The former AIM market small-cap stock has completed its acquisition of rival Bwin.Party, becoming the world’s fifth-largest online gambling company with a market cap of £1.5 billion.
GVC is expected to grow its pre-tax profit by 78% to €82.9 million in 2016 and by another 121% to €183.4 million the year after. Despite this, its price to earnings ratio of 10.1 is significantly lower than its gaming sector peer group’s average of 18.3.
‘We view this discount as unwarranted given the group’s proprietary technology, geographic diversity and high visibility on earnings driven by €110 million synergy delivery combined with robust underlying revenue growth,’ says Cenkos analyst Simon French.
GVC is taking a dividend holiday in 2016 but is expected to resume dividend payments within 12 months.
This would result in a yield of at least 4.7% in 2017 rising to 6.3% in 2018, assuming a 50% payout ratio in line with its peers. If the group resumes dividends under its former dividend policy, i.e. 75% of clean net operating cash flow, the 2017 yield would be 7.7%.
Cenkos’ target price is 892p, implying 75.6% upside.
Some analysts had suggested GVC would qualify for a FTSE 250 listing because of its size, but the group has gone for a Standard listing rather than a Premium listing. We understand that under London Stock Exchange rules a company needs a Premium listing in order to be included in the FTSE 250.