The Stars Group has a 51 per cent upside, says Echelon Wealth

Lower than expected quarterly numbers from The Stars Group (The Stars Group Stock Quote, Chart TSX:TSGI) aren’t dampening any spirits at Echelon Wealth Partners, where analyst Gianluca Tucci is keeping his “Buy” recommendation, saying that the stock is deserving of a premium multiple compared to its industry peers.

Online gaming company The Stars Group announced its first quarter fiscal 2019 results on Wednesday, reporting revenue of $580 million, Adjusted EBITDA of $195 million and Adj. EPS of $0.38 per share. The consensus forecast was for $613 million, $217 million and $0.41 per share, respectively, while Tucci was calling for $620 million, $217 million and $0.41 million, respectively. (All figures in US dollars unless noted otherwise.)

In an update to clients Wednesday, Tucci noted that management reaffirmed its guidance for 2019, calling for between $2,640 million and $2,765 million in revenue and Adjusted EBITDA between $960 million and $1,010 million, numbers which are trending to the lower end of the range. Yet Tucci believes the synergies from its acquisitions will be help grow the company’s top and bottom lines going forward.

“Stars Group via its recent acquisitions and partnerships is a global powerhouse, with strong positions in all the largest regulated global gaming markets. We expect TSGI to leverage its scale and competitive advantages to continue growing market share and outpace market growth rates over the long term. We believe there are material synergies between CrownBet/WMH Australia/Sky Bet betting platforms and BetStars, and there is room for technical cross-deployment in TSGI’s other markets,” says Tucci.

“We believe shareholder value will grow from current levels concurrent with disciplined and focused execution and debt repayment. Sportsbook represents 50 per cent of the global online gambling market – we think the CrownBet, William Hill Australia and SkyBet acquisitions as well as the Eldorado and FOX Sports partnerships are meaningful expansions in this vertical, with focus on technical/operational integration and growth in their respective markets,” he adds.

Tucci has revised his estimates for 2019 upward, now calling for revenue and Adjusted EBITDA of $2,612 million and $956 million, respectively (was $2,597 million and $945 million, respectively). The analyst is maintaining his target price of C$37.50, with a valuation multiple of 5.1x fully diluted 2019 revenue estimate, 13.9x Adjusted EBITDA estimate and $15.1x P/E estimate. Those numbers compare to TSGI’s Online Gaming Operator comparables average at 2.4x, 9.4x and 15.3x, respectively.

Tucci’s C$37.50 target represented a projected return of 51 per cent at the time of publication.