Stockwatch: time to buy this ex-FTSE 100 fallen star?

It’s possible the stars are aligning for this company and, while they’ll probably remain off-limits to conservative investors, analyst Edmond Jackson believes the odds are shifting in their favour.

3rd December 2024 12:47

Edmond Jackson from interactive investor

The small-cap shares in betting group Evoke (LSE:EVOK) look as if they’re possibly forming a support level around the 50-60p area and continuing to rise to 65p this morning. Might this mark a “double bottom” chart reversal since mid-October?

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Its five-year chart shows a roller coaster over the Covid lockdown period when online gambling went through a boom and slump; then in 2023 a rally from 55p to 125p failed to hold, and this year the stock halved from 100p:

Source: TradingView. Past performance is not a guide to future performance.

There is a greater fall from grace in the sense of how William Hill – nowadays just one company in this group – has twice been in and out the FTSE 100, back in 2005 and 2013.

“Evoke” is barely six months old: a re-branding of what used to be 888 Holdings, which listed in 2005 having developed online gambling brands such as 888casino, 888 poker and 888sport.

Over 2011 to 2018, its shares ten-bagged from 30p to 300p, but fell to 135p before Covid. Then in mid-2022 came the transformational (in a questionable sense) takeover of William Hill for £2.2 billion, which introduced the “Mr Green” brand that Hill acquired for £242 million in early 2019.

So, there are impressive-sounding assets – historically at least – if hard for non-gamblers to judge how competitive they stand in this industry. There is Denise Coates, majority shareholder and CEO of Bet365, who is the highest-paid business person in the UK; and enough ads on commercial radio featuring Harry Redknapp for Bet Victor to drive you potty.

Was William Hill a classic ‘stretch too far’?

A chief reason this is share trading near all-time lows is the William Hill takeover saddling the group with colossal debt. It marked a prime example of how the era of ultra-low interest rates (and in the wake of Covid) led to some companies losing sense as to appropriate gearing.

As of last 30 June, Evoke’s balance sheet had £1,655 million of longer-term debt, plus a more modest £29 million of near-term debt, tempered only by £244 million cash. It is chiefly why the net assets position has deteriorated – to £56 million negative and before £1,983 million goodwill/intangibles.

Moreover, the ratio of current assets to current liabilities was shy of 0.6 – further worsening a high financial-risk profile.

Evoke - financial summary
Year-end 31 Dec

	2018	2019	2020	2021	2022	2023
Turnover (£ million)	406	439	663	712	1,239	1,711
Operating margin (%)	18.4	9.3	3.9	8.9	-1.0	-3.5
Operating profit (£m)	74.8	40.9	25.6	63.2	-11.8	33.0
Net profit (£m)	71.1	32.6	8.8	49.9	-120	-56.4
EPS - reported (p)	19.4	8.8	2.3	13.2	-28.3	-12.6
EPS - normalised (p)	17.6	10.0	18.5	17.1	0.1	7.5
Operating cashflow/share (p)	8.6	17.3	42.5	25.6	-7.1	33.8
Capital expenditure/share (p)	4.5	4.8	6.8	6.1	18.0	15.7
Free cashflow/share (p)	4.1	12.5	35.7	19.5	-25.1	18.1
Dividends per share (p)	9.2	4.7	14.0	3.3	0.0	0.0
Covered by earnings (x)	2.1	1.9	0.2	4.0	0.0	0.0
Return on total capital (%)	59.5	27.5	18.6	42.6	-0.5	1.6
Cash (£m)	103	73.1	139	189	318	256
Net debt (£m)	-103	-33.5	-114	-166	1,474	1,493
Net assets (£m)	126	124	110	124	159	79.9
Net assets per share (p)	34.5	33.7	29.8	33.4	35.7	17.8

Source: company accounts.

At least there appears to be breathing space. Notes in the accounts under “net debt” cite only £11 million of debt maturing in 2026 “with most of the debt maturing across 2027 to 2030. In addition to this, the group has access to a £200 million revolving credit facility, with £150 million available until 2028, additionally £50 million to December 2025.”

