s also very unlikely costs are growing rapidly, hence all of these gains ought to feed into margins and cash flow generation thus paying down debt a lot faster.
Last year 2Q results came out on 13th August but this was also as the acquisition was progressing. If trading has been as strong as I am suggesting, there is an argument for a clear need to update the market with a material change, it might be that they wait until a scheduled trading update early to mid-August going on last year’s timing.
Why should the overall rating be higher?
Gamesys is a growth business in a growth market, the UK has the highest online penetration of online gambling in the world and a consistent multi-year backdrop of online taking share from offline gambling. Other countries are following this trend over time and Gamesys can capitalize on this. The best current example is their rapid growth in Japan, and they’ve also had good success in Spain as examples. After the takeover/merger with their technology provider, management has a wide range of available growth brands and geographies. Excluding any regulatory change, a 5-10% group organic growth for many years ought to be a realistic proposition, and that makes it a growth business.
Gamesys is a high return and highly cash generative asset. EBITDA margins for the whole company in 2020 should be around 30%. It’s also a very low capital business. There are very few capex needs for a 100% online business, hence all cash flow is available for paying down debt (in recent years but now that bugbear will be solved during 2020), paying back to shareholders (we support a buyback ASAP and it could happen in 2H2020) and acquisitions. It’s also worth noting their very low corporation tax rate (instead paying a large part of consumption taxes and other regulatory amounts) due to tax domicile.
Gamesys is now fully integrated, they own all the assets, control the technology and have removed a lot of historic complexity. It’s now a much more attractive asset for a corporate to acquire in what is very clearly a consolidating industry. The CEO is now clearly aligned with shareholders (owns 15%, worth £150m at the moment) and other board members. Noel Hayden has done an excellent job being out of the stock market limelight over many years, he has shepherded his own investment holdings exceptionally well to culminate in this 15% stake. He is clearly keen and incentivized to maximise value on a multi-year basis.
What might Gamesys shares be worth?
Our background here is that we think 2020 EBITDA and EPS estimates could be 20% higher than the current consensus. Hence EBITDA of 178m 2020 becomes £213m and EPS of 117p becomes 140p for 2020. On these numbers and the current share price of 891p, market cap of £969m and net debt of £370m (our number at half year 2020 estimate) means a P/E of 6.4 and an EV/EBITDA of 6.3 for 2020.
888 trades on 14x 2020 recently upgraded EPS and has a net cash B/S and trades on 8x EV/EBITDA 2020. GVC has quite a bit of debt, a currently burdensome shop network that took a lockdown hit to this year’s earnings and is quite a bit larger, it trades on an EV/EBITDA of 11 and a P/E of 18 for 2020, depressed earnings in 2020 with a large bounce expected in 2020. Flutter (OTCPK:PDYPY) trades on EV/EBITDA of 19.7 and a P/E of 23 as its valuation is boosted by a strong market position in the rapidly expanding US market (Fanduel (DUEL)) when compared to many European peers.
William Hill (OTCPK:WIMHY) has a long history of missteps and currently is burdened by the lockdown of the large shop network so has very little earnings and trades on an EV/EBITDA of 11.3 for 2020. Each of the comps in the sector has various different attributes behind its valuation. We settle at a P/E of 12x which implies 1680p (on 140p upgraded numbers) and an EV/EBITDA of 9x (9 x 213 = 1917 – net debt of £370m = 1547 / 108.7m shares = 1420p. Hence somewhere around 1500p, 65-70% upside. If they paid out 40% of 2020 EPS (140p so div of 56p) at 1500p that’s around a 3.7% yield which would look okay too, although we would prefer buybacks given where the shares currently trade at.
Disclosure: I am/we are long JKPTF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.