View from the City: Can US operators live up to their punchy valuations?

The last month saw a number of UK-listed operators report half-year results in which, for the City, the US was part of the focus. While Davy noted that William Hill reported “modest profit” in it HY results, on the US it believes that “longer term, the investment thesis hinges on its ability to secure a leading position in the US,” arguing “a better-than-expected current trading and financial position should facilitate a step-up in US growth investment from H2 onwards”. Numis believes for William Hill, the US “holds most upside risk”, given it has a “leading market share in sports betting (by virtue of its dominance in Nevada), has signed an exclusive sports partnership with CBS and will benefit from operating Caesar’s 29 sportsbooks…post its merger with Eldorado.” Aside from results, Bloomberg reported that William Hill is merging its US business with Caesars which could generate $700m in revenue next year and, as a separately listed entity, could command an attractive market valuation. Gamesys reported positive results and is looking to make inroads in the US backed up with Canaccord’s view that “the US is an appealing opportunity given the success so far.” GVC, on the other hand, has a strong position in the US, with Berenberg noting that: “With the partnerships the JV currently has, alongside the strong online gaming performance and the ability to cross-sell, the company anticipates a long-term customer acquisition cost of $250, which we believe would enable the company to deliver solid returns in the medium term.” After acquiring 35,000 customers in H1, primarily through FanDuel and TVG, Flutter highlighted its market-leading position in terms of market share for both sports and gaming. Davy noted that “the group has made good progress on the integration of TSG,” with improvements to “responsible gambling, anti-money laundering procedures and unregulated market exposure expected to have an estimated £65m annualised impact on contribution to profit.” The broker added that the pace of growth for the group compares favourably with both GVC and William Hill. Right now, the emerging US-listed peer group have higher valuations compared to their UK peers. Clearly, the developing US market is where investors see major opportunities for the industry.  However, with these lofty valuations comes increased scrutiny and expectations and it will be key for highly rated operators to quickly grow into their punchy valuations. Failing to do so, could result in a bubble being burst.