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Bwin's German problem

Bwin's year has been forgettable so far, but an operational improvement next year could leave the shares in the gaming operator looking good value at current prices
November 13, 2012

What's new:

■ German regulatory uncertainty

■ Tough economic conditions

■ Slightly better end to the year expected

IC TIP: Buy at 119p

Online gaming company Bwin.Party's (BWIN) difficult year was made worse by the decision of gambling regulators to impose a new 5 per cent turnover tax for operators in the German market. That has hit the company particularly hard as Germany is its largest single market. Consequently, third-quarter net revenue was down 10 per cent compared with last year. Since the end of September, though, some positive signs of improvement are starting to emerge.

For example, in the four weeks to the end of October, average daily net revenue was up 19 per cent to €2.27m (£1.8m) compared with the previous quarter. That was driven by a recovery in sports betting and an improvement in poker. Bwin reckons that poker, in particular, will benefit from the availability of PartyPoker on mobile phones and a complete relaunch of the brand in the first half of 2013.

It's worth noting that Bwin is not the only company that has been caught out by the German turnover tax. Gaming exchange Betfair (BET) has declared its German operations unviable in response to the tax and will withdraw from the market, writing off £6m in revenues in the process. The difference in Bwin's case is that several of its key markets are in regulatory flux, too. For example, the company paid Spanish regulators about €33m earlier this year in order to receive an operating licence. This comes at a time when the recession-hit Spanish economy is still contracting.

Peel Hunt says...

Hold. Net revenues recovered from the 8 per cent quarter-on-quarter falls reported at the time of the half-year results to a 5 per cent decline, but this was still below expectations. Net revenue for the quarter came in at €184m, whereas we had been expecting €191m. Integrating the Party Gaming businesses during a period of significant regulatory change in some core markets, and during a period when structural challenges in poker have intensified, has meant a difficult last 18 months. The uncertain backdrop is likely to continue for at least another six months and most likely longer.

Investec says...

Hold. Bwin.Party's third-quarter figures were soft, weakened by a triple German whammy of the introduction of sports wager taxes, a delayed start to the soccer season, and reduced wagering volumes. So, alongside the key risk of German gaming regulation/prohibition, all things Deutschland appear ugly. However, an improvement in fourth-quarter trading, which was more than just a seasonal uptick, leads us to retain our 2012 forecasts for pre-tax profits of €137m and normalised EPS of 13.8¢. There is sufficient momentum in other regulated markets and operational/strategic initiatives to hold the shares.