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Time to bet on ‘The Stars Group’?

Image result for the stars group

The Stars Group Inc (TSGI on the TSX or TSG on the Nasdaq) reported earnings this morning, easily beating on top line revenue and earnings per share, but lowering projected 2018 guidance. 

Some positives we took out of this announcement are TSG’’s robust growth. Revenues are up 35% year over year, and 15% organically, showing strong growth in all revenue streams year over year. Specifically, poker revenues are up 6.9%, gaming up 26.3%, and betting up 122.2%. Increased betting revenues are attributable to the World Cup. Ebitda numbers rose 14.8% year over year as well. Top line revenue beat forecasts of 380.8 million with a number of 411.5 million, and earnings per share beat estimates of $0.56, with EPS of 0.60. The main reason for the drop in the share price today is the cut in guidance, calling conservatively for EPS of $1.99-2.22, versus previous at 2.33-2.47. Revenue guidance was raised with new revenues coming online from the acquisitions of Sky Betting and Gaming, which was not included in this quarter, and acquisitions of two Australian Businesses.

Time to buy?

We think this is a good buying opportunity due to the large runway for growth as well as best in class brands shared by the new combined company. With the ‘Sky Betting and Gaming’ acquisition, it gives them a larger market share in the largest online gaming jurisdiction, the UK. It also diversifies their revenues in very regulated industries. Sky has a very loyal base, and with average bets being on the more recreational side (less than 8 pounds on average), this offers coverage should the economy weaken. With the Australian purchases, it further grows their market share in the number 2 market in the world, and makes for significant cost synergies between the companies. As well, with 3 such distinct revenue streams, the opportunity to cross sell across all 3 will lead to greater growth in all 3 areas.

Growth

For the growth runway, one has to just look at the USA, with sports betting being made legal federally and opening up opportunities in the biggest economy in the world. With the scale of TSG, they remain primed to capture a large share of this new market. Other areas of growth include areas such as India, where pokerstars.in is launching. India would provide a large base (over a billion people) in a growing economy that is becoming more connected overtime.

The industry tailwinds of more countries potentially opening up, as well as demographics shifts, tend to favour TSG’s business, especially after the Sky acquisition. Sky Betting and Gaming also has a great penetration rate in younger customers, showing demographic tailwinds, which should overall help organic growth.

The balance sheet overall doesn’t look in bad shape, as a result of much of the acquisitions being paid for through conversions and issuing of stock. With the future cash flow, the company will be able to aggressively de-leverage the balance sheet, as well as focus on capex spending to drive future growth. Considering how ‘The Stars Group’ is trading and assuming top end adjusted guidance, they would be trading at around 14x earnings for 2018. For a company showing such strong year over year growth organically, adding the growth provided through these acquisitions long term, this is a very cheap multiple. Once the headwinds of integration as well as more regulatory clarity occurs in some places, the growth will continue to accelerate. With the new, more diversified geographically and business segments, this presents less concentration risk to investors.

Although the guidance cut is less than ideal, we think based off of the underlying fundamentals and large drop today, that TSG is still one of the best buys out there for growth and value.