Risk aversion has the potential to injure Entain’s share price twice over. A shift from growth stocks to value has naturally caused the betting group’s market rating to deflate. Punters who are less willing to speculate on sports matches and online gaming have forced management to cut revenue guidance for this year.
Entain’s share price has descended the mountain it climbed last year. From a peak in September of £23.77, equivalent to 43 times forward earnings, the share price has more than halved to £10.86, and a forward earnings multiple of 17.
Online gaming outside the US has eased, post-lockdown, off 7 per cent during the second quarter. Annual comparators will get easier this year, which will give a fillip to quarterly growth rates, but there are also detractors that might limit progress.
Affordability checks put in place by Entain in the UK is one, then there is the white paper into gambling safety in Britain, which is not accounted for in Entain’s online gaming revenue guidance for this year.
The bigger unknown is the extent to which consumers with more demands on their cash choose to spend less on gambling. That was a big contributor to the cut in guidance for the former-US business this year. But of greater interest to investors is what this means for the BetMGM joint venture, in which Entain has a 50 per cent interest alongside MGM Resorts International. It is through this that Entain is seeking to capitalise on the deregulation of the sports betting market in America.
Opening in new states will bring with it more punters. Guidance for net gaming revenue of $1.3 billion for BetMGM has been retained for this year, which would be annual growth of 52 per cent.
With inflation raging in America and recession looming, to what extent will the pressures on consumer spending experienced in Australian, European and South American gambling markets unfold in the US? Entain might win more clients and achieve its target 25 per cent share of the US market, but if those customers each spend less, just like punters elsewhere, then the payback it gets for spending on acquiring those customers via flashy marketing campaigns might also reduce.
The loss-making BetMGM business has held guidance to be generating positive earnings next year, but a fall in spending per customer could push out what month the business hits that milestone or reduce the magnitude of those profits. Lucky for Entain that guidance is quite vague.
A cheaper market value makes another bid more likely. Entain batted away two approaches last year, one from MGM Resorts and the other from DraftKings, the No 3 player in the American market.
MGM's $607 million acquisition of the Swedish online group LeoVegas could be read in two ways, analysts at Peel Hunt say: either it means MGM has less need for Entain to fulfil its digital growth ambitions, or the potential synergies on offer from snapping up Entain, too, would make a deal more attractive.
The mature betting business is highly cash generative, which has helped fund the US expansion and other acquisitions. Debt has also played a part and, as a ratio of adjusted earnings, rose to 2.4 at the end of December after financing acquisitions, still within a target range of between two and three.
Financing the push into new states and M&A activity in other markets does not look like it will be an issue, with cash and undrawn debt totalling £900 million. The earnings potential from the US business is vast, but the risk of further weakness in gaming revenue might hold the shares at a lower valuation in the short term.
ADVICE Hold
WHY Lower valuation reflects risk of a further weakening in online gaming revenue
Supermarket Income Reit
As rising interest rates push up debt costs and tenant finances are squeezed more tightly, real estate investment trusts afforded a premium by the market are becoming scarcer. The FTSE 250 constituent Supermarket Income Reit is one such rarity, with shares that trade 5 per cent above the net asset value forecast at the end of December this year.
The attraction for investors is a generous dividend backed by a lengthy, inflation-linked income stream derived from acquiring and leasing a portfolio of supermarkets to the big grocers, including Tesco, Sainsbury’s and Morrisons. A dividend of 5.90p a share was paid out for last year, a payment of 5.94p is forecast for this year, which at the current share price would leave the shares offering a potential yield of 4.8 per cent. Unlike the broader retail industry, the underlying value of the company’s supermarket assets has continued to tick upwards as investors pile into more defensive areas of real estate.
But a highly acquisitive strategy brings with it two potential problems. First, there is the fact that rising property values make generating a decent return from buying assets harder. Second, although frequent equity raising has funded a chunk of acquisitions, funding any more deals with debt is likely to become more expensive.
Most of the Reit’s debt is priced at a floating rate, a margin above Sonia, which reflects the average of the interest rates that banks pay to borrow sterling from each other. The Sonia rate has increased to almost 1.2 per cent, from 0.2 per cent at the end of December, which the brokerage Peel Hunt estimates could reduce Supermarket Income’s earnings for this year by 8 per cent, assuming additional debt is drawn at these rates. Only 50 per cent of drawn debt is hedged against further interest rate movements, but fixing the remainder of that debt at the current five-year Sonia swap rate would push earnings down by about a fifth, the brokerage reckons. Analysts there have cut their target price on the stock to 115p a share, just below where the shares currently trade. If earnings don’t fall, then growth looks more likely to slow.
ADVICE Hold
WHY The premium baked into the shares appears to account for future potential growth
