Entain’s EBITDA margin expected to drop in 2023 amid unregulated market exits

Entain recorded a 12% increase in NGR in 2022, but anticipates low to mid-single digit growth in online NGR in 2023 due to regulatory headwinds.

Topline numbers

In 2022, Entain generated NGR of £4.35bn, an increase of 12% on 2021.

Moreover group NGR, which includes the operator’s 50% share of BetMGM, has experienced 18% growth, indicating a three-year compound growth rate of 11%.

While online NGR slightly decreased by 1% in 2022, retail NGR witnessed a significant surge of 66%, benefiting from favourable Covid-19 comparisons and an enhanced customer offer through betting and gaming terminals.

Overall, Entain’s financial performance was robust, with group underlying EBITDA increasing by 13% to reach £993m, which is at the top of the upgraded guidance range.

News nugget

Entain reported Q4 results in February, and its full-year performance was broadly in line with previously announced expectations.

Consequently, during the earnings call, the company’s outlook for 2023 and beyond was a key focus.

While Entain stressed that its US joint venture BetMGM is on track to be profitable by H2 2023, the operator pointed to regulatory headwinds and expects online NGR growth in 2023 to be in the low to mid-single digits.

EBITDA margin for 2022 came in at 27.1%, but will drop to 26% this year, Entain said.

CFO Rob Wood stressed that the margin would be 3% higher if not for Entain’s strategy to exit unregulated markets.

“As our regulated revenue mix nears 100%, we have now absorbed most of the impact of becoming fully regulated, which puts us in a strong position versus other operators.

“Therefore, over time, with increasing benefits of scale, we remain confident that our long-term EBITDA margin should trend towards 30%,” Wood said.

During the earnings call, Wood also shared some insights on the forthcoming international tax reform, which will introduce a global minimum tax rate of 15% for multinational enterprises starting in 2024.

Wood explained that as Entain is a UK tax resident with its online business headquartered in Gibraltar, where the corporation tax rate was recently increased to 12.5%, the company only expects a minor impact on its effective tax rate once the Base Erosion and Profit Shifting (BEPS) measures are implemented.

Entain anticipates an effective tax rate of approximately 23% for 2023.

Going forward, CEO Jette Nygaard-Andersen confirmed that M&A will continue to be a critical component of Entain’s growth strategy.

In addition to this, the company has ambitious plans to attract new audience segments.

Nygaard-Andersen cited the recent launch of Unikrn’s esports betting operations as evidence of this commitment.

She added that Entain strives to “continue to test, learn and experiment with new formats”, including multiplayer free-to-play and live game shows, as well as partnering with leading household entertainment names.

Best quote

During the earnings call, Entain chairman Barry Gibson spoke about the company’s strategy of operating exclusively in domestically regulated and regulating markets, which represents an opportunity worth $170bn according to Entain.

Gibson commented: “A huge amount has been achieved, but it is clear that there’s still much to do, with the main issues relating to our legacy business that need to be resolved and do not reflect the type of business we are today.”

Best question

Much of the discussion revolved around Entain’s main markets.

Ed Young from Morgan Stanley sought additional details on the regulatory challenges that Entain had previously referenced, while Kiranjot Grewal from Bank of America enquired about the company’s growth markets for 2023.

CFO Wood stressed that the UK’s affordability checks are “clearly the main one”, while the fact that Entain is not licensed in the Netherlands yet has an “ongoing impact”.

Moreover, Wood said Germany is another challenging market for compliant operators. However, with the new regulator now firmly in place, “we are hopeful that we will also see increased enforcement as the year progresses. “It’s so severe how disadvantaged compliant operators are,” Wood added.

Turning to 2023 growth markets, Entain CEO Jette Nygaard-Anderson identified Brazil and Italy as key growth markets for the company in 2023, with strong growth in Australia also expected.

Commenting on increased competition in Australia, she added that the market is “likely going to soften during the year.”

However, Entain believes it can still gain market share in Australia and see growth in 2023.

Current trading & outlook

In a note to investors, Peel Hunt analyst Ivor Jones highlighted that Entain’s share price has decreased due to the dissipation of bid speculation after MGM officials said they would not try to acquire Entain.

“We believe that strong future trading will offset this,” Jones said.

In addition, he expressed scepticism about Entain’s reported losses of £34.3m in “new opportunities,” which the company attributes to ongoing innovation spending and the launch of Unikrn esports.

Although Jones is uncertain about the value of these initiatives, it suggests that reducing investment in this area could support profit growth, he wrote.

Meanwhile, Entain said it has started 2023 with positive underlying momentum and is confident in its long-term strategic prospects.

Investors remained cautious, and at the time of writing, shares in Entain were trading nearly 4% lower.