Following the UK Budget announcement on Wednesday (30 October), one FTSE 100 company soared above the others. The stock in question was Entain (LSE:ENT).
Its shares were 27% down since the start of the year. But the chancellor’s announcement about tax increases caused the stock to jump almost 9%.
Bated breath
Rachel Reeves approached the first Budget of the new government aiming to find £40bn in taxes. With a promise not to target working people, businesses were squarely in the spotlight.
Before the announcement, various think tanks recommended higher taxes on gambling. The Social Market Foundation suggested raising taxes on online casinos from 21% to 42%.
Entain is one of the world’s largest betting companies and would have been right in the firing line. But that announcement never came – taxes on gambling are set to stay where they were.
As that became apparent, the share price jumped from £7.25 to £7.70 per share. And the stock eventually finished the day 9% higher than it started.
What it means for Entain
Entain’s website tells investors what a significant boost the latest news is. It states that tax is the company’s largest single expense and that it paid £529m in UK taxes in 2023.
For context, that’s around twice what the firm generated in free cash flows last year and almost five times what it distributed in dividends. The potential increase would have been substantial.
While another £529m wouldn’t have made much difference to the £40bn the chancellor was looking to find, it must have been considered. So Entain shareholders might well be pleased.
It’s therefore easy to see why investors have been responding positively to the latest news. But with the stock still well below where it was in January, is the news a buying opportunity?
Should I consider buying?
Entain has an attractive position in the online gaming industry. And the enduring popularity of this market was reflected in the company’s Q3 trading update earlier this month.
Despite this, it’s not a stock I’m interested in. While the company might have avoided a tax increase from the UK, there are plenty more external issues to pay attention to.
It’s anticipating a changing regulatory environment in Brazil from 2025, which could prove a challenge. And the same goes for new deposit rules in the Netherlands.
I think this kind of thing is going to be a constant challenge for the business and there’s not much it can do about it. That’s why it’s not on my list of stocks to buy.
Rolling the dice
Avoiding a tax increase that was reported to have broad public support is a big win for Entain. And it’s no surprise to see the share price climbing as a result.
The stock still looks cheap, at around five times EBITDA. But in this case, the nature of the business means I’d be happier investing elsewhere.
This post was originally published on Motley Fool