Bulls can therefore speculate on scope to avoid or substantially mitigate any financial restructuring, if trading proceeds better like management entertains. More skeptically, it’ll be interesting to see how this share will struggle to remove its debt albatross.

The net debt to adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) ratio had risen from 5.6x to 6.4x this year. An 18 October third-quarter update cited a leverage target below 3.5x by end-2026. No dividends will be resumed until that drops below 3x.

A weak first-half year albeit second-half turnaround?

Interim results, which included a £143 million net loss, initially looked disastrous, however £71 million of operating expenses were classed as exceptional and £111 million involved depreciation/amortisation.

This was on like-for-like revenue 2% easier at £862 million. Management blamed UK retail down 8% but, given it represents near 70% of the group, you could say it shows gambling as not necessarily “addictive”, hence providing reliable revenues, and/or that Evoke’s marketing is less than fully competitive.

While management likes to focus on adjusted EBITDA, an £80 million net interest charge over six months alone compromises shareholder value.

Yet the company proclaimed: “significant profitability expected in the second half, driven by the full period benefit of a £30 million cost-saving programme, more effective marketing focused on core customers, and enhanced product.”

The 18 October Q3 update cited total revenue up only 3% like-for-like. However, there’s “no change to the expectation for the second half to be in line with the mid-term target of 5-9% year-on-year growth”.

There was no specific mention of profit, although that’s a tad tricky perhaps in a near-term accounting sense.

It would also have been good to see management back their words with share purchases, but there is yet to be any trading this year while the price has fallen. The CEO does own over two million, however.

Yet Artemis Investment Management nearly doubled its stake to 10.4% in the wake of this update and last month raised it further to near 11.7%. This obviously could be averaging down yet they still consider Evoke warrants further commitment. It at least implies the situation is not going from bad to worse.

Three hedge funds look to be closing short positions

Such trading logic has applied also on the short side lately.

Until earlier this year, Marshall Wace – an experienced manager at short-selling whose targets I keep aware of – had a short position equivalent to 1.1% of Evoke’s issued share capital. This has recently reduced to 0.49%, now below the disclosure threshold.

Millennium International Management did raise its short, also to 1.1% as of 22 November, but three days later had cut this to 0.23%.

Qube Research & Technologies has also been reducing, from 0.8% mid-October to 0.65% as of 25 November.

Possibly their actions may have contributed to this share moving up, which obviously is not the same as it affirming improvement in the business.

Improving sentiment is, however, affirmed by Deutsche Bank upgrading its stance just recently from “hold” to “buy”, albeit with a reduced target of 74p from 90p.

It can be an intelligent time to buy an unfavoured share when short sellers are starting to close. Buying back can squeeze the market price higher, especially if recovery buyers are waiting for the chart to put in a low.

If consensus – or guidance to those representing it – is fair, near £12 million net profit is expected for this year, equating to normalised earnings per share of 2.6p, rising to over £56 million in 2025, for earnings per share (EPS) over 14p. In this hopeful scenario the price/earnings multiple would be below five times.

Avoided Labour’s tax grab

Another reason for the share’s current support is the Budget – quite surprisingly – not raising taxation or taking any kind of tougher measures on gambling, despite protests about its effects on mental health and families. Moreover, the chancellor has also said future Budgets will not be as tough.

Much will obviously depend on how the UK fiscal position evolves. Cynics may note the industry’s contributions to Labour Party coffers.

Cutting to the chase: there obviously remains much uncertainty around Evoke and whether its commercial offerings can gain better traction and debt can be managed, so as to leave meaningful shareholder value. Its shares remain highly speculative, off-limits to conservative investors.

Yet for experienced traders who can stomach risk, evidence certainly suggests sentiment at least is turning. It departs from my preference for proven intrinsic value, but I currently feel the odds starting to favour “buy”.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

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