Investment banks reiterate Entain Buy rating as Q1 trading update reveals 31% NGR growth

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Investment analysts have reiterated Buy recommendations on Entain stock as a trading update from the FTSE 100 operator showed a 31% rise in NGR for Q1 2022.

Entain has not yet released full figures for the period, but reported a decline of 8% in online gaming NGR, consisting of a 7% downturn in sports revenue and a 10% reduction in gaming revenue.

This was more than offset by the return of the retail sector – which was all but destroyed in Q1 2021 as a result of Covid-19 related lockdowns – as revenue from Entain’s land-based network increased more than 10-fold year-on-year resulting in the 31% increase in group NGR.

Lockdowns throughout Italy and the UK in Q1 of last year meant Entain’s retail networks remained almost entirely closed during the period, giving rise to the exceptional comparative period in the first quarter of this year.

The firm also provided two-year and three-year CAGR figures of 8% and 6%, respectively, helping to give a more consistent view of the business’ long-term growth amid the exceptionally volatile period caused by macroeconomic factors and Covid-19.

The two-year CAGR for retail specifically gives a more realistic view of the long-term performance of Entain’s land-based network, at 4%, while CAGR over a three-year period shows a 2% reduction.

Retail figures are also given on a like-for-like basis, while the number of shops and outlets in Entain’s estate has reduced by 7.1% between Q1 2021 and Q1 2022, from 4,662 to 4,333.

Paul Leyland: “With the use of cash down to under 20% in the UK, the shop of the future may need to become the shop of the present urgently.”

Paul Leyland of Regulus Partners said in a note to investors that this reality is of significant concern. While a 2% reduction in like-for-like CAGR does not sound catastrophic, the reality when accounting for Entain’s reduced retail footprint, together with increasing inflation and shifting consumer habits, is that “there is a looming structural problem” for the business, he said.

“In Italy and arguably Belgium there is a much clearer route to resilience-omnichannel for shop estates since both have robust cash economies (86% Italy before Covid-19 for small payments; 58% Belgium), but with the use of cash down to under 20% in the UK, the ’shop of the future’ may need to become the ‘shop of the present’ urgently, in our view,” he explained.

Elsewhere, Entain’s joint venture with MGM Resorts International, BetMGM, continued to see significant growth in terms of its footprint, with the brand now available in 23 North American markets. It entered four new markets during the last quarter, in addition to launching in Ontario earlier this week, following the end of Q1.

Entain said BetMGM boasts market share of 24% across all the markets where it operates, making it the number two operator in North America across sports betting and iGaming. For iGaming specifically, it remains the leading operator, with market share of 29%.

The brand is now expected to reach positive EBITDA in 2023, Entain said, and further details will be made available at the BetMGM business update on 12 May.

Peel Hunt investors’ note: “We believe the share price fails to reflect the strong growth potential, cash generation and M&A potential.”

“We have started the year with a good performance across all areas of our business, driven as ever by the strength of our industry-leading platform,” said Entain CEO Jette Nygaard-Andersen. “We have delivered strong performances in all of our major markets, and I am pleased to report that retail is performing well with customers returning for our in-store experience.

“In the US, BetMGM is firmly established as the number two operator, and our market launches during Q1 mean that we now have access to over 41% of the US adult population. Elsewhere, our strategy of expanding into new markets is continuing at pace, having acquired businesses in Canada, Latvia and Poland during Q1.”

London-based investment bank Peel Hunt reiterated its Buy recommendation for Entain in a note to investors today (7 April), stating the stock is undervalued compared to its 1,622p target price. 

“We believe the share price fails to reflect the strong growth potential, cash generation and M&A potential,” it said.

Leyland was more cautious in his overall assessment. He said: “Entain has the opportunity to create a powerful hub with local spokes, but the risks of over-centralisation (lose share in each market) or over-localisation (lose synergies and control) are significant, in our view.”

About the author

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Conor Mulheir

Conor entered the gaming industry in 2018 producing high-level live event content for audiences in London, Amsterdam and São Paulo. From 2020, he went on to report news and commission exclusive content for various gaming media brands before joining iGaming NEXT as editor in January 2022.

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