Entain’s ascent was predicated on its ability to capitalise on the rewards to be reaped by expanding in a newly liberalised sports betting market in the US. An anticipated slowdown in growth caused by punters having less cash to squander has caused a decline in the gambling giant’s shares over the past 12 months. Yet trading thus far indicates that the owner of Ladbrokes and Coral remains on track to hit more enduring growth targets.
Guidance for earnings before taxes and other charges has been reiterated at £925 million to £975 million this year, which would be 5 per cent to 10 per cent higher than last year. That is despite net gaming revenue being flat during the third quarter compared with last year as the FTSE 100 constituent lapped the boom in online gambling amid lockdowns in Australia and felt the impact of the enforced closure in the Netherlands while awaiting a new betting licence.
Stripping the impact of those challenges out and online net gaming revenue, which accounted for almost 70 per cent of the group total during the first half, was closer to a mid-single-digit rate of growth. The football World Cup is expected to boost that annual growth rate towards the high single digits during the fourth quarter. Cost of living pressures are having an impact on growth rates — next year the rate of online gaming revenue growth is expected to be in the mid-single digits, lower than the double-digit rates to which the group has become accustomed.
Crucially, the gambling giant remains on track to hit profitability in America at some point next year. Online gaming revenue in the US states where the business had already launched was up 50 per cent in the third quarter. Growth in the online business makes Entain highly cash generative. Cash generated outside the US is being used to fund marketing in America as new states have legalised sports betting.
Add in new debt facilities that accompany this year’s €920 million acquisition of the Croatian sports betting company SuperSport, and financing costs are expected to more than double next year to nearer £200 million, versus about £80 million this year. The pricing Entain manages to secure for a €700 million loan that will be used to part-fund the SuperSport deal will prove more illuminating on how accurate those estimates are.
The fall in Entain’s share price may prompt some investors to ask whether the group will opt to return cash via share buybacks rather than pursuing acquisitions. But geographical expansion is too alluring for management, and shareholders shouldn’t expect the breaks to be put on M&A in favour of special returns. Rising debt costs “might even open new doors for us”, reckons the chief executive, Jette Nygaard-Andersen, as other bidders pull back on acquisitions.
The more intriguing question for shareholders is how the joint venture inevitably, eventually, ends. Selling its 50 per cent stake in BetMGM to MGM Resorts is less attractive while market valuations are so low. A wholesale takeover of Entain by its joint venture partner is more likely. The gap between the share prices of Entain and MGM has rarely been wider, at about 60 per cent.
The original terms of MGM’s offer in January last year, of 0.6 MGM shares per Entain share, imply a valuation of 1,658p for the London-listed gambling group, 46 per cent higher than the group’s current share price. Given the higher cost of financing, the conditions are unlikely to be as favourable but the chasm between Entain’s current share price and that reference point indicates that a decent premium would still need to be proffered in any takeover attempt. Whether that bid materialises or not, the shares look undervalued.
ADVICE Buy
WHY The share price does not reflect the long-term growth potential from expanding internationally
4imprint
Selling promotional pens and tote bags to businesses doesn’t seem like a business model with a wide enough moat capable of delivering strong and consistent profit growth. The FTSE 250 constituent 4imprint has defied that logic, however, which has made it one of the index’s top 15 best performers since the start of this year and one of the few constituents to be in positive territory.
Over the past five years the promotional products company has generated revenue growth at a compound annual rate of 14 per cent and an annual rise in profits of 31 per cent over the same period. After positive half-year revenues of $516 million during the first half, it is on track to hit a long-term revenue target of $1 billion this year.
How? By capitalising on a highly fragmented market in North America, where it generates the bulk of revenue, and dialling down on direct mail marketing to potential customers in favour of online and television methods. Rivals in the logoed goods industry have been slower to adopt the latter methods.
The economic downturn, with potentially tighter corporate marketing budgets, is the chief risk hanging over an analyst forecast of revenue growth of 10 per cent next year to $1.14 billion. That already looks priced into the shares, which trade at 15 times forward earnings, the lowest valuation since March 2020. A price/earnings growth ratio of just 0.48 is more indicative that future profit potential is not reflected in the group’s market value. A ratio below one is thought to indicate that shares are undervalued.
True to its target of retaining a net cash position, the group had net cash of $67.1 million on its balance sheet at the start of July. Special cash returns to shareholders are an option, one which analysts at the brokerage Liberum think is likely this year, given that a special dividend was paid out in 2018 at a time when the group had net cash of about half the current level.
Funding marketing to take market share is a bigger priority, which could become even more important if the group wants to capitalise on an eventual recovery in the economy, in the same way it did post-pandemic.
ADVICE Buy
WHY Growing market share could continue a strong record of earnings growth
