View from the City: Scale and diversification are key to success

It has been a challenging year for stocks in the gaming sector, with the European names down 31% on average and the US names down 40% year to date (YTD). In the UK, the white paper continues to be an overhang and despite its delay, fears of a very draconian approach have abated somewhat given the leaked first draft and Liz Truss’ pro-business approach, although it is yet to be seen how long she will remain in Number 10.

Macro concerns are likely to persist, with the key question being how resilient gambling revenues will be in a challenging macro environment. However, there are reasons to be optimistic.

The US market continues to expand rapidly and there is clear evidence from both FanDuel and BetMGM that profitability is around the corner. Activity levels appear to have been strong throughout the start of the NFL season, and the upcoming Proposition 27 ballot in the Californian referendum could be a positive catalyst. Markets such as Latam and Central and Eastern Europe are still delivering very strong growth and are likely to be key markets for global operators in the coming years.

The ability to access cheap credit has fuelled an M&A spree in recent years but it feels like the hurdle rate for future M&A is going to increase, with operators prioritising a nimbler balance sheet. Flutter (-15% YTD) remains our preferred play owing to its market-leading US business and leading positions in several key markets. Entain’s (-35% YTD) share price performance remains heavily dependent on a renewed bid from MGM Resorts International.

Following a period of bid speculation, Playtech’s (-42% YTD) recent results showcased a business in rude health. For 888 (-69% YTD), the equity has endured a volatile period owing to a disappointing H1 and high interest rate sensitivity.

Looking forward, the key to being successful in this industry will continue to be scale and diversification.