JPJ Group plc — Remote gaming duty increases in April 2019

JPJ Group plc — Remote gaming duty increases in April 2019

Following the resignation of Sports Minister Tracey Crouch, the UK government has bowed to pressure to bring forward the reduction in FOBT stake limits, from October 2019 to April 2019. To coincide with the FOBT changes, the planned increase in remote gaming duty (from 15% to 21%) will also commence in April. We reduce our FY19e EBITDA by a further £6m but our FY20 estimates are unchanged. JPJ shares have fallen by c 30% ytd and, despite the reduced EBITDA, trade at only 5.7x P/E, 7.5x EV/EBITDA and 15.1% free cash flow yield for FY19e.

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JPJ Group plc

Remote gaming duty increases in April 2019

RGD tax changes

Travel & leisure

15 November 2018

Price

597p

Market cap

£444m

Net debt (£m) at September 2018

298.8

Shares in issue

74.3m

Free float

95%

Code

JPJ

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(11.6)

(37.2)

(29.8)

Rel (local)

(11.8)

(32.0)

(26.0)

52-week high/low

1,036p

590p

Business description

JPJ Group plc is a leading online gaming operator mainly focused on bingo-led gaming targeted towards female audiences. At September 2018, 56% of revenues were generated in the UK.

Next events

FY18 results

March 2019

Analysts

Victoria Pease

+44 (0)20 3077 5700

Katherine Thompson

+44 (0)20 3077 5730

JPJ Group plc is a research client of Edison Investment Research Limited

Following the resignation of Sports Minister Tracey Crouch, the UK government has bowed to pressure to bring forward the reduction in FOBT stake limits, from October 2019 to April 2019. To coincide with the FOBT changes, the planned increase in remote gaming duty (from 15% to 21%) will also commence in April. We reduce our FY19e EBITDA by a further £6m but our FY20 estimates are unchanged. JPJ shares have fallen by c 30% ytd and, despite the reduced EBITDA, trade at only 5.7x P/E, 7.5x EV/EBITDA and 15.1% free cash flow yield for FY19e.

Year end

Revenue (£m)

EBITDA*
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield

(%)

12/16

269.0

102.2

83.5

112.6

0.0

5.3

0.0

12/17

304.7

108.6

78.2

103.9

0.0

5.7

0.0

12/18e

311.4

106.2

86.3

110.6

0.0

5.4

0.0

12/19e

328.4

99.0

84.5

105.1

40.0

5.7

6.7

12/20e

345.8

102.0

88.5

109.6

45.0

5.5

7.5

Note: *PBT and EPS are normalised and fully diluted (EPS), excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Parliamentary U-turn

Following the Budget announcement on 29 October and the resignation of Tracey Crouch, the government has brought forward the timing for the FOBT stake reduction. The move from £100 stake to £2 stake will now commence in April 2019 rather than October 2019. To coincide with the FOBT changes, the increase in remote gaming duty (from 15% to 21%) will also happen at the same time.

A further £6m reduction in EBITDA

At Q318, the UK comprised c 56% of JPJ’s total revenues and the increase in RGD (from 15% to 21%) will have a c £12m annual impact on group EBITDA. As a result of an additional six months, we reduce our FY19e EBITDA by a further £6m. This one-off hit in FY19 represents 8p per share. At this stage we have not factored any mitigation into our forecasts and we continue to assume limited market growth due to the variety of regulatory burdens. Please see our 14 November Update for the recent Q318 trading commentary.

Valuation: 5.7x P/E for FY19e

As a reflection of the uncertain UK regulatory environment, JPJ shares have fallen by c 30% ytd and, despite the EBITDA hit, trade at only 5.7x P/E, 7.5x EV/EBITDA and 15.1% free cash flow yield for FY19e. Despite the regulatory challenges, the online bingo-led business model remains highly cash generative and from next year we anticipate annual operating cash flow of c £90m. Continual debt reduction should lead to a 2.5x net debt to EBITDA ratio during 2019 (vs 3.0x at Q318) and we anticipate dividends next year.

Exhibit 1: Financial summary

£m

2015

2016

2017

2018e

2019e

2020e

December

PROFIT & LOSS

Revenue

 

 

194.6

269.0

304.7

311.4

328.4

345.8

Cost of Sales

(101.4)

(130.7)

(147.5)

(159.6)

(178.1)

(185.3)

Gross Profit

93.3

138.3

157.2

151.9

150.3

160.5

EBITDA

 

 

70.4

102.2

108.6

106.2

99.0

102.0

Operating Profit (before amort. and except.)

