Following Playtech (PTEC) over the years has been a disorientating experience for gaming sector watchers. The company's success with innovative gaming software and turning around the marketing strategies of big bookmakers has been balanced by the looming presence of its founder and biggest shareholder, Israeli billionaire Teddy Sagi. However, what investors cannot get away from is that, in spite of its sometimes controversial status, Playtech needs to be taken seriously, having entrenched itself firmly in the FTSE 250.
- Deal with Ladbrokes
- Limited competition
- Can expand through acquisition
- Plenty of cash
- High exposure to unregulated markets
- Large individual investor
The tipping point for Playtech in investment terms was undoubtedly its partnership with William Hill to develop the venerable old bookmaker's online gaming offering. The joint venture was, by all measures, a staggering success, with William Hill enjoying the fastest earnings growth in the sector, and Playtech taking home £424m after William Hill bought Playtech's 29 per cent share earlier this year. The potential returns Playtech could generate by spending that cash wisely are significant, but the William Hill deal goes beyond just that.
Playtech's reputation now precedes it and Ladbrokes has agreed a deal with Playtech to improve its online offering. This opens up the possibility of creating a venture as successful as William Hill Online. In addition, these kind of deals, once struck, tend to last as migrating users and changing technology is often too much hassle to attempt, which gives Playtech a roster of long-term clients who are generally plugged in to stable regulatory regimes. This also helps inhibit serious competition.
Until its new venture begins to produce results, Playtech will need to expand through acquisitions in order to build its presence in specific areas. The most recent acquisition was PokerStrategy.com for €38.3m (£33m), which should complement the company's poker offering and its affiliates marketing division. The company has plenty of money to spend, up to €500m (£431m) according to JPMorgan Cazenove estimates. The broker believes a buyback or a special dividend is a possibility, suggesting a £50m special dividend payment would equate to about 17p a share. But the group shouldn't be short of strategic options for expansion either.
PLAYTECH (PTEC) | ||||
|---|---|---|---|---|
| ORD PRICE: | 693p | MARKET VALUE: | £2.03bn | |
| TOUCH: | 693-694p | 12M HIGH: | 717p | LOW:341p |
| FWD DIVIDEND YIELD: | 2.9% | FWD PE RATIO: | 16 | |
| NET ASSET VALUE: | 176¢ | NET CASH: | €56.6m* | |
| Year to 31 Dec | Turnover (€m) | Pre-tax profit (€m)** | Earnings per share (¢)** | Dividend per share (¢) |
|---|---|---|---|---|
| 2010 | 142 | 98.8 | 38.5 | 19.0 |
| 2011 | 207 | 114 | 46.2 | 16.5 |
| 2012 | 317 | 171 | 58.1 | 23.2 |
| 2013*** | 353 | 144 | 48.6 | 23.2 |
| 2014*** | 385 | 146 | 49.5 | 23.2 |
| % change | +9 | +1 | +2 | - |
Normal market size: 3,000 Matched bargain trading Beta:1.06 *Prior to disposal of William Hill JV stake **Adjusted PBT and EPS figures ***JPMorgan Cazenove forecasts £1=€1.16 | ||||
For example, the company is under-represented in sport, deriving only 8 per cent of its software revenues from European sports betting when the sector comprises 40 per cent of all gaming revenues and is growing steadily. Analysts at JPMorgan Cazenove estimate that adding one major licensee could add about €30m to revenues annually; mobile phone gaming means European sports betting volumes are growing by double figures annually, so Playtech simply needs to match the rest of the market.
The downsides to Playtech relate to the company's high level of unregulated market exposure, which is estimated at 56 per cent of revenues. Many gaming companies have given up operations in so-called grey markets, but Playtech will argue that it offers a business-to-business service, rather than signing up customers itself, which insulates it from direct regulatory action. The other risk with Playtech is the large number of related-party transactions it has carried out with Mr Sagi, who has benefited hugely. There should be some protection as the company's move to the main market a year ago requires shareholder approval for such transactions, but the risks cannot be ruled out.
