European Regulatory Scrutiny And AI Competition Will Strain Prospects

Key Takeaways

• Regulatory pressures, shifting demographics, and increased competition from digital rivals threaten FDJ United's revenue growth, operating margins, and long-term business viability.
  
• International expansion and challenging macroeconomic conditions heighten operational risks, integration difficulties, and may further erode profitability.
  
• Digital growth, regulatory stabilization, and operational efficiencies position FDJ United for enhanced margins, resilient core earnings, and potential upside in net income and shareholder returns.

Catalysts

Engages in the gaming operation and distribution business in France and internationally.

• Intensifying regulatory scrutiny across key European markets, such as the enforced affordability controls in the Netherlands and the U.K., is likely to keep constraining revenue growth and may drive up ongoing compliance costs for FDJ United, squeezing both top-line growth and operating margins.
  
• Accelerating adoption of artificial intelligence and automation by online-first competitors threatens to erode FDJ United's traditional lottery and betting business model, increasing the risk of customer attrition and compressing market share, translating into lower revenue growth and potential long-term earnings stagnation.
  
• The company remains heavily exposed to its aging core French lottery market, where demographic shifts and cultural changes are leading younger consumers to show weaker interest in traditional products, undermining recurring revenue and creating long-term downside risk to the EBITDA base.
  
• International expansion, particularly following the Kindred acquisition, presents heightened operational and integration challenges, with increasing acquisition-related costs and possible entry into less profitable or more heavily regulated markets likely to dilute net margins and weigh on earnings growth.
  
• Macroeconomic uncertainty and persistent inflation, combined with possible tightening of consumer discretionary spending, create downside risk for demand across gaming and betting segments, potentially resulting in flat or shrinking revenues and declining profitability over the coming years.

FDJ United Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on FDJ United compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming FDJ United's revenue will grow by 5.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 9.2% today to 8.1% in 3 years time.
• The bearish analysts expect earnings to reach €333.0 million (and earnings per share of €1.78) by about August 2028, up from €321.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 20.0x on those 2028 earnings, up from 15.8x today. This future PE is greater than the current PE for the FR Hospitality industry at 16.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.2%, as per the Simply Wall St company report.

FDJ United Future Earnings Per Share Growth

Risks

• The ongoing digital transformation, including a strong pipeline of new online and instant games, growing iLottery penetration, and the successful integration of Kindred's proprietary sportsbook platform, positions FDJ United to realize structural growth in digital revenues and operational scalability, supporting both revenue and EBITDA margin improvements over the long term.
  
• Management has set out clear multi-year ambitions for organic revenue growth of around 5% per year from 2025 to 2028, an EBITDA margin above 26% in 2028, and a progressive dividend policy with a minimum payout ratio of 75% of adjusted net income, which collectively may reinforce investor confidence and underpin share price resilience through stable and rising earnings and distributions.
  
• Regulatory headwinds in the UK and Netherlands, which recently contributed to restated top line declines, are described as stabilizing, with management expecting these drags to begin to lap in the second half and for growth to resume in these jurisdictions in 2025 and 2026, suggesting potential future recovery in international revenues and reduced regulatory risk to group earnings.
  
• Continued strong growth in France-where lottery revenues rose 6%, iLottery revenues rose 16%, and retail sports betting is anticipated to rebound in the second half after a temporary payout-related dip-shows the resilience of FDJ United's core domestic business and provides a defensive base supporting recurring EBITDA and reducing the risk of sustained long-term declines in net income.
  
• Operational efficiency plans, including cost rationalization, IT integration, and workforce streamlining, are expected to contribute meaningfully to cost reductions from 2026 onward as key platform migrations complete, supporting an improvement in EBITDA margins and free cash flow, and offering the potential for upside to net income and shareholder returns as synergies are realized.

Valuation

• The assumed bearish price target for FDJ United is €27.8, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of FDJ United's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €43.0, and the most bearish reporting a price target of just €27.8.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €4.1 billion, earnings will come to €333.0 million, and it would be trading on a PE ratio of 20.0x, assuming you use a discount rate of 9.2%.
  
• Given the current share price of €27.52, the bearish analyst price target of €27.8 is 1.0% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.