GVC Holdings: Big bets placed on further share price upside

Buyers are piling into the owner of bookmaker Ladbrokes, paying prices not seen since last November. 

Ladbrokes Coral owner GVC Holdings (LSE:GVC) has become a firm favourite with investors after two profit upgrades and a rival's $6 billion merger deal triggered a wave of buying.

Shares are up 43% since the first of those upgrades alongside interim results in mid-August, with the second upgrade in today's third-quarter trading update lifting shares to 787.8p.

A number of analysts, however, think the bookie's winning run has further to go after stating that shares have the potential to return to their record high in July 2018 at near to 1,110p.

Broker Jefferies points out that GVC trades at an "unwarranted valuation discount" to the proposed new company being created out of Flutter Entertainment (LSE:FLTR) — formerly known as Paddy Power Betfair — and Toronto-listed Stars Group, which owns Poker Stars.

They said: "Flutter historically traded at a sector premium multiple mainly due to a strong balance sheet, very limited unregulated market exposure and double-digit growth.

"FlutterStars may yet demonstrate those characteristics again but in the shorter-term we think that GVC looks relatively similar." Jefferies noted that GVC trades on a 8.3x enterprise value to 2020 earnings multiple, whereas FlutterStars is on 11.4x. 

The broker is impressed by GVC's portfolio of brands across diversified products and geographies, as well as the economies of scale generated by its software platform.

The company's momentum was highlighted in today's update, with the stand-out performance coming from online after net gaming revenues rose 12% in the third quarter. This was despite the comparative period last year including part of the FIFA World Cup, with analysts at Morgan Stanley noting that the two-year growth rate had accelerated to 40%.

Source: TradingView Past performance is not a guide to future performance

Trends in the UK bookmaking estate have also been better than first feared after the government reduced the maximum stake on fixed-odds gaming machines to £2.

These factors, as well as confidence that changes in German regulation won't affect its 2019 performance, have allowed management to upgrade its full-year profit estimate to between £670 million and £680 million, from the £650 million to £670 million signalled in August.

There's also been an encouraging start for GVC's joint venture with MGM Resorts following a ruling last year by the US Supreme Court to legalise sports-betting.

The BetMGM app launched in New Jersey in September using the GVC technology platform, with the company "very well placed" to capitalise on the US sports-betting opportunity.

The MGM partnership is the latest big development for GVC after the acquisition of Ladbrokes Coral in 2018 created a company operating 19 established brands around the world, including bwin, Crystalbet, Foxy Bingo, Gala, partypoker and PartyCasino. Cost savings from the Ladbrokes Coral deal in the region of £130 million by 2022 are also being targeted.

The company is highly cash generative, giving it flexibility to invest in the business, reduce debt and return cash to shareholders. It trades with a prospective dividend yield of over 5%.

Less favourably, and with governments globally under pressure to raise tax revenues and reduce debt, the gaming industry is likely to remain a relatively easy target for regulation.

Analysts at Berenberg left their price target unchanged at 1,100p today, adding: "Despite a good run in the shares over the past two months, the stock remains on undemanding multiples."