Regulation will hit annual profit warns Entain

Entain (LSE:ENT) continues to be buffeted by waves of regulation and competition, while a number of exceptional charges drove the group to a full-year loss despite posting higher revenues.

A post-tax loss of £879 million was recorded due to a raft of exceptional items, including but not limited to a fine of £585 million fine relating to its legacy Turkish business and a hefty impairment charge of £190 million on its Australian business. The overall total of these items was £1.29 billion, which removed any possibility of the group posting a profit.

Perhaps more positively, and stripping out these one-off charges, underlying earnings rose by 1% to £1 billion, ahead of the expected £939 million, while revenues increased by 11% to £4.77 billion against an estimate of £4.67 billion.

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Regulation remains an inevitable thorn in the side for gambling companies, and Entain is certainly no exception. The spectre of regulation is a constant threat, with problem gambling being an easy political target in any of the jurisdictions in which the group operates.

Increased regulatory headwinds in the likes of the UK and Germany have been joined by higher deposit limits in the Netherlands, all of which inject shorter term changes to consumer behaviour as the changes are absorbed. In addition, there are other pressing concerns, such as the consumer’s propensity to spend given the wider economic picture, and whether the cost-of-living crisis will simply remove some of the revenues which may otherwise have come Entain’s way.

In the meantime, there are some pockets of optimism, with the group seeing the benefit of ever-improving products, while a range of well-known brands such as Ladbrokes and Coral and geographical diversity providing the potential for further growth impetus.

Total Net Gaming Revenue (NGR) increased by 14% for the year, including growth of 9% in its retail business and 12% online. However, the latter figure was lessened by the performance in both the UK and Australia, where revenue dipped by 6%.

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In terms of overseas presence and perhaps for the group as a whole, the most exciting driver for potential growth is the company’s joint venture with MGM Resorts, in the form of BetMGM. In the US markets in which it operates, the venture has a 14% market share in an overall market where there have been previous estimates for an addressable market in excess of $35 billion of revenue.

BetMGM turned earnings positive in the second half of the year, which bodes well for prospects, with NGR rising by 36% to £1.96 billion, at the top end of the previously guided range of between $1.8 billion and $2 billion. Meanwhile the introduction of a “Single Account Single Wallet” which allows the customer to gamble in different states is showing early signs of success, while the imminent opening of Nevada should provide more opportunities, not least of which where the company could experience visitor footfall in Las Vegas.

Even so, being such a fast-growing and lucrative market for providers has quickly led to a level of fierce competition, whereby the joint venture will need to continue running to keep still as other competitors emerge, and as existing players double down on their offerings in terms of pricing, promotion and presence.

In terms of outlook, Entain is maintaining a cautious approach, not least of which is due to the ongoing regulatory challenges. A review in the UK is coming to a close which should at least provide some visibility on what will be required of gambling companies in the future, while the search for a permanent chief executive is ongoing, injecting some uncertainty into the group’s more immediate direction.

The group is also looking to benefit from synergies arising from previous acquisitions, targeting cost savings of £70 million by next year. But it has warned that regulatory changes in the UK and Netherlands could reduce annual profit by about £40 million.  

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The share price reaction to these results is indicative of the challenges which the group continues to face, with a drop of 40% over the last year comparing to a decline of 3% for the wider FTSE100 index.

The fall is also in stark contrast to the fortunes of its FTSE100 rival Flutter Entertainment (LSE:FLTR), whose shares have risen by 23% over the last year and where the group has the potential benefit of an additional US listing and remains the preferred play in the sector. Even so, the long-term bulls of Entain are difficult to dislodge, such that the market consensus of the shares as a 'strong buy' remains firmly in place.