GVC has now released their half year results for 2013.
Revenues are up across all areas but the largest increases are in Sportingbet and BSB revenue, reflecting the new acquisition. Variable costs are also up, but much less than revenues so Gross Profit is €27.9M higher at €45.6M. Personnel expenditure and Technology costs are up €9.8M and €6.5M respectively reflecting the larger group and the only other major expenses are the costs arising on the Sportingbet acquisition, which was €15.1M. These costs included €4.6M for lawyers and other advisors and a €1.6M incentive paid to the directors. The total also included €5.4M of restructuring costs. All of this means that Operating Profit was €5.9M lower at €700K. There was a one-off profit from asset sales of €1.3M and the lack of the loss making discontinued operation, which was €900K last year. Therefore the profit for the year was only €3.4M lower at €829K, not bad considering the substantial costs arising on the acquisition.
There were a number of large increases in assets. By far the largest increase was the €81.5M hike in intangible assets relating to the acquisition. There was also a €13.8M increase in cash balances with customers (clearly not an accessible asset) and a pleasing €9.6M increase in cash that the group has at hand. Otherwise there was a €3.6M increase in balances with payment processors, which are funds held by third party collection agencies subject to collection after one month or used to make refunds to customer and €2.9M more other receivables. This all means that the total assets have doubled and tangible assets have also doubled to €54.1M. Likewise, most of the liabilities have also increased, with the balances with customers cancelled out, a €16M increase in accruals and a new €8M interest free loan from William Hill as part of the agreement to acquire Sportingbet. This was partially mitigated by a €4.3M reduction in trade payables and a €1.7M fall in deferred consideration on the Betboo acquisition. There is still €10.6M remaining on the deferred consideration, however. Net assets in total were €78.1M higher at €136.6 but net tangible assets actually fell, down €3.4M to a negative €10.4M.
The cash paid to suppliers and employees dwarfed the cash receipts from customers to leave the net cash from operations a hefty outflow of €17.2M, €17.4M worse than last year. The cash flow is bolstered by the €8M new loan but the main factor is the net €35.5M income from the acquisition, including cash acquired. Against these large numbers, the €2.2M spent on dividends looks rather paltry. The overall effect was a €21.7M gain of cash – this was entirely due to the acquisition, however, and it is disappointing to see there was a net cash outflow from operations (although this will hopefully change once all the efficiencies have been ironed out).
The bulk of the profit was earned in the B2B business with Casino Club also contributing a decent amount. Sporting Bet just about broke even after a small loss this time last year. The majority of revenues were earned in Europe with emerging markets making up just 14% of the total.
On the 19th March of this year, the group completed the acquisition of Sportingbet PLC, excluding the Australian business which was acquired by William Hill. The business was acquired for €79M, paid for by the issue of new shares. The group came with a lot of payables but a €42.6M cash injection from William Hill meant that the net tangible asset base of Sportingbet was close to neutral. There was a €76.5M payment of Goodwill, which seems a very hefty valuation. As part of the Sportingbet acquisition, William Hill was granted an option over their Spanish business which William Hill has exercised. The hand over will occur on the 16th September this year. To date the business contributed €1.3M of profit for GVC so it is a shame to lose it but it was not unexpected.
The business the group acquired was in a poor condition and was heavily loss making with net current liabilities of €47M, declining revenues and a high cost base. It is good to hear, then, that the restructuring and integration of the business is nearly complete and is going better than was expected with a reduced cost base (down by 50%) and increased revenues so that the group is now profitable (albeit currently due to the contribution of the Spanish business that is being transferred to William Hill). The balance sheet has been completely repaired and the business is now producing a modest amount of cash. The management cancelled unnecessary IT functions, outsourced IT support, closed the high cost Guernsey operation, halved the London footprint, integrated the various sportsbooks and terminated inefficient marketing such as sponsorships. The management are now looking for other acquisition opportunities. Another benefit of the acquisition was the mitigation of about €23M in deferred consideration that would have become payable to Sportingbet relating to the previous acquisition of the B2B business.
During the year the group disposed of the Betaland business for a nominal sum stating that due to declining profitability it was no longer in their interest to keep the business. During the half year before it was sold, the business made a €783K loss.
In the first half of the year Sportingbet revenues were 5.2% ahead of the same period of last year, which was achieved despite the lack of any major football tournaments. In Q3, revenues fared even better, up by 12.1%. B2B revenues in the first half were 15% ahead but fell in Q3 due to the weakness of the Turkish Lira and a slight reduction in player activity due to changes in the regulatory regime in Turkey where the Islamic leaning government seems to be putting the squeeze on gambling in that country. Casinoclub revenues were 9% up in the first half and 8.3% higher in Q3 so overall revenues for the first half were up by 8.5% but “only” up by 3.4% in Q3 due to the lower B2B revenues.
In Europe, the regulatory environment remains unclear but as already mentioned, the regulatory controls in Turkey have become stricter which is a bit of a concern as much of the B2B sales are made in the country. In the UK HMRC has announced that the government expects the finance bill in 2014 reflecting the change in regulation taxing remote gambling on a place on consumption basis at a rate of 15%. Based on current trading, this is likely to cost the group about €2M a year
Due to the progress being made with the acquisition, the group have announced a quarterly dividend of 10.5 Euro cents which, when added to the other two quarterly payments this year gives an incredible yield of 7.4%. If it can be assumed there will be another similar dividend payment next quarter, this gives an annualised yield of about 10%! It has been stated that market expectations for the current year are likely to be exceeded, which is another encouraging point. Profits were down on the first half of last year but this was entirely due to the acquisition. Net tangible assets also fell due to the loan from William Hill and increased accruals. There was a huge gain in cash levels but this was again, due to the acquisition and the cash that William Hill put forward to clear the balance sheet of Sportingbet, while there was a hefty €17.2M outflow on operations which I hope is driven by the acquisition again. The performance of each division seems to be going well but the recent regulatory pressures in Turkey are a potential cause of concern. Overall, though, the successful integration of Sportingbet and that incredible dividend yield alongside minimal debt encourage me to buy a few more of these.
On 4th December the group was prompted by a number of poor announcements from other sporting bet companies to issue one of its own. They announced that trading in the first two months of Q4 held up very well. The group experienced an increase in the average daily wagers but sports margin did slip somewhat. Net Gaming Revenue rose by 4% on the average level in Q3. The board therefore expect the full year results to be at the upper end of expectations. Overall a decent update.
On 9th January the group issued an update covering trade for Q4. Revenues in the 4th quarter averaged €531K per day which was 3% above that of last quarter prompting management to state that EBITDA will come in above current management expectations. Also, the next quarterly dividend of 11.5€ cents was announced which brings the total so far for the year to 32.5c, about 26.9p at current exchange rates. By my reckoning this gives a yield of 7% not including the final dividend which could well take the yield above 10%. Given the successful integration of Sportingbet seems to be complete I think this is a return I can’t ignore so I have bought a few more.