70.1

101.6

108.2

105.7

98.5

101.5

Intangible Amortisation

(50.6)

(55.5)

(62.6)

(61.3)

(61.3)

(61.3)

Exceptional and other items

(109.7)

(80.3)

(104.9)

(20.1)

0.6

0.6

Share based payments

(2.9)

(2.3)

(1.4)

(0.6)

(0.6)

(0.6)

Operating Profit

(93.1)

(36.5)

(60.8)

23.8

37.3

40.3

Net Interest

(24.0)

(18.1)

(30.0)

(19.4)

(14.0)

(13.0)

Profit Before Tax (norm)

 

 

46.1

83.5

78.2

86.3

84.5

88.5

Profit Before Tax (FRS 3)

 

 

(114.2)

(36.7)

(65.8)

7.0

23.3

27.3

Tax

(0.5)

0.1

(0.7)

(3.0)

(5.0)

(5.0)

Profit After Tax (norm)

45.5

83.6

77.5

83.3

79.5

83.5

Profit After Tax (FRS 3)

(114.8)

(36.7)

(66.5)

4.0

18.3

22.3

Average Number of Shares Outstanding (m)

61.2

71.2

73.9

74.6

75.0

75.5

EPS - normalised (p)

74.4

117.3

104.9

111.7

106.1

110.7

EPS - normalised and fully diluted (p)

 

73.1

112.6

103.9

110.6

105.1

109.6

EPS - (IFRS) (p)

(187.6)

(51.5)

(90.0)

5.3

24.4

29.5

Dividend per share (p)

0.0

0.0

0.0

0.0

40.0

45.0

Gross Margin (%)

47.9

51.4

51.6

48.8

45.8

46.4

EBITDA Margin (%)

36.2

38.0

35.6

34.1

30.2

29.5

Operating Margin (before GW and except.) (%)

36.0

37.8

35.5

33.9

30.0

29.4

BALANCE SHEET

Fixed Assets

 

 

674.3

652.3

595.9

538.2

480.4

422.7

Intangible Assets

668.8

648.8

589.0

527.7

466.5

405.2

Tangible Assets

0.2

0.9

1.3

4.8

8.3

11.9

Other long term assets

5.3

2.6

5.6

5.6

5.6

5.6

Current Assets

 

 

63.9

139.0

93.2

122.5

130.1

118.5

Stocks

0.0

0.0

0.0

0.0

0.0

0.0

Debtors (incl swaps)

25.6

62.0

26.0

28.0

30.0

32.0

Cash

31.8

68.5

59.0

84.5

89.1

74.5

Player balances

6.5

8.6

8.2

10.0

11.0

12.0

Current Liabilities

 

 

(54.3)

(154.9)

(98.5)

(44.3)

(40.3)

(38.3)

Creditors

(23.1)

(41.3)

(46.3)

(40.0)

(38.0)

(36.0)

Short term borrowings

(25.2)

(26.7)

(0.3)

(0.3)

(0.3)

(0.3)

Contingent consideration

(6.0)

(86.9)

(51.9)

(4.0)

(2.0)

(2.0)

Long Term Liabilities

 

 

(394.8)

(397.1)

(386.7)

(373.5)

(321.5)

(271.5)

Long term borrowings

(189.3)

(347.4)

(369.5)

(369.5)

(319.5)

(269.5)

Contingent consideration

(203.6)

(33.3)

(7.7)

(2.0)

0.0

0.0

Other long term liabilities

(2.0)

(16.4)

(9.4)

(2.0)

(2.0)

(2.0)

Net Assets

 

 

289.0

239.4

204.1

242.9

248.8

231.4

CASH FLOW

Operating Cash Flow

 

 

23.3

84.2

102.0

104.2

90.0

93.0

Net Interest

(24.0)

(17.5)

(30.9)

(19.4)

(14.0)

(13.0)

Tax

(0.5)

(1.2)

(1.0)

(3.0)

(5.0)

(5.0)

Capex

(2.5)

(2.5)

(3.2)

(4.0)

(4.0)

(4.0)

Acquisitions (inc earn-outs)

(355.6)

(156.3)

(94.2)

(52.4)

(5.0)

(5.0)

Financing

203.7

(29.6)

22.2

0.0

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

(7.4)

(30.6)

Net Cash Flow

(155.6)

(122.9)

(5.2)

25.5

54.6

35.4

Opening net debt/(cash)

 

 

27.1

182.7

305.6

310.7

285.2

230.6

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

0.0

Other

0.0

0.0

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

182.7

305.6

310.7

285.2

230.6

195.2

NPV of outstanding earnouts/ other

 

209.5

140.8

76.6

10.0

5.0

0.0

Currency swaps

 

 

(4.7)

(38.2)

0.0

0.0

0.0

0.0

Adjusted net debt

 

 

387.5

408.1

387.3

295.3

235.7

195.3

Source: Company accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by JPJ Group plc and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by JPJ Group plc and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

GVC Holdings — Parliamentary U-turn

Following the resignation of Sports Minister Tracey Crouch, the UK government has bowed to pressure to bring forward the reduction in FOBT stake limits, from October 2019 to April 2019. The planned increase in remote gaming duty (from 15% to 21%) will also commence in April. We reduce our FY19 EBITDA by a further £95m and net debt/EBITDA now peaks at 3.0x in FY19. Our FY20 estimates are broadly unchanged.

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