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KPMG eGaming Summit 2016Market View: The Gaming Sector
September 2016
Simon French, Cenkos Securities
2
Market size and growth: in total, by product and by geography
Advancement of mobile and UK's leading role in it
The changing landscape of the major players in the market
M&A - why and why now, success and failure
Public v private ownership
Public market view of eGaming
Attractiveness of eGaming companies
Regulatory and political risk
30 minutes to cover
3
eGaming market overview
$38.5bn GGY in 2015
CAGR of 8.3% since 2006
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015p
eGaming GGY 2006-15 (US$m)
Source: GBGC
4
eGaming market overview
$38.5bn GGY in 2015
Dominated by Europe
eGaming GGY 2015
Source: GBGC
42%
27%
2%
20%
2%7%
Europe Asia Central & South America North America Africa Oceania
5
eGaming market overview
$38.5bn GGY in 2015
Dominated by Sports betting
eGaming GGY 2015
Source: GBGC
58%27%
9%
6%
Sports betting Casino Poker Bingo
6
Mobile revolution
2016 c3x the previousEuropean Championships
H1 2016 mobile sportsbook stakes/NGR %ge
Source: Cenkos Securities
50.0%
55.0%
60.0%
65.0%
70.0%
75.0%
80.0%
85.0%
Ladbrokes William Hill Coral Group Paddy Power Betfair
7
UK at the forefront
c3.5x penetration of Asia
Playtech software revenues: mobile penetration
Source: Playtech
0%
10%
20%
30%
40%
50%
60%
H1 2013 H1 2014 H1 2015 H1 2016
Group Group ex UK UK
8
The changing landscape
9
The changing landscape
2015
One large player
Leading eGaming companies 2015 NGR (£m)
Source: Cenkos Securities
0
200
400
600
800
1000
1200
1400
1600
Bet36
5
Am
aya
William
Hill
Pad
dy P
ow
er
Betfair
bw
in.p
arty
Un
ibet
88
8 H
old
ings
Betsso
n
Gala C
oral
Ladb
rokes
Sky Bet
GV
C H
old
ings
10
The changing landscape
2016
3 mega mergers
Leading eGaming companies 2015 NGR (£m)
Source: Cenkos Securities
0
200
400
600
800
1000
1200
1400
1600
Bet36
5
Pad
dy P
ow
er Betfair
Am
aya
William
Hill
GV
C b
win
.party
Ladb
rokes C
oral
Un
ibet
88
8 H
old
ings
Betsso
n
Sky Bet
11
M&A – why and why now
Why?
Cost synergies
Enter new geographies
Exposure to new products
Acquire new skill sets
Accelerate earnings growth
Buy talent
Diversify
Reduce risk
Why now?
Market growth is slowing
Regulation is increasing
Taxes are rising
Technological change is accelerating
Marketing costs are increasing
A couple have worked
Everyone else is doing it
12
M&A - success and failure
The Good
Paddy Power-Sportsbet
Betfair-Blue Square
Paddy Power-Betfair
GVC-bwin.party
GVC-Sportingbet (ex Australia)
The Bad
William Hill-Sportingbet (Australia)
bwin-Partygaming
Bwin-Ongame
Sportingbet-Paradise Poker
Rank-Blue Square
The Ugly
Partygaming-Empire Online
Ladbrokes-888
William Hill-888
Rank-888-William Hill
Amaya-Rational
13
The Public Markets and eGaming
Three financial centres of excellence for eGaming:
London, Stockholm and Toronto
At least 14 gaming companies listed in London
More likely to follow
Intertain/JackpotJoy
Access to investors who have understanding and experience of the market
Sportingbet floated on OFEX in 1999
Deep pools of capital
Combined mkt cap of c£19bn
14
Public Market View of eGaming Companies
Large, growing, global industry with small number of large players and largenumber of small players:
Growth rates framed by regulatory and technological change
High margins and strong cashflow conversion should lead to relatively highand progressive dividend payout policies
Regulated markets warrant a premium to reflect earnings security
Consolidation inevitable and will drive synergies, grow margins and increasemarket share
Industry will crunch down to 2-3 large global players and long tail of nicheoperators
The U.S. will ‘never’ regulate
15
Scale benefits
EV/EBITDA multiple v EBITDA
Source: Bloomberg, Cenkos Securities estimates
0
50
100
150
200
250
300
350
400
450
500
0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0
EV/EBITDA
EBITD
A £
m The bigger the EBITDA thehigher the multiple
16
High margins
EBITDA margins
Source: Bloomberg, Cenkos Securities estimates *Online ex Australia
But significant disparity inamongst leading operators
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0%
888 Holdings
32Red
Gaming Realms
GVC Holdings
Ladbrokes*
NetPlay TV
Paddy Power Betfair*
Playtech
William Hill*
17
Leads to high dividend payments
