Indeed, NetPlay's net revenue soared 21 per cent last year, cash profits were up almost a third to £4.3m and cash generation was truly eye-catching. The company generated £4.3m of cash from its operations, which boosted the company's net funds to £12.3m by the end of December, the equivalent of 4.2p a share, or a quarter of its market capitalisation. And, given that rising revenues have an accentuated impact on profits due to the operational gearing of the business, the 21 per cent rise in turnover drove both pre-tax profits and EPS up fivefold to £3.3m and 1.2p, respectively.
Ordinarily, such an outstanding operational performance would be reflected in an equally impressive share price rating. However, in the case of NetPlay TV, investors have yet to grasp the fact that the company is now in a strong earnings upgrade cycle, and one that has still some way to run. In fact, net of cash the company is being valued on only 10 times historic earnings, a lowly valuation which seriously undervalues the company given the momentum being seen in the business.
Strong customer acquisitions
In a first-quarter trading update the company revealed that "key performance indicators are significantly ahead of the same period in 2012 and the prior quarter. The growth in new depositing and total depositing customers year on year has resulted in a 39 per cent increase in total net revenue versus the first quarter of 2012 following increased investment in marketing." That's hardly an understatement considering NetPlay signed up 17,700 new depositing casino players in the first three months of 2013 - a 42 per cent increase year on year. This also represented a 27 per cent rise over the final quarter of 2012, so there is sequential progress being made. NetPlay now has more than 30,000 active depositing casino players across all platforms, up from less than 22,000 at this stage last year.
Interestingly, mobile and tablets accounted for a third of all new depositing players and 30 per cent of total net revenue in the first quarter of 2013, indicating the inroads the company is making into attracting casino players in mobile devices. Net revenue from mobile and tablets almost doubled between the final quarter of 2012 and the first quarter of 2013. This reflects the heavy investment in mobile and tablet marketing and the fact that all live television roulette games are now available across iPhone, iPad and Android devices.
Earnings upgrades
Importantly, after factoring in higher marketing spend and TV advertising, which has been pulling in the new players, these customer acquisitions are proving highly profitable. Last month, analyst Amisha Chohan at broking house Sanlam Securities upgraded his cash profit estimates for 2013 by 5 per cent to £5.3m, and upgraded his 2014 estimate by 8 per cent to £5.7m.
On a pre-tax level, this translates into profits of £4.6m this year and £5.2m in 2014, to produce EPS of 1.5p and 1.7p, respectively. But with the business generating huge amounts of cash, expect the net cash pile to have increased further to £15.8m by the end of 2013 - the equivalent of 5.4p a share. And if NetPlay hits those 2014 estimates, the cash pile is expected to swell to £20m by the end of 2014, or almost 7p a share. Johnathan Barrett of N+1 Singer has similar forecasts for the next couple of years.
Moreover, if NetPlay can maintain the momentum in attracting new signs-ups, there is a very good chance that earnings estimates for 2013 and 2014 will be exceeded, which opens the door for even more earnings upgrades. But, even without them, the company looks too lowly valued.
Low valuation
That's because, net of 5.4p a share of cash at the end of this year, NetPlay shares are being rated on only seven times 2013 earnings estimates, falling to a ludicrous 5.5 times 2014 earnings estimates. There is a dividend, too, as NetPlay paid out 0.375p a share of EPS of 1.2p in 2012. On that basis, the historic yield is 2.2 per cent.
But with so much cash being generated analysts believe there is scope to increase the payout markedly. In fact, Mr Chohan at broking house Sanlam forecasts a payout of 0.5p a share this year and 0.6p a share in 2014 to give attractive prospective yields of 3 per cent and 3.6 per cent, respectively.
Catalyst for a re-rating
I initially advised buying shares in NetPlay back in February at 12.5p, although a surge of buying meant that the majority of readers will have bought in at around the 13.75p level in the five trading days after I published my article ('A share to hit the jackpot', 11 February 2013).
I then reiterated my buy advice when the price was 16.5p ('Another roll of the dice', 13 March 2013). At the time, I noted: "Even after the recent re-rating, NetPlay's shares are still deep into bargain basement territory and, in my view, my 18p target price is likely to prove very conservative. Ahead of the forthcoming results on 9 April, I rate the shares a trading buy and have lifted my target price to 20p." In the event, the shares peaked out at 19.8p in April so the target price was virtually hit.
However, the drift in the price since the last trading update has in my view set up yet another buying opportunity. That's because I believe the odds are firmly weighted to the upside for further earnings upgrades following what is likely to be an upbeat second-quarter trading statement at NetPlay's annual general meeting on Tuesday, 28 May.
Analyst Johnathan Barrett of N+1 Singer has so far taken a "conservative approach by not assuming high returns from marketing expenditure, but it is hard not to recognise the momentum, executive record [of management] and upside potential to our forecasts". However, without further earnings upgrades, Mr Barrett has an intrinsic value on the shares of 19.7p to 21p. Mr Chohan of Sanlam Securities upgraded his target price from 20p to 22p following the trading update on Tuesday, 9 April. Both targets look very reasonable to me and I can see clear potential for NetPlay's share price to rally above 20p in the run-up to the second-quarter trading update. The shares rate a trading buy on a spread of 16p to 16.5p and my one-month target price is 21p. If hit, this will produce a return of around 25 per cent.
MORE FROM SIMON THOMPSON ONLINE...
My next article will appear online by 12pm on Friday 3 May and will included updates on Heritage Oil (HOIL), Polo Resources (POL) and IQE (IQE). I have also written four other online articles so far this week, all of which are on my homepage:
'Seasonal stock picking strategies', 30 Apr 2013
'Small-cap stock picks', 1 May 2013
'Hot property: take two', 2 May 2013
Please note that I am working my way through all the recommendations I have made in the past six months and will update all of them as soon as I have been able to reassess the investment case; reappraise new analyst research; analyse any company announcements since I went on leave to write my book at the end of March; and talk to management of the companies concerned if need be. Rest assured I will update the positions as soon as possible.
■ My new book, Stock Picking for Profit, will be published at the end of May and is being sold only through YPDBooks at £14.99, plus £2.75 postage and packaging. Pre-orders can be placed online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213.
