Entain’s (LON:) current strategy shows some pockets of strength as it attempts both to streamline the business and increase its attractiveness as a gambling destination, but more broadly, there are other factors at play which have held back any share price progress.
Inevitably, companies in this sector do not have a clear run, leaving their shares at the higher end of the risk spectrum. At any given time, adverse sports results can hinder profit margins, quite apart from the more ominous spectre of regulation. Betting companies are an easy target for governments aiming to raise additional income through taxes, and indeed the share price has suffered more recently given the increase of UK online gambling tax from 21% to 40% earlier this year, the effects of which are yet to fully wash through. Regulation remains an intractable thorn in the side for gambling companies, as evidenced by previous crackdowns in both the UK and Germany as well as higher deposit limits in the Netherlands, all of which inject shorter-term changes to consumer behaviour as the changes are absorbed.
Entain also has a 50/50 joint venture in the US with MGM Resorts, namely BetMGM. This had been seen as a particularly enticing tie-up with an estimated addressable market in excess of $35 billion of revenue following the loosening of some regulations in the US. Such prospects enticed Entain’s rival Flutter Entertainment to move its primary listing to New York, citing greater potential access to liquidity as well as heightened brand awareness. However, such a potential pot of gold has inevitably attracted a swathe of competition which is intensifying.
Indeed, at the end of July, the JV released guidance which suggested a deterioration of conditions Stateside, although still earnings positive and being seen as a main engine of growth for Entain in the times ahead. This followed a pop in the price at the beginning of June when there was speculation that People Inc of the US was tabling an $18 billion bid for MGM Resorts International, which in turn could lead to the company looking to buy out Entain’s stake in the joint venture. In the meantime, revenues and adjusted earnings for the year are estimated to be at the lower end of the respective ranges of £2.9 to $3.1 billion and $300 to $350 million, which has been a weight on the share price. BetMGM has also said that while it remains confident of delivering more than $500 million of adjusted earnings in the coming years, the current market environment may mean that this 2027 target timeframe will need to be extended.
In terms of its core figures, there are some signs of hope. Growth of 5% in group Net Gaming Revenue (NGR) to £2.54 billion was largely driven by an increase of 7% online, and within that number by a 13% spike in the UK. The online performance overall represented the ninth consecutive quarter of growth and the group’s vast array of brands, which includes the likes of Coral and Ladbrokes, was further boosted by heightened activity due to the World Cup.
The headline numbers are messy and lead to differing outcomes depending on the metrics being used. Underlying earnings came in at £479 million, a decline of 2% on the corresponding period but ahead of the £455 million expected, while underlying operating profit fell by 10% to £319 million. A pre-tax profit of £46.4 million compared with a loss of £66.3 million last year, leading to a vastly reduced post-tax loss which came in at £11.4 million versus £85.8 million previously. Outlook for the full year is unchanged, with underlying earnings expected to fall between £910 and £960 million, with continued online NGR growth in a 5% to 7% range.
Elsewhere, the group is mindful of a net debt position which currently stands at £3.6 billion. At the end of June, Entain announced that it had agreed to sell a 20% stake in its Central & Eastern Europe unit to its joint venture partner EMMA Capital for around €425 million, as it looks to launch a phased and total exit from the region. The eventual proceeds will be used to pay down debt and any excess capital returned to shareholders, which could in time further boost the currently respectable 3.6% dividend yield.
Regulation and the potential underperformance of its US JV have tended to put a stranglehold on any share price appreciation. The shares have fallen by 39% over the last year, as compared to a gain of 18% for the wider FTSE100, while the price is almost 75% shy of the record high which was achieved in September 2021. Despite all the turmoil, there is a loyal band of investors who remained prepared to take a punt on a business which undoubtedly has some exciting potential – if it can be delivered – and the market consensus of the shares as a strong buy reflects this commitment.