DKNG - 888 Holdings: A Below The Radar Sports Betting Entry

2023-08-20 08:59:32 ET

Summary

• 888 Holdings acquired the global business of William Hill for $2.35 billion, adding to its online betting footprint.
• The company aims to stabilize revenue flow, expand its iCasino games, and stay competitive in the US market.
• 888 Holdings has a significant debt burden but is focused on reducing it and increasing overall value.

This company has long-lived in the lower reaches of the global online betting business. In 2022, it dipped its head above the radar screen when it announced it had acquired the global business of the powerful UK legacy brand, William Hill. The seller was Caesars Entertainment, Inc. ( CZR ) which bought out Hill for $4b in 2022 primarily for its US footprint. It put up the for sale sign on the Hill UK and global business and 888 Holdings plc ( EIHDF ) snapped it up for $2.35b. That deal piled a ton of debt on 888 that it is still in the process of slowly carving it down as it emerges as a multi-brand global online sports and iCasino entry. 888 has not only gotten the online business with footprints in the UK, EU, Eastern Europe, Mideast and Asia, but also Hill’s 1,350 betting shops in the UK. It claims to have 1.6 m average monthly players across its entire global reach.

52- week range: 0.6500-1.6690

Market cap: $652m

With a recently appointed new CEO deep in online gaming experience from Fortuna Group. 888 is slowly positioning itself to assure its revenue flow will stabilize, add additional heft to its iCasino games, and stay competitive in the seven US markets where it is currently licensed. (Its US business rose 74% this YTD, EBITDA for its brand +29%.)

TTM: A snapshot ( All noted in USD unless otherwise shown)

Revenue: $2.2b

Gross profit: $1.97b

EBITDA: $60.162m

Brands: William Hill, 888, Mr. Green, SI Sportsbook and SICasino in partnership with Authentic Brands of New York which manages major retail and entertainment brands in the US.

Debt burden management will be one key to increasing value

Above: The global online business is where 888 has long played and will continue to do so as its new management focuses on building value .

TTM debt : 1.6bGbp, above $2b and the principal reason why when its revenues are rising is that its bottom line remains held down by interest expense which produces a current ratio of 0.70, clearly in harm’s way. But that is the crux of the decision. On one hand you clearly have impressive global scale producing increasing volumes. On the other, a hard-nosed approach to financial discipline to assure FCF adequate to meet obligations going forward. So in the end, our view is this: 888 is a classic stock for investors with more risk tolerance than the average buyer of stocks in this sector.

Its US shares are very thinly traded but with 448m outstanding. We believe the thin trading levels of the US stock is mostly due to the generally fading conviction on sports betting stocks, its low profile as an als-ran platform in the US. However, the William Hill buy has put it back on the map, as it were.

2022 performance

Revenue up: 74% (largely due to Hill)

EBITDA: 29% UP

The core proposition

Tighter focus on keeping marketing costs in line, increasing revenue via the Hill brand. Reduce net debt. Leverage reduced as of 12/22 from 5.6X to 5.1X as of June 2023 (in pound sterling). Undrawn P150m RCF brings total liquidity to over P300m. A plan last year focused on bringing a top executive team from ENTAIN (MGM’s partner in BetMGM) was scrubbed when regulators reported to 888 various investigations relating to the group prior to their approach to 888. The company severed negotiations and hired a new CEO, who is expected to begin this coming October. The stock price is part of the core proposition, although in general principle it should not be a consideration alone in a buy sell or hold situation. Yet in this case, we discern a disconnect between the scale of global presence of 888 online and retail gaming brands (including the US) and the price of the shares.

The penny share prices clearly spring from investor wariness about the company’s debt profile, as well as a test of whether it has the savvy and resources to sustain and grow its international gaming footprint.

Management has told investors it expects to produce p150m in synergies, much of which will fall into this year and mid 2024. We’ve heard that song before post-merger by many companies that failed to reach those goals. But in this case we do have an existing operator with established reach, having been joined by one of the most famous names in betting shops in William Hill. So this is no startup of merged wannabees, but a clear pathway to the goal.

For this reason, many of the data points one would ordinarily want to see in a special situation buy like this are, at this stage, of marginal value. It comes down to this: If you believe that management can make this exponentially expanded platform grow at a profitable rate, and accelerate its reduction of long term debt from FCF, as it has done in 2022. If so, and you on balance consider yourself the possessor of a bit higher than average risk profile, you have a shot at a four bagger here if management can deliver as it promises.

Also consider the overall sector at this time. In the US, Draft Kings ( DKNG ) and Fan Duel (PDTPY) jointly control 77% of the total US market. Bet MGM is the only platform beyond the two leaders with a double-digit market share. Sports betting as the core product of them all has the ongoing baggage of high marketing costs and thin margins. The situation is improving, with the top players in the space beginning to turn profitable. But at the same time, one after another of early sports betting enthusiasts have entirely left the field of play now seeing it as a dead end street producing slim profits at best.

But for casino operators, there is indeed a plus. They have their eyes really peeling on the iGaming growth and much healthier margins of customers playing blackjack, craps, slots, roulette, etc. online. 888 is in that business as well. And despite the fact that they are not backstopped by brick and mortar casinos, they still have the UK retail sports books to enhance their offers and keep their brands in the player consciousness there.

Note: The 2022 results presented in the management earnings release, unless otherwise stated, reflect the pro forma results as if 888 had owned Hill for the periods noted. This is done to aid comparability.

Investors in the online gaming space going forward have many choices among the top and even second tier operators, currently trading at what we believe are attractive valuations given the move into profitability we see spreading over the next three sequential quarters.

We think a look at 888 now should be part of an evaluation of opening a mini-portfolio of online gaming stocks. You want to have money in at least one of the leaders in the US, a position in a company with a global footprint. And lastly, the entry point here of an interesting potential with a possibly strong upside lies with 888.

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