Gambling group expected to be highest yielding FTSE 250 stock in 2017

Online gambling group GVC (GVC:AIM) claims it can increase the profits of Bwin.Party (BPTY) to such an extent that it will be able to return to a dividend yield of almost 10% in 2017. If the assertion stacks up it will make GVC the highest yielding stock in the FTSE 250 (assuming it completes a planned move to the Main Market) and a very rewarding ride for Bwin shareholders.

GVC’s dividend yield - at 9.3% in 2014 and an estimated 10.6% for 2015 - is one of its biggest attractions for income-seeking investors but big question marks have been raised over whether it can be maintained once the Bwin deal completes.

GVC is taking a dividend holiday in 2016 while the turnaround plan is put into action, mirroring the approach it took when it acquired Sportingbet in 2013. That deal led GVC to pay a special dividend and drive a €45 million swing in EBITDA (earnings before interest, tax, depreciation and amortisation) in just 12 months.

Panmure Gordon forecasts a dividend yield for GVC of 9.6% in 2017, significantly higher than Bwin’s 12-month trailing dividend yield of 3.4%.

GVC chief executive Kenneth Alexander tells Shares: ‘The yield is forecast at 9.6% because we are going to increase the profits of the Bwin business significantly. If Bwin performs as it historically has then obviously we won’t, but we expect to get €125 million of synergies by combining. We expect to run the business significantly better, generate more cash and pay out a far greater dividend.’

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Talking Point Table

Marketing moves

There had been concerns GVC would scrap all the marketing spend for Bwin but Alexander says this isn’t the case. ‘We will spend the same level on marketing as Bwin did, excluding its sponsorship deals which will end. We’ll allocate the marketing spend to different territories where we can make a better return on money. There are some territories where Bwin has been less aggressive so we will increase marketing there, but it won’t involve a significant amount of upfront investment.’

Alexander says Bwin has spent vast sums of money on big sponsorship deals, most notably with Spanish football team Real Madrid. ‘Bwin’s brand has been built so we can scale that back. Bwin was already going to end its sponsorship,’ he says.

GVC has taken on very expensive financing to fund the deal, paying a total coupon of 12.5%. Alexander says this should be refinanced in the next year. ‘It’s just a bridge to get the deal done,’ he adds.

Doubling returns

Panmure Gordon analyst Karl Burns reckons GVC can double shareholders’ returns in four years.

‘Whilst initially sceptical about the acquisition, further analysis has shown the stock holds limited downside risk at the current share price, with upgrade potential from revenue synergies, refinancing and disposals. Despite the regulatory and execution risk, we feel the risk/reward profile of the stock is firmly weighted on the upside,’ he says.

GVC is risky at 400.5p but we feel confident in the management team’s track record, demonstrated by its success with Sportingbet.



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