Entain performed better than management expected over the third quarter. Underlying Net Gaming Revenue (NGR) grew by 7%. There were strong performances in Online International markets as well as the UK & Ireland, but retail outlets continued to drag.
The US-facing joint venture, BetMGM, grew NGR by 18% but the standout performance was Brazil which was up 48%.
Entain expressed increased confidence for the last months of the year, with online NGR expected to be mid-single-digit positive, a further improvement to guidance. Underlying cash profit (EBITDA) is now expected to be towards the top end of the £1.04bn - £1.09bn guidance range.
The shares were up 2.8% in early trading.
Our view
Entain’s modest upgrade in its third-quarter trading update shouldn’t have come as a huge surprise. Nonetheless investors responded positively.
The biggest contributor to profits in the core business remains the UK & Ireland, where tighter gambling regulations have been weighing on performance. Over time, the comparatives will become easier, and there are growing signs that marketing and product development efforts are driving more players to Entain’s betting and gaming websites.
Progress at its betting shops is proving to be a slower burn. And the sector does come with some inherent risks, like the potential for more regulatory change. On top of that, gambling’s long been seen as an easy target for the taxman. Unfavourable sporting results can also cause financial results to disappoint.
The domestic market is relatively mature, and growth may never shoot the lights out. But there are more exciting opportunities overseas. One such example is Brazil, the fastest-growing market outside the United States. Entain is already well established here and was an early applicant for a license in a new regulatory framework. This opens up new commercial opportunities and creates a barrier to entry. Nonetheless, competition in Brazil is still likely to intensify.
We welcome the move to exit non-core unregulated markets like Chile and Peru, allowing investment to focus on high-growth areas, along with the core regions like the UK.
Margin expansion is also on the cards, with 'Project Romer' on track to deliver £70mn of annualised cost savings to the online operation by 2025 (c.6% of 2023 operating costs), rising to £100mn by 2026. These initiatives sound great, but we're not getting too excited until some results 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. 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 looks to be overcoming recent challenges and there are some attractive growth prospects to go for, particularly in overseas markets. However, Entain’s valuation has enjoyed a substantial recovery of late, which leaves the stock vulnerable to disappointments and adds pressure on the new CEO Gavin Isaacs to keep driving performance.
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.
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