View from the City: Entain’s future looks bright thanks to M&A and the US
RB Capital’s Julian Buhagiar looks at Entain’s undervalued share price and what 2023 could hold for the operator
As the World Cup draws to a close, the consistent winners look like the bookies themselves, given the distributed results spread. But aside from the beautiful game, an interesting dark horse is the re-emergence of Entain, with its share price increasing by 28% in the last few weeks.
This is due to various factors, not least BetMGM – its previously unloved lovechild with MGM Resorts – increasingly looking like a good long-term bet. Especially when one of the next World Cup hosts is the US. It’s therefore becoming likely that Entain’s current stock price could be undervalued, for a few key reasons.
One, more than 30 states support sports betting in the US, and Proposition 27 (the recent bill rejecting gambling in California) is likely to be repealed or re-enacted, or at least highly discussed, by 2026. While a deafening majority voted down the bill a few weeks ago, it’s likely that it will reappear on the ballot in 2024 or soon thereafter. Either way, there will very shortly be a larger addressable market.
Secondly, Entain’s share price trades at 18 times 2023’s expected earnings of about 40%-60% the ratio of some other operators. This has led to UBS signalling a ‘Buy’ rating for the stock, with a target of £17.70, which is about 33% higher than where it stands. UBS expects BetMGM to turn profitable next year and revenue to reach $3bn by 2025. Other analysts are pegging the target price above £18.
Finally, let’s not forget that Entain completed the acquisition of SuperSport a few weeks ago and is expected to complete the purchase of BetCity by the end of 2022. Both are lucrative and cash-generative brands that will likely displace any medium-term hiccups such as UK regulation. And even with this there could be a silver lining, should an eventual review finally materialise in 2023 and thus stabilise longer-term revenue outlook.