Interactive Investor

Why GVC Holdings is the best FTSE 100 recovery stock

Shares are above their pre-crash price, but these numbers demonstrate the benefits of diversification.

16th July 2020 09:49

Richard Hunter from interactive investor

Shares are above their pre-crash price, but these numbers demonstrate the benefits of diversification, reports our head of markets.

GVC Holdings (LSE:GVC) efforts may not be enough to move profits from red to black, but its model has shown the benefits of diversification throughout the pandemic.

With the likes of Ladbroke and Coral betting shops shuttered and no sporting events during lockdown, total net gaming revenues in the UK for the second quarter plunged by 86%, resulting in a decline of 50% for the half-year. There was a similar story in Europe, with enforced store closures all but wiping out revenues. Total group revenues slipped by 22% in Q2, bringing the H1 number down by 11%.

Even prior to the lockdown, the broader industry was in the crosshairs of the government, with proposed and possible regulation threatening to crimp revenues on measures such as the £2 limit on Fixed Odds Betting Terminals, plus the removal of the ability to fund gambling with credit cards. Meanwhile, GVC’s acquisition spend and investment into the business generally had raised some concerns on the level of its net debt position.

During the lockdown period, however, the group managed to operate at cash neutral through a series of measures, such as the cancellation of the dividend, the suspension of marketing spend and with access to additional credit facilities which would have boosted liquidity if required. 

The various schemes available from the government and the business rates relief programme were also a useful prop in mitigating financial harm to the business.

In the absence of sporting events, in particular, the online channel came into its own throughout the period, as customers flocked to non-sports offerings such as poker and bingo. Already accounting for just over half of online revenues, its importance was further underlined not only by increases of over 20% on both the second quarter and the half-year as a whole, but also in providing an alternative source of income, demonstrating the benefits of a diversified business model. 

The return of sporting events and the reopening of shops generally has had an initially encouraging response from customers. This should reinforce GVC’s cash generative strength, while further afield the joint venture in the US with MGM Resorts has had additional investment from both parties, in what looks to be a reasonably aggressive attack on its competitors in a huge and competitive market.

GVC shares had suffered from the indiscriminate markdowns during the March meltdown, since when there has been a recovery of over 180%. The performance over the last year has seen the shares rise by 52%, enough to clinch promotion to the FTSE 100 in June, where this index has declined by 17% in the same period.

There will be an element of adjustment until the company can regain its previous momentum and negate the revenue declines, which have inevitably dented its recent financial performance. 

However, appetite for the stock remains undiminished and, with the prospect of US expansion running in tandem with an established European presence, the market consensus of the shares as a ‘strong buy’ will likely remain in force.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.