Global iGaming Index: Regulation bites

April’s Global iGaming Index, in partnership with Regulus Partners, was typified by significant underperformance by a number of stocks, with growth lagging the NASDAQ benchmark. Churchill Downs is the stock in focus The index remained flat in March, lagging behind the NASDAQ, despite the benchmark exchange seeing growth slowing to 4.5% over the month (see Figures 1 & 3). There were a significant number of stocks that reported declines over the month, with 22 of the 35 down from 1 March to 5 April, of which 10 fell by double-digit percentages. Just 10 index components reported gains, with only three reaching double-digit growth.  Looking across all markets, it appears that the sector is in need of a story. Regulation is impacting investor confidence–namely stricter controls across Europe– and slow regulatory progress in the US, not to mention high start-up costs, is not helping. The biggest faller of the month was Scientific Games (down 25.1%), with the supplier posting a net loss of $352.4m in its full-year results, published in late February. It has since moved to drive down net debt, with plans to spin off a stake in its social division put into motion in March.  Scientific Games was closely followed by International Game Technology (down 21.4%). The supplier’s 2018 results, published on 7 March, revealed a 2% year-on-year decline in revenue. While its lottery and Italian divisions proved resilient, this was offset by declines from its North America Gaming and Interactive division, as well as a weaker performance from its International business unit.  March saw a number of operators post their 2018 results, but there was little sign of investor confidence. 888 Holdings saw its share price decline 12.7%, despite reporting record profit for the year, with investors seemingly doubtful of future strategy following the acquisitions of BetBright and JPJ Group’s Mandalay bingo assets.  Paddy Power Betfair, meanwhile, was up 2.4% despite seeing full-year profits hit by significant investment in the US market. The operator has fully embraced the US opportunity with its acquisition of DFS brand FanDuel, but this does not appear to have significantly boosted investor confidence. GVC, which saw 2018 revenue soar to £3bn following its acquisition of Ladbrokes Coral, was down 11.7%. This was due in part to chief executive Kenneth Alexander offloading 2.06 million shares in the business on March 8, which saw the operator’s share price drop 14% in one day–its largest fall in nine years. Alexander has since stated that he will not reduce his stake in the business while he serves as chief executive of GVC. The Stars Group was one of the few operators to see shares boosted by strong full-year figures. After reporting revenue of $2bn for the year, its shares were up 13.9% as of 5 April. GAN, meanwhile, was up 2%, with the rise following the launch of a strategic review of the business announced in late March, which may see it put up for sale. Stride Gaming, which announced plans for a potential sale in February, also appears to have been boosted by the prospect of M&A, with shares up 11.7%.  Stock in focus The lack of investor confidence in the opportunities created in the US is arguably personified by Churchill Downs (down 1.7%). The business appears to be very well-placed in theory, yet has seen little material change in practice.  The operator reported a 14% rise in FY2018 revenue to $1bn, with EBITDA up 15% to $328.8m. It has streamlined its business through the sale of the social division Big Fish Games to Ainsworth, helping it drive down net debt by 30% to $751m, and facilitating a $547m share buy-back.  Racing (29% revenue) grew 6.8% to US$295.4m, driven largely by a successful flagship Kentucky Derby (111% net growth) and Breeders Cup (11%), with broadly flat underlying performance (-0.8%), partly due to bad weather impact in Arlington (IL). Its acquisition of Presque Isle racino (PA) was completed post period end. Online wagering (also 29% of revenue) grew 13.5% to US$291.5m, due to 8.3% handle growth (5ppts overall sector outperformance) and accounting changes. The division has undergone a name change in order to reflect sports betting potential (via a partnership with SBTech), though this has not yet driven operating performance, either in revenue or, tellingly vs. some other approaches, costs. Casino (41% revenue) increased by 17% to US$411.2m; 43% of growth was due to the Ocean Downs transaction (consolidated late Q3) as well as a strong underlying performance, partly helped by competitive dynamics in Calder, FL, caused by Hurricane Irma as well as improved marketing and returns on investment.  The operator’s other investments (4% including inter-company sales from United Tote) increased by 59% to US$37.8m, largely due to the addition of Derby City Gaming (a US$65m capex, 85,000 square foot, 900-terminal “historical racing machine” venue in KY), as well as a regulatory interpretation on slot-like products not dissimilar to FOBTs in the UK prior to 2007. Based on historical race results vs. an RNG providing the backend, these machines reportedly look, feel and behave just like slots to the consumer. Churchill Downs is the largest real-money gaming business in the US, with a presence in 30 states through its TwinSpires brand. While its advance deposit wagering position is strong, and sports betting is now live in Mississippi, it is yet to see any regulatory movement in other markets in which it owns and operates properties.  “The big challenge for Churchill Downs therefore is to ensure that sports betting is a complementary operational product in its core markets rather than a strategic threat to its broader horseracing business, especially outside its strong but narrowly based flagship events,” Regulus Partners’ Paul Leyland said. “Given the broad lack of innovation in US racing (matching a global problem in most racing markets), combined with pitching a traditional pari-mutuel product against low-margin fixed odds sports offer, meeting this challenge will be no mean feat,” he added.