GMVHF - Entain: Online Continues To Perform Strongly

2023-04-20 06:18:29 ET

Summary

• The 1Q23 trading update showed a significant 11% increase in Group NGR.
• BetMGM has reached the 25% mark of the midpoint of its 2023 revenue and the 2H23 EBITDA forecast of positive growth has been restated.
• While there are some warning signs, such as slower online sales growth (CAGR basis), the momentum is building with the help of BetMGM and other markets.

Investment thesis

My original thesis is that I view Entain ( OTCPK:GMVHF ) [ENT] as a compelling equity story, with good execution, strong earnings growth, and solid cash/balance sheet metrics. Its diversified exposure to sports betting and gaming through its multiple brand strategy boosts market access across these geographies, growing at mid-single-digits to high-single-digits % within online in the near to medium term. After the 1Q23 trading update and call, I was reassured in my buy rating, and the market agreed, sending shares up by 7%. I believe the share price outperformance was largely because both the US and ex-US businesses are performing as expected, and are thus on track to meet their respective FY23 targets. The impact of UK/German regulatory headwinds is expected to sequentially lessen beginning in 2H23, according to the company's projections. In addition to the United States and the United Kingdom, other markets like Italy, the Baltics, and Australia have shown support. While the stock price has dropped since February, I believe that the 1Q23 results have restored some confidence among shareholders.

1Q23 trading update highlights

The first quarter of 2023 saw a significant 11% increase in Group NGR when compared to the previous year, surpassing the expected growth of 9.3%. The online NGR growth of 11% for the entire year was in line with the low teens growth forecast. Additionally, despite accounting for the impact of regulations in the UK and Germany, the pro forma online NGR showed a better-than-expected growth rate of 6%, exceeding the projected low to mid-single digit growth for the full year.

Online revenue

I was pleasantly surprised by the 16% YoY increase in reported online NGR for 1Q23. However, I will concede that currency was a more significant tailwind than I had anticipated, accounting for 500 basis points of upside. It's worth noting that the gaming grew by 20% in constant currency, 10 times faster than the sports grew by 2%, but that this disparity is merely a result of the BetCity acquisition and geographic performance. Most significantly, I am learning to be wary of potential warning signs such as the 3 and 4 year CAGR for online sales have slowed since 4Q22. That said, it's encouraging to see that actives KPIs are growing at a rate of 19%, indicating that momentum is building after the World Cup in Q4.

BetMGM

BetMGM has reached the 25 percent mark of the midpoint of its 2023 revenue guidance of $1.8-2.0 billion in the first quarter of 2023. Given that new state launches ought to make steadily increasing contributions throughout the year, I take this as encouraging. BetMGM's revenue has grown sequentially every quarter since 1Q21, indicating that there is some upside risk to FY23 revenue guidance. Importantly, the 2H23 EBITDA forecast of positive growth has been restated. With the turnaround of profitability here, I expect margins to continue expanding moving forward, driving earnings growth.

Other regions

OSB regulation is expected to be implemented in Brazil by the end of the year or at the earliest by the beginning of next year, and the country's betting duty was recently announced to be 15% of GGR. A similar process is also ongoing for iGaming, though I doubt it will have a major impact on ENT seeing as how it represents such a small percentage of the business. Strong performance continues in Australia, but the market is as cutthroat as ever. BetR, a competitor, appears to be putting less emphasis on the quality of their products and more on rolling out aggressive promotions in an effort to gain market share. That said, ENT is still holding up well. Finally, the development in India keeps drawing my attention as a potential catalyst. There has been some movement in India toward a national regulatory framework for online gaming, but the emphasis there remains firmly on games of skill for the time being.

Valuation

After recent underperformance since the beginning of the year, I believe ENT has a favorable risk reward in the gambling sector (in terms of catching up to previous share price levels). While I do not anticipate any major changes in the near future, I do expect the Online business to maintain a healthy rate of growth, especially once regulatory headwinds subside. BetMGM has already proven itself to be a growth driver, and I expect it to become an even bigger contributor in the future, especially in light of its continuing momentum, which has been bolstered by the launch of its services in new states. The reaffirmation of profit projections is further evidence of BetMGM's solid fundamentals.

Conclusion

My recommendation remains as buy. Overall, the 1Q23 trading update for ENT has been positive, with strong growth in group NGR and online revenue. While there are some warning signs to keep an eye on, such as slower online sales growth (CAGR basis), the momentum is building with the help of BetMGM and other markets.

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