Canaccord
What's new Stars Group had a mixed end to 2018. A favourable run of sports results in December under-pins FY18 profit forecasts, but European tax rises/FX put pressure on FY19. SkyBet was always facing a YoY decline in H2 betting revenues, given the spike in its Q4 gross win margin last year (14.0%, vs 8.5% in the first 9 months). SkyBet was hit by a weak Q3 FY19 margin of 7.3%, but we see an improvement in Q4, with a strong run of Premier League results (for the bookies) in December, off-setting a weak November. This helps underpin FY18 forecasts. But the Italian government provided a less festive end to the year by announcing gambling tax rises to help reduce its deficit; online Gaming tax rises from 20% to 25%. We estimate this knocks $8m off FY19 Ebitda ($10m, if we add the impact of a new Romanian gaming tax, announced January 4th). In addition, we factor in a nine-month hit from the 6% rise to 21% in UK Remote Gaming Duty from April (we previously assumed only a six-month impact and 5% rise). This drives an $18m incremental hit to forecasts. In addition, FX pressures remain, given relative strength of the US$ vs FY18 averages. We see a 2% hit to revenues/Ebitda from FX translation (around $20m), relative to FX rates used in its FY18 guidance, although this is an estimated incremental $8m hit against our forecasts, set in November. There was one piece of good news in December, with the positive Court of Appeal ruling in Kentucky, reversing a previous $870m adverse judgement. Management expect the decision to be challenged, but the judgement was sufficiently damning ("an absurd, unjust result") to materially reduce the risk of a meaningful payment by TSG. Impact on the Canaccord Genuity view FY18 was an eventful year, with the acquisition of Crownbet/William Hill in Australia, and transformational acquisition of SkyBet. The implied return on investment from Sky has shrunk with rising regulatory costs; but we see meaningful upside to the $70m synergy target (we expect this to be raised with the Q4 results), with material incremental revenue synergies on top. We also see the SkyBet model is providing a strong template for potential media broadcast partnerships in the US, positioning Stars strongly for the evolving US sports betting market. We leave FY18 forecasts unchanged (pro forma Ebitda $907.0m, assuming full year SkyBet ownership), but FY19 Ebitda comes down on tax/FX from $1011.9m to $975.7m, driving EPS -4% from $2.07 to $1.98, with similar downgrades for FY20. FY19 year-end Debt/Ebitda rises to 4.9x (from 4.7x). Valuation TSG shares are off their lows, and up 8% in the past month, but they have still been savagely de-rated, trading on a FY20 EV/Ebitda of just 9.3x, a PER of 8.3x and free cash flow yield of 10.8%. We nudge down our TP from $35 to $33.5, to reflect the downgrades (still 11.0x FY20 EV/Ebitda), but still see significant upside, with Stars looking well placed to be a clear winner from the legalisation of the US betting market. Buy. Share performance catalyst Synergy targets, US partnerships, Kentucky appeal. Q4 results in March.