Goldman Sachs has delivered a blow to Entain, the parent company of Ladbrokes and Bwin, as it downgraded its rating from buy to sell, expressing deep-seated concerns about the trajectory of the company’s business growth, particularly within its online division. This downgrade was coupled with a reduction in Entain’s price target, plummeting from 1,450p to 820p.
The new target represented a 2.9% decrease from the closing price yesterday, November 27. Monday’s closing price of 844p was also 1.7% lower than the previous Friday’s closing at 859p.
The downgrade decision is rooted in a series of challenges that Entain has grappled with in recent months. Goldman Sachs pointed to issues with growth, attributing these challenges to a confluence of regulatory headwinds, heightened competition, and shifts within the market.
The repercussions of these challenges were notably acute in Entain’s online gambling operations, leading Goldman Sachs to forecast a negative proforma online growth in both Q4 of 2023 and H1 of 2024. The outlook for a return to growth is anticipated only in the second half of the next year.
Beyond the broad financial implications, Goldman Sachs is making significant adjustments to its projections, slashing estimates for Entain’s earnings per share in 2024 and 2025 by approximately 30%.
This substantial revision underscores the depth of concern regarding Entain’s financial performance. Moreover, there are worries about the erosion of free cash flow, indicating potential challenges in sustaining operational liquidity.
Goldman Sachs specifically identified core issues affecting Entain’s market standing, highlighting the diminishing market share of BetMGM, its joint venture with MGM Resorts International, in the US.
Despite holding an 18% market share in states offering online sports betting and iGaming, BetMGM’s growth has stagnated, contributing to broader concerns about Entain’s competitive position.
Adding to the litany of challenges is the $739.2 million (£585 million) settlement with the Crown Prosecution Service (CPS) over historical activities in Turkey. This settlement, part of a Deferred Prosecution Agreement (DPA) reached by Entain in August, entails financial penalties, profits disgorgement, charitable donations, and contributions to CPS and HMRC costs.
While the terms were announced in August, Goldman Sachs believes the impact will be more substantial than initially anticipated, influencing Entain’s performance in the foreseeable future.
The investigations and settlements have prompted transformative changes within Entain. The departure of CEO Kenny Alexander, just days before the confirmation of the investigation in 2020, marked a pivotal moment.
Shay Segev stepped in as the new CEO that year, and the company shifted its management and control from the Isle of Man to the UK, aligning with broader changes in tax residence. The rebranding in 2020 from GVC highlighted a corporate shift in identity.
However, challenges persisted, and in August 2022, the UK Gambling Commission ordered Entain to pay a record $21.46 million (£17 million) for social responsibility failings. This, coupled with other setbacks, intensified concerns among investors. In response, Entain’s Chairman Barry Gibson and current CEO Jette Nygaard-Andersen significantly increased their shareholdings.
In the midst of these challenges, Entain unveiled Project Romer in its Q3 trading update, outlining a strategic initiative with the goal of achieving an online EBITDA margin of 28% by 2026 and 30% by 2028.
This plan includes streamlining the group to enhance operational leverage and drive cost efficiencies, with a target of achieving $126.23 million (£100.0 million) in cross-cost savings by 2025.
The repercussions of these challenges and the looming financial penalties have ignited concerns not only among investors but also among industry observers. The decline in market valuation by more than a third in the current year has intensified apprehensions, especially when compared to the contrasting rise in competitor Flutter Entertainment’s shares, which soared by 13% during the same period.
