DesjardinsA mixed bag; lower their rating but bump the target by $3.00. GLTA
The Stars Group Inc. (TSGI-T, TSG-Q) delivered "very strong" first-quarter results, said Desjardins Securities analyst Maher Yaghi.
However, he downgraded his rating for the Toronto-based online gambling company to "hold" from "buy" based on "diminishing" upside potential.
"The start of 2018 was good for TSGI with both revenue and profitability topping expectations," said Mr. Yaghi. "Growth came from both poker and casino and sportsbook, as well as a favourable FX tailwind and acquisitions. While organic revenue growth remained healthy for the legacy business, it is important to note that a few headwinds are likely to affect reported results later in the year. Firstly, casino revenue growth is likely to continue to decline as underlying quarterly active unique players have shown little growth lately. In addition, FX and potential regulatory changes in Russia could pressure poker revenue growth. Overall, however, we continue to expect positive organic growth for the business for all of 2018."
On Thursday before market open, the company reported revenue for the quarter of US$393-million, a rise of 24 per cent year over year. The result topped both the consensus estimate on the Street (US$358-million) and Mr. Yaghi's projection (US$352-million). Adjusted EBITDA of US$175-million also beat the consensus (US$149-million).
"Excluding currency movements and the CrownBet acquisition (which contributed US$11m), organic growth on a constant-currency basis was up 9 per cent, which is still a very strong result, especially given the company did not launch new casino games in new jurisdictions in the quarter," the analyst said.
Mr. Yaghi said he continues to view the company's $4.7-billion acquisition of Sky Betting & Gaming from CVC Capital Partners and Sky plc, announced on April 21, positively, and he believes both the rationale and price paid are appropriate.
However, in justifying his downgrade, he said: "Our recommendation also needs to consider the company's high expected leverage ratio post-closing, which is likely to be near 6 times," he said. "Given the stock's diminished potential upside and the firm's expected leverage, we are moving our recommendation to Hold."
Mr. Yaghi did raise his target price for Stars Group shares to $48 from $45. The average on the Street is $46.83.