Analysts showing concern over Unibet's growing tax burden

Analysts showing concern over Unibet's growing tax burden

Tuesday, August 2, 2016
The regulating world is a challenge for Unibet management

Unibet has enjoyed an impressive run of results when it comes to gross win revenues and player numbers with both metrics hitting record levels in its latest second-quarter results statement. With a mix of organic growth and acquisitions (including the full benefit of the iGame and Stan James buyouts), the company saw its gross win rise 57 percent year-on-year to £126.6m while the total active player number almost doubled to reach a record 1.13 million.

However, despite the positives the analysts say there are questions to be asked about “an anaemic’ EBITDA performance, which rose less impressive 11 percent to £21.1m in the second quarter. Stripping out the £4.6m operating profit from the two acquisitions, EBITDA would have gone backwards.

“Unibet’s top-line momentum is clearly very strong (and contrasts with Betsson),” wrote Paul Leyland, analyst at Regulus Partners in a note to clients. “However, focus should also be on a doubling of duties paid in the period to £15.7m, which was a key cause limited profit progression. Moreover, this rate still only represents 12 percent of revenue, demonstrating reliance on dotcom cash flow in a rapidly regulating world.”

His counterparts at Morgan Stanley were similarly torn between praise for the company’s revenue performance and medium-term worries over margins. “The business continues to deliver strong customer and revenue growth, which should support its high multiples… but we see medium-term risks from higher duties pressuring margins.”

In a note to clients, Morgan Stanley betting and gaming lead Vaughan Lewis suggested the results left a number of questions which shareholders should consider posing to management. Among its worries was the increased level of gambling duties paid as a percentage of revenues which rose from 10.9% in the fourth quarter of last year to 12.4% in the second quarter of this year. This, as the Morgan Stanley team points out, comes even as the share of revenue from unregulated jurisdictions fells slightly from 36% to 35%.

The percentage of revenues that will go towards gambling duties and tax is sure to increase in the year ahead. Belgium has long been a big market for Unibet and its parliament recently passed a controversial bill allowing VAT on to be levied online betting and casino revenues sites as of the start of this month at a rate of 21 percent. Morgan Stanley estimates Belgium is worth circa £30m a year in gross win revenues and suggests the new tax will represent a circa £6m headwind to revenue and EBITDA, assuming no mitigation.

Meanwhile, in early July the Netherlands (another big market for Unibet) passed online gambling legislation which allows for a gaming tax set at a swingeing 29 percent. That new regulated regime comes into force as of January 2018. Morgan Stanley estimates that will produce a circa £30m headwind for Unibet in its first year of operation.

More broadly, the team at Morgan Stanley suggest Unibet management should look to informing the market regarding the expected medium-term EBITDA margin given the increased percentage of regulated market earnings in the next few years. Taking into account the planned regime in the Netherlands and with potential new regulated markets such as Sweden, Norway and Finland possibly happening over the course of the next three years or more, Morgan Stanley expects the blended duty rate paid by Unibet to move over time from the circa 12 percent currently to double to around 24 percent over time.

Totally Gaming says: The results from Unibet are impressive and the latest record figures in terms of gross win revenue and active player numbers show the degree to which the company is getting it right particularly in terms of marketing. The lag in terms of percentage rises in EBITDA is as much a function of increasing duties as anything else, but the analysts are clearly concerned that the company needs to fine-tune the operation to better enjoy the fruits of its revenue gains.

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