The stakes surrounding Entain’s ferocious expansion have always been high — but when some markets are slowing from their Covid-era boom, they become even bigger.
The post-pandemic comedown has been harsher than expected. It also has coincided with a cost of living crisis and new affordability measures being put in place in Britain, which have sent punters elsewhere. Online gaming revenue is now expected to decline in the high single digits during the third quarter, once acquisitions are stripped out. For the year, guidance has worsened to a fall somewhere in the low single digits. A tighter handle on costs means that adjusted earnings before interest, taxes and other deductions is still expected at between £1 billion and £1.05 billion.
Next month Jette Nygaard-Andersen, the Entain boss, will set out how she will sustainably grow earnings organically and cut costs further as the business works towards an adjusted earnings margin of 30 per cent. It is now at 26 per cent. Scaling back newer and less profitable bets, such as esports or investment in interactive elements of online betting, could be one way of moving closer to that margin target.
Entain has long been a bet on the rapid growth potential of the newly liberalised American sports betting market. That is accessed via a 50-50 joint venture with MGM Resorts. The group does not disclose what it spends on marketing, a key area of expenditure, nut the cost of luring more customers means the joint venture is yet to make a profit. Funding a portion of the American expansion is also part of the reason that cash generated by the rest of Entain has been outpaced by the amount being thrown behind the joint venture and acquisitions elsewhere. The amount of cash turned out by the business rose by just over two thirds to £319 million over the first half of the year, but the amount ploughed back into the BetMGM joint venture and snapping up smaller businesses more than doubled to £686 million.
The cost of expansion in the United States now accounts for only a sliver of that figure. The idea is that it eventually comes away altogether as the joint venture becomes self-sustaining. Entain’s share of losses associated with the American business narrowed to £48.1 million in the first six months of the year, less than half the figure reported over the same period last year. The US business expects to become profitable, at least before interest, taxes and other charges, during the second half of this year.
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Hitting that milestone should provide the proof needed to reassure investors. Entain says it is still on track and analysts at Investec think the BetMGM joint venture will record an adjusted loss of $55 million this year, but will jump to a profit of $288 million next year and will reach $1.06 billion by 2026.
Entain is in a position of weakness at present. There is also the deferred prosecution agreement with HM Revenue & Customs to settle allegations of bribery in its former Turkish subsidiary. It has budgeted £58 million, which would be accounted for over four years. That still needs to be agreed with the courts and, in turn, could put Entain back at the negotiating table and may mean the group sells a chunk of its 50 per cent stake in BetMGM to MGM Resorts. A wholesale takeover of Entain by its joint venture partner could emerge, too.
The rump of the group also would be easier to swallow. An enterprise value of eight times adjusted earnings before interest, taxes and other charges is about half the peak at the end of 2021. Investors could be convinced by the chance to realise the value of the business more quickly.
ADVICE Hold
WHY The group remains a potential takeover target at the present valuation
YouGov
YouGov has been a second-order casualty of the retrenchment in spending among global technology companies. Market sentiment has not been worse since the time of the Brexit referendum. Even after a jump of more than a fifth on its results day, its shares trade at 18 times forward earnings, a quarter lower than the decade average.
Annual figures did not disappoint. Revenue was 9 per cent ahead on a like-for-like basis and adjusted operating profit was up by 23 per cent.
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Within that, slashed marketing budgets within the technology sector hurt sales for the data services division, which companies typically access on a more ad hoc basis for one-off projects. The technology industry is the largest market for YouGov, accounting for 14 per cent of revenue, but it has started to note a pick-up in spending in the industry.
Struggles here have been made up for by gains in its higher-margin data products and custom research businesses. Just over 40 per cent of group revenue is recurring, but a big chunk of that comes from its most profitable data products business, which counts roughly 80 per cent of its sales as repeat.
A €315 million deal to acquire the consumer panel business of GfK, the retail researcher, was agreed in July. The idea is to push the European-focused business into the United States, YouGov’s largest market, and to combine its target’s in-person canvassing with YouGov’s existing data resources. Pre-deal, the company expects to meet the market’s expectations for this year. Those feature revenue of £344 million and adjusted operating profit of £65.6 million, which represents a recovery in growth rates against last year’s levels.
A period of elevated investment is behind the group, which could help margins to rise even further. Its adjusted operating margin reached 18.7 per cent last year, from 16.4 per cent the year before. It has a target of hitting 25 per cent over the medium term. Getting there will rely on a continued shift to companies paying for data on subscription for market research. If that emerges, YouGov should regain its premium rating.
ADVICE Buy
WHY Shares look too cheap given the company’s net cash position and growing margins
