Reaction to Entain and PageGroup third-quarter results

Entain Q3

Entain (LSE:ENT)’s gamble to conquer overseas markets in addition to its core UK offering is showing signs of paying off. Indeed, the most enticing prospects are currently reserved for the US, where its joint venture BetMGM is beginning to gain real traction.

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The US has loosened some of its regulatory grip over recent years, with the addressable market estimated to exceed $35 billion of revenue, a true pot of gold at the end of the rainbow. Rival Flutter Entertainment 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.

BetMGM increased revenues in the quarter by 23% to $667 million, validating previous guidance which had been upgraded to net revenue of at least $2.75 billion for the year, including earnings of $200 million. Entain now anticipates that at least $200 million will be returned to the group and its partner MGM Resorts in what is hoped will be a large payback on the investment so far.

For the company as a whole, Net Gaming Revenue (NGR) grew by 6% in the three months to 30 September, including an online spike of 5%, with the UK & Ireland also adding 8% in NGR and 15% online. Entain has reiterated its guidance for the year of online NGR growth of 7% and earnings in a range of between £1.1 billion and £1.15 billion.

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 has suffered more recently given a reported and 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 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.

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Even so, and despite some profit taking at the open, 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 FTSE100, 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 19% over the last year compares to a gain of 14.6% for the wider FTSE100, and which has been bolstered by a spike of 54% over the last six months. The market consensus of the shares as a buy is further validation that investors believe the Entain story has much further to go.

PageGroup Q3

A moribund labour market is weighing heavily on PageGroup (LSE:PAGE), although given recent updates from its competitors the sombre news comes as little surprise.

In general, decision-making is being delayed by tighter budgets and lower confidence levels both from companies and candidates on the outlook. The largest area of the group is the Europe, Middle East and Africa (EMEA) unit which accounts for 52% of the group total and which saw a decline of 10.2%. Within the unit, the beleaguered economies of France and Germany were at the eye of the storm, with declines of 16% and 11% respectively.

In addition, UK gross profit fell by 14.3%, although its effect was less powerful given that the domestic economy only accounts for 12% of the group total. There were quarter on quarter increases in both the Americas and Asia, where the former grew by 3.5% largely due to a resilient performance in the US, but this did little to alter the overall picture. Gross profit for the group fell by 6.7% to £187.8 million and plans are afoot to introduce a cost reduction programme which should yield annualised savings of £15 million from next year. At the same time, the group is maintaining its guidance for full year operating profit of £21.5 million.

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At first glance, a generous dividend yield of 7.3% could suggest that investors are being paid to wait until these pressured economies turn a corner. However, the dividend is only covered 0.3 times, which is close to being unsustainable and is therefore certainly not guaranteed. An unloved sector has resulted in a decline of 36% over the last year for PageGroup shares, as compared to a gain of 5.9% for the wider FTSE250. The strength of the share price at the open does little to repair the damage and is likely a sign of some relief that conditions had not deteriorated as much as had been expected.

While the shares currently have a market consensus of a hold, larger rival Hays is marginally preferred, while its much smaller competitor Robert Walters is currently the pick of the bunch, albeit on a very limited consensus. For the time being, investors are likely to continue to steer clear of a sector which is presently facing more threats than opportunities.