London-based investment bank Peel Hunt expects Flutter Entertainment, Entain and 888 to be positively transformed over the course of the next few years.
Today (2 September), Peel Hunt gaming analyst Ivor Jones explained in a note to investors why in his opinion, all three companies are undervalued.
“888, Entain and Flutter are all cash-generative businesses, but near-term cash flow is being held back by investment,” Jones said.
Transformation is ahead, however, believes the London-based investment bank. In the case of Flutter and Entain, this will come from the swing into profitability of their US businesses during 2023. In the case of 888, it should come from paying down the William Hill debt burden.
The investment bank pointed out the valuations of Entain and Flutter’s US offshoots are pivotal to their share prices.
Jones believes investors will give more credence to long-term potential once these companies become profitable, and that investors will pay more for growth after that point, although that requires patience.
Even though 888 has more modest plans in the US via its Sports Illustrated sportsbook, success for 888 in that market would also prove positive for its valuation too, Jones wrote.
In its analysis, the investment bank compared the operators’ EV/EBITDA multiples on two bases: first, based on forecast EBITDA; and next by excluding the contribution of the US businesses from the EBITDA but including their value as if they were standalone assets, based on Peel Hunt’s proprietary 2025 estimates.
As a result of these workings, Flutter’s EV/EBITDA multiple falls from 13.9x in FY23E to 8.3x in FY26E. However, assigning a £16bn asset value to Flutter’s US business (FanDuel) sees the implied multiple on the ex-US business fall from 3.7x to 2.0x.
Jones highlighted that Flutter has increased its debt through the recent acquisition of Sisal, and forecast that Flutter will not fall within its 1-2x target net debt/EBITDA range until 2024.
“From that point, while still investing in growth, we forecast that Flutter could pay a yield rising from 3.3% in FY24E up to 11% in FY26E,” said Jones.
In light of its analysis, the investment bank increased its target price for Flutter from 14,500p to 16,000p.
Switching to Entain, which is live in the US via BetMGM, Jones said the operator’s EV/EBITDA multiple falls from 9.1x in FY23E to 5.3x in FY26E. “However, assigning a £6.5bn value to Entain’s US business sees the implied multiple on the ex-US business fall from 2.7x to 1.2x. At our target price, those adjusted multiples would fall from 7.0x to 5.0x,” he said.
Entain is to increase its debt through the planned acquisition of SuperSport, and the investment bank forecast that it will not fall within its 1-2x target net debt/EBITDA range until 2024. From then on, Peel Hunt forecasts that Entain could pay a yield rising from 2.7% in FY24E up to 12% in FY26E.
888 is the most undervalued of the three companies, according to the bank’s analysis.
With the US (SI Sportsbook) a much smaller part of 888’s business, the two different valuation approaches result in multiples much closer to each other: “5.4x FY23E EBITDA including the US losses in EBITDA, and 4.4x attributing a value of £300m to what is more an option than a business in the US at present.
“888 has taken on a very material level of debt through the William Hill acquisition, and we forecast that it will not fall within its 2-3x target net debt/EBITDA range until 2026E,” Jones said.
At that point though, 888 could pay a yield of 38.1%, according to Jones, who acknowledges this “is a long time to wait in uncertain markets”.