Entain’s gamble to conquer overseas markets is paying off

High investor expectations leading into these results were clearly justified, as Entain (LSE:ENT) has revealed half-year numbers littered with examples of strong trading momentum.

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The group’s gamble to conquer overseas markets in addition to its core UK offering is showing signs of paying off. Entain previously revealed that its joint venture with BetMGM in the US has now become earnings positive, and elsewhere Brazil is now the fastest-growing market outside the States. While it has undoubtedly been a tough slog for the group to get to this stage, where promotional investment has been something of a necessary headwind, the benefits are beginning to appear.

At a group level, there are any number of signs of progress. Net Gaming Revenue (NGR) rose by 7%, group earnings by 11% to £583 million, while underlying operating profit spiked by 52%. Underneath the bonnet, Entain NGR was up by 3% despite the strong comparatives of the Euros football tournament last year, while online NGR’s rise of 5% was driven by strong iGaming and sports performances, and included growth of 21% in both the UK & Ireland and Brazil.

The most enticing prospects, however, are currently reserved for the US, which has loosened some of its regulatory grip over recent years, with the addressable market estimated to exceed $35 billion (£26 billion) of revenue, a true pot of gold at the end of the rainbow. Rival Flutter Entertainment (LSE:FLTR) responded to this prospect by moving its primary listing to the New York Stock Exchange in May last year, citing greater potential access to liquidity as well as heightened brand awareness.

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For Entain, US exposure comes in the form of its joint venture, BetMGM, where the unit is at last earnings positive. The unit had earnings of $109 million in the period, with net revenues rising by 35% to $1.35 billion, underpinned by growth of 28% in iGaming and 61% in online sports. Of course, this is a particularly competitive market, and the joint venture will need to continue building on its wins as other competitors emerge, and as existing players double down on their offerings in terms of pricing, promotion and presence.

Inevitably companies in this sector do not have a clear run, leaving their shares at the higher end of the risk spectrum. At any given time, adverse sports results can hinder profit margins, quite apart from the more ominous spectre of regulation. Betting companies are an easy target for governments aiming to raise additional income through taxes, and indeed the share price suffered last week as it emerged that there was an increasing probability of higher UK taxes to come at the time of the Autumn Budget. Regulation remains an intractable thorn in the side for gambling companies, as evidenced by previous s crackdowns in both the UK and Germany as well as higher deposit limits in the Netherlands, all of which inject shorter-term changes to consumer behaviour as the changes are absorbed.

In addition, there are other pressing concerns, such as the consumer’s propensity to spend given the wider economic picture, and whether the cost-of-living crisis will simply remove some of the revenues which may otherwise have come Entain’s way. The ongoing move towards geographical diversification may mitigate this impact, particularly if the US offering continues to encroach upon the potential riches which the country provides. In the meantime, the group has upped its guidance for the full year, including earnings in a range of £1.1 billion to £1.15 billion and online NGR growth of 7%, while also targeting £100 million of annual cost savings taking effect from next year.

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For the moment, Entain’s star is shining bright and it has any number of “podium positions” across its sprawling geographies and brand portfolio, which includes the likes of BetMGM, Ladbrokes, Coral, Gala and Foxy Bingo. The group has decided to stay put in the FTSE 100, for the time being at least, as opposed to rival Flutter’s decision to transfer to the US. In simple percentage terms, this has been of benefit to the share price, where a rise of 68% over the last year compares to a gain of 11.2% for the wider FTSE 100 and of 43% for Flutter. The market consensus of the shares as a buy is further validation that investors believe the Entain story has much further to go