Entain’s US joint venture, BetMGM, has increased net revenue by 6% in its first half to $1.0bn with growth accelerating towards the end of the period.
Cash losses from operations (EBITDA) came in at $123mn. In the second half, marketing investment in iGaming is expected to be greater than planned. BetMGM now expects second half losses to be similar to the first half, compared to consensus forecasts of a $67mn profit.
The language around a $500mn cash profit target in the ‘coming years has softened from the previously more defined goal of 2026.
The shares were down 6.0% in afternoon trading.
Our view
A profit warning from Entain’s 50% owned American operation was another knock to investor sentiment. Outside of the US, Entain’s first quarter update in April revealed a mixed bag with the pace of revenue decline slowing. But with the US outlook falling short of earlier hopes, there’s now some pressure to deliver a improving trends in the core business, and that’s far from guaranteed.
Regulatory challenges loom overhead, and several headwinds have come at the same time. Affordability checks in the UK and a German market that's seeing new regulations like stricter deposit limits, are expected to continue to weigh on performance. A recent vote in the Netherlands also paves the way for a potential ban on online gambling advertising. All in, regulatory headwinds were expected to be a £40mn drag on cash profit this year.
Retail has been a positive surprise, with performance hanging on despite easier comparable periods now being behind us. But we see Entain's future in the higher-margin online business.
Following a spree of acquisitions, organic growth is back in focus. We're expecting to see Entain exit some non-core markets like Chile and Peru, with investment funnelled into high-growth areas like the US and Brazil, along with the core regions like the UK.
Margin expansion is also on the cards, with 'Project Romer' on track to deliver £70mn of cost savings to the online operation by 2025 (c.6% of 2023 operating costs). These initiatives sound great, but we're not getting too excited until some results start to come through.
Entain’s hope of cracking the US rests with its joint-venture BetMGM. It's taking a bit longer than expected to reach profitability as it spends heavily on marketing to gain a foothold in this relatively immature but potentially huge market for online betting and gaming.
BetMGM’s now live in Nevada, the home of Las Vegas, making it the only top three operator with a licensed app in the state. We see a lot of room to run in this market, but it's starting to run up against tougher competition - so it's an area to follow closely. While there are some signs that it’s starting to get the most out of its marketing dollars, it will take some time before it can claim that the investment was worthwhile.
Entain’s been under pressure of late and the valuation now reflects that reality. We can understand the sentiment, with regulatory headwinds, changes at the helm, and increased US competition. With a longer-term view, we feel the growth prospects are being overlooked and the opportunity in the US will come through over time - though there are no guarantees.
Environmental, social and governance (ESG) risk
Consumer services companies are medium risk in terms of ESG, and very few companies excel at managing them. That leaves plenty of opportunity for forward-thinking firms. Product governance concerns are a primary driver of this risk, along with the environmental and social impact of those products and services. Additional material issues to the industry are resource use and waste, and labour relations.
Entain’s overall management of material ESG issues is strong.
Entain has established a board-level ESG committee overseeing issues like safer betting, regulatory compliance, and anti-bribery. The company has strong policies on responsible gambling, anti-bribery, and whistleblowing, but needs improvement in responsible marketing, data privacy, and political involvement.
Entain key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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