Everyone loves an underdog - Sporting surprise

Friday, 3rd February 2017 08:14 - by David Harbage

There’s no sign of a Leicester City-like ‘upstart’ challenging for the English Premier League this season, but football results over the past week have delighted the neutral spectator.

Last weekend two non-league teams, Lincoln City and Sutton United, made it to the fifth round of the FA Cup – the first time this has happened in the competition’s 146 year history. Fulham, Millwall, Oxford United and Wolverhampton Wanderers are also to be congratulated after ‘knocking out’ higher league opposition. Since then, in the Premiership’s midweek games, Arsenal were beaten at home by lowly Watford, and both high flying Manchester United and Tottenham Hotspur failed to beat relegation contenders Hull City and Sunderland.

Such unlikely outcomes will be appreciated by financial bookmakers as much as the wider sporting public. Today’s trading update from GVC Holdings bears testimony to the intuitive notion that the ‘bookie is the only ultimate winner’. While there will be periods of time when the racing and sporting favourites appear to win more often (which was the case in the first three months of 2016 and in December – by reference to domestic events), the intelligent non-emotive player will acknowledge the truth of that statement.

GVC has bingo and casino operations (including partypoker, Foxy Bingo), in addition to its sports gaming (features Sportingbet, bwin brand names) business, with licenses in 15 countries (but operating in 30 geographic markets) and declares its results in Euros. In the final quarter of 2016 net gaming revenue rose 7% (9% in constant currency terms) to Eu231.3m, with the margin on sport being 9.6% (which equates to the 2016’s average return). Management indicated that the full year results would exceed previous guidance: by reference to revenue, profitability and strong cash generation which had facilitated a re-engineered balance sheet. The latter featured refinancing of an expensive Eu386m loan – required to acquire bwin.party in February last year – which would reduce interest payments by Eu40m in 2017, as net debt had fallen to circa £140m.

The market was also cheered by advice that the group was on target to achieve Eu125m of synergy (integration benefits) from bwin and that January had been a particularly strong month with revenue growth up 21%. The latter takes no account of how well the book has been positioned for sporting events or subsequent results. Besides strong organic growth the board of this company – which moved to a main listing and into the FTSE250 index last year – indicated an appetite to participate in further corporate activity, as opportunities (to merge or acquire peers, within a fast consolidating industry) presented themselves.

Is it too late to back this particular gaming business? No recommendation from this writer, as always, but a reiteration of consensus views across the 8 broker research houses (7 say Buy and 1 Hold) that monitor GVC. Pre-tax profits are forecast to rise by 20% in calendar year 2016, and EPS (earnings per share) growth is set to be 62% this year and 23% in 2018. A return to normal dividend payments (suspended on the bwin purchase) of 50% of EPS would equate to a forward looking yield of 5% next year – before any prospect of special pay-outs that investors have historically enjoyed. On a forward looking price-to-earnings (PE) ratio of just 10.3 times, which represents a near 30% discount to the UK equity market mean, such growth is not factored in. Perhaps because the shares have only just come onto the radar of bigger institutional investors – despite having a market capitalisation or worth of £1.9bn, its entry into the FTSE350 universe (where most fund managers will ‘fish’) was only on 19 September 2016.

In terms of assessing the principal risks surrounding the company and its online business, regulatory concerns are paramount. In particular, changes in jurisdictions and markets where regulation is not clearly defined; plus conflicts between different countries or jurisdictions. A customer may reside in one country, but use a service which is located in another – separate national regulators may apply new, differing rules and protocols which could disrupt current business practice. Besides adhering strictly to local rules, GVC has sought to diversify its proposition as well as where it operates in order to reduce its exposure to the risk of losing an operating license. Growth in online gaming, via smartphones and tablets, on a global basis is not in doubt but regulatory uncertainty might underpin expectations that the historical discount valuation – typically applied to domestic ‘bricks & mortar’ bookmakers – should continue. Based on the assessment of the three brokers to most recently publish a price target (Canaccord Genuity, Investec and Numis), a 755p-760p stock price would seem a fair valuation.                   

Don’t expect Danny Crowley or Paul Doswell to be leading their respective Imps or U’s out of the Wembley tunnel on the 27 May but, as long as the ball is round or a sport involves fallible human beings (to say nothing of four legged beasts), there is always scope for a surprise. Leaving aside any such dreams, the most likely financial winner in the sporting arena is much easier to call.    

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.