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The interim results published last month showed an underwhelming 6% year-on-year increase in EBITDA at £499m. The market was disappointed as a weaker-than-expected performance in the online division was counterbalanced by stronger retail results. Following these results, the stock has seen a 16% decline.
HSBC noted in its research that the underlying pace of EBITDA growth at Entain was flat to slightly negative once factors such as mergers and acquisitions (M&A), foreign exchange (FX), and the impact of ongoing tax increases in Australia were accounted for. Over the course of this year, many geographies have struggled due to pandemic-related issues or increased competition. Regulatory impacts also played a role, with UK net gaming revenue (NGR) down -2% year-on-year and Germany’s NGR down -30% year-on-year. A significant increase in central costs further exacerbated the situation.
Despite these challenges, HSBC remains optimistic about Entain’s future performance. The bank suggests that the second half of the year doesn’t require a substantial improvement in underlying performance to meet company guidance and their conservative forecasts. HSBC believes that faster expansion will be required in 2024 but maintains that there is still value in Entain’s shares based on a projected 2024 free-cash-flow yield of 6.1% and a price-to-earnings ratio of 15.5x.
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