Dividend yields
Source: Bloomberg, Cenkos Securities estimates *Online ex Australia
Above average dividendyields relative to the market
0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00%
888 Holdings
32Red
GVC Holdings
Ladbrokes
NetPlay TV
Paddy Power Betfair
Playtech
William Hill
18
Regulatory and political risk
Licensing
Tougher talking (and action) from Gambling Commission
Anti-money laundering
4th EU Directive
Advertising
New research suggests gambling advertising may be harmful
Countries ex UK clamping down
Sports integrity and funding
Match-fixing
Horse racing Levy/ Levy Replacement
Extension to other Sports?
19
Regulatory and political risk continued
Taxation
Current UK regime relatively generous by European standard
Sector’s growth has lead to increase in visibility of problem gamblingamongst eGaming players
RGT research project may result in further adverse publicity
Possible increase from 15% to 20%
Would raise £175m p.a
HM Treasury ongoing review of input VAT exemption for offshorecompanies
Brexit
Status of overseas territories
Rights of workers
Forthcoming issues
eSports betting, Daily Fantasy Sports, Social Gaming
20
What we like
Broad geographic diversity:
Regulated markets are not a panacea
Proprietary technology
Drives greater synergies in consolidation
Strong balance sheets
To enable participation in consolidation or return of value toshareholders through increased dividends
21
Summary
Large global market dominated by Europe and Sports betting
Market growing but slowing
Management teams changing as market matures and consolidates
UK leads the world on mobile – plenty of growth to come
Consolidation not inevitable (because it doesn’t work very often)
London is the financial centre for eGaming but doesn’t mean views are right
Investors attracted to cash generation and subsequent dividend income
Heightened regulatory and political risk given macro backdrop
22
This marketing communication has been produced by Cenkos Securities Plc (“Cenkos”) which is authorised and regulated by the FinancialConduct Authority (“the FCA”). This [report] is not independent and should not be relied on as an impartial or objective assessment of itssubject matter. It is not investment research and it has not therefore been prepared in accordance with legal requirements designed topromote the independence of investment research. In particular, Cenkos is not prohibited from dealing ahead of the distribution of this[report], as it would have been were it independent investment research. Please visit www.cenkos.com to see our conflicts managementpolicy and additional relevant information. Nothing in this [report] constitutes, or is to be construed as, an offer or a solicitation of an offerto buy or sell investments. The information and opinions constitute a judgment as at the date of this [report] and are subject to changewithout notice. Whilst the information in this [report] is based on sources believed to be reliable, Cenkos has not independently verifiedthe contents of this [report] and makes no representation or warranty that it is wholly accurate or complete. Cenkos accepts noresponsibility or liability for any losses arising from this [report]. This [report] is being supplied to you solely for your information and maynot be reproduced by, or further distributed to, any other person without our specific consent. No other person may rely or act upon it.We are not advising you on the merits of the investments discussed in this [report] and the [report] is not based on a consideration of yourcircumstances. We have not assessed the suitability of the investments for you. You should base your investment decisions on your ownfinancial objectives and you should seek independent investment, tax and legal advice as you consider appropriate. Past performance isnot necessarily a guide to future performance. An investor may not get back the amount originally invested. Cenkos may, from time totime, undertake transactions (as principal or agent) in securities the subject of this report, and have or may have a position or holding insuch securities, or a related investment, as a result of such activities. In addition, Cenkos may, from to time, provide or have providedservices to the company the subject matter of this Research Note.
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