The gaming market has seen its share of change and upheaval over the past few months as companies jostle to establish themselves in rapidly regulating markets in Europe and the US. This has led to some wildly varied valuations for gaming companies, particularly those with partnerships in the US, and leaves behind the definite impression that the market is backing the wrong horses ('Gaming: Westward, look, the land is bright', 6 Sep 2013).
- Expansion into Italy
- Highest margins in the sector
- Regulated markets-only business
- Decent income
- Taxation question unanswered
- Early days for mobile strategy
In contrast to chasing the American dream, investors might find it more profitable to look for opportunities closer to home, or at least as far as Gibraltar, for the regulated gaming growth that is driving the market. In this context, Gibraltar-based 32Red (TTR) is starting to show clear evidence that its expansion plans and relatively cost-effective approach to acquiring gaming customers is starting to bear fruit. Yet its shares still offer an attractive yield while trading on a derisory multiple of earnings.
The key to 32Red's future success will be how quickly the company can diversify its revenues away from the UK market, where it has a 4 per cent share. An expansion into Italy may offer the first proof that the strategy can work. The Italian venture - the company now has Bologna FC as a casino partner - has grown more slowly than expected due to high set-up costs and the country's fragile economy. However, with the economic squeeze beginning to lift, and 32Red's advertising and marketing programme beginning in earnest after a summer hiatus, the rate of growth should improve when a greater number of games are available.
32RED (TTR) | ||||
|---|---|---|---|---|
| ORD PRICE: | 54p | MARKET VALUE: | £38m | |
| TOUCH: | 54-55p | 12M HIGH: | 59.8p | LOW: 38p |
| DIVIDEND YIELD: | 4.1% | PE RATIO: | 7 | |
| NET ASSET VALUE: | 7p | NET CASH: | £6.3m | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 16.9 | 1.65 | 2.40 | 0.50 |
| 2011 | 25.0 | 2.80 | 3.94 | 1.20 |
| 2012 | 32.1 | 3.08 | 4.29 | 1.40 |
| 2013* | 38.5 | 4.80 | 6.30 | 1.82 |
| 2014* | 44.4 | 5.80 | 7.60 | 2.20 |
| % change | +15 | +21 | +21 | +21 |
Normal market size: 1,000 Matched bargain trading Beta: 0.07 *Numis forecasts, 2013 dividend excludes 2.5p special payout, underlying PBT and EPS figures | ||||
The most noticeable feature of 32Red's operations is that the company looks relatively cheap to run. In the first half new casino players cost an average of £159 to acquire, compared with £166 at the same stage last year. When a yield per player of £398 is taken into account, it is clear that 32Red is currently achieving some of the highest margin rates on each new player in the sector. This has been helped by investment in customer relationship management (CRM) to target offers more effectively and help to reactivate lapsed players. And importantly 32Red only develops business in regulated markets. That may slow growth rates, but it adds certainty to prospects as many countries, including the US, have cracked down on so-called "grey area" operators.
Nevertheless a regulatory downside exists due to the UK government's unresolved threat to impose point-of-consumption tax on Gibraltar-based firms. This might significantly cut profitability, although management reckons it can pass some of the extra costs on to the company's affiliates - the agents who take a fee for attracting customers - and games providers. The company also needs to integrate smartphones fully into the business, although there are some regulatory hurdles to this in Italy, for instance, which management is currently lobbying to change.
