There are very few companies out there that can consistently produce double-digit returns for investors year after year. However, these companies do exist and sometimes fall to such attractive valuations that it’s almost impossible not to buy.
One such company is gaming group GVC Holdings (LSE: GVC). Its growth over the past five years has been nothing short of explosive. Until the beginning of 2012, the company failed to attract investors’ attention, as it traded on AIM and was considered to be something of a speculative play on the growth of online gaming.
Nonetheless, over the next few years, the company powered ahead and gradually gained recognition among investors. It generates the majority of its revenue overseas, in countries such as Germany, Turkey and other unregulated markets where profits can be significantly higher than in the UK.
GVC’s biggest break came in 2015 when the company sidestepped an offer to buy it from 888 Holdings. It then went on to buy rival Bwin for £1.1bn, a 45% premium to the prevailing market price. At the time many analysts thought the company was overpaying, but over the past two years, GVC’s management has shown that if anything, as well as making itself a tougher takeover target, the group underpaid.
At the beginning of this month, it unveiled a robust 16% growth in revenue from sports betting, most of which came from Bwin. Since the acquisition completed, the group’s overall daily revenue is a by around 11%, showing that efforts to cross-sell and streamline Bwin’s offering have paid off handsomely.
And since the acquisition, the firm’s market capitalisation has exploded from around £300m to £2.2bn in just two years. GVC has gone from being the prey to the predator, and more established players in the UK gaming market such as William Hill and Ladbrokes Coral are being touted as possible bid targets.
As GVC has exploded in size, shareholders have reaped the benefits. Management has decided to return most of the group’s excess cash to shareholders, meaning that over the past five years it has paid out around 130p per share in dividends, equal to around 81% of the firm’s 160p share price at the beginning of 2012. When you add capital growth, over the past five years, the shares have produced a total return of 460%, a compound annual growth rate of 41%.
City analysts believe that these explosive returns can continue for at least the next two years. Analysts have pencilled-in a dividend yield of 3.8% for 2017, followed by a yield of 4.2% for 2018. Earnings per share are expected to grow 23% to 61p for 2018, meaning that the shares currently trade at a 2018 P/E of 12.5.
GVC has proven itself to be a serial acquirer over the years, and if management decides to do another deal at some point in the next 24 months, then these forecasts will be revised higher. At the end of 2017, the company reported net debt of €132m and a cash balance of €370m, giving plenty of firepower to make further acquisitions as they emerge. If management decides to pull back from acquisitions, for the time being, there’s lots of cash for special dividends to investors.
The bottom line
So overall, after returning 41% per annum since 2012, it looks as if GVC can continue to produce market-beating returns for investors for the foreseeable future.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended GVC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.