Shares in the Aim-traded company NetPlay TV (NPT: 20.25p) have now produced a 60 per cent gain since I first initiated coverage at 12.5p nine months ago ('A share to hit the jackpot', 11 February 2013) and news of a major acquisition this week was taken warmly by the market. It's only realistic to expect these gains to be extended in the coming weeks as more investors digest the positive implications of the deal and for the share price to make headway towards my upgraded target price of 24p. It also vindicates my decision three weeks ago to maintain my positive stance on Netplay's shares when they were trading at 18p, even though the price was making heavy work of breaking through its 12-month high of 19.8p (‘Punting on new highs’, 16 October 2013).
There have been several repeat buying opportunities since my February article, all of which I have highlighted, so there has been ample opportunity to take a position in this company. Importantly, it's still not too late to do so either, as Netplay's acquisition of Vernons.com, the e-gaming division of Sportech (SPT), is a smart looking deal and one that will immediately boost Netplay's earnings per share in its 2014 financial year.
It is also the first acquisition under the management team led by chief executive Charles Butler and indicates that the board are willing to invest some of the company's burgeoning cash pile in expanding the business and taking advantage of opportunities as and when they arise. In fact, even after forking out £3m in cash to acquire Vernons.com, analyst Johnathan Barrett expects Netplay's year-end cash pile to have swollen from £12.3m a year ago, to £13.2m, or 4.5p a share. And that's after paying out £1.25m of dividends, or 0.43p a share in the interim period.
A smart acquisition
For its money, Netplay is acquiring a registered use base of 367,000 customers across Vernons.com online casino, bingo, poker and sports books, not to mention an important brand to add to the company's including Supercasino.com and Jackpot247.com brands which are operated under an Alderney gaming licence.
Importantly, Vernons operates on the same software platform (Playtech) as NetPlay, and also has operations in Guernsey. As a result the integration of the acquisition is made far easier and less costly (the £100,000 cost of which is being paid for by Sportech in any case) and there should be significant cost savings, too.
The bolt-on deal also enables Netplay to diversify its product range. For instance, the company will market its existing live roulette TV product to the acquired Vernons' customer database once the integration is complete (expected by year end). NetPlay has also signed an agreement with the vendor which will enable it to offer Sportech's football pools to its customer base. It has also led to earnings upgrades.
Analysts at N+1 singer predict Vernons.com will add £500,000 of operating profit to Netplay next year on additional net gaming revenues of £4m. On this basis, the brokerage has lifted its 2014 revenue estimate from £30.6m to £34.6m and upgraded its cash profit estimate from £6m to £6.5m. On this basis, expect pre-tax profits of £6.1m and EPS of 2.1p, up from £4.5m and 1.5p, respectively, in the current financial year to end December 2013. In other words, Netplay is not only forecast to grow earnings per share by 25 per cent in 2013, but is now expected to lift them by 40 per cent next year.
And given the impressive cash generation of the business, this should be good news for the dividend too, which is already expected to be lifted by 25 per cent to 0.5p a share in the current financial year. Analyst Michael Campbell at Daniel Stewart expects a dividend of 0.6p a share in 2014 to produce a dividend yield of 3 per cent. Moreover, Mr Barrett is now looking for a year-end cash pile of £18.1m - the equivalent of 6.2p a share - at the end of 2014.
So, not only are the shares trading on a miserly 6.5 times 2014 earnings estimates net of cash, but management are clearly looking to use the cash pile wisely to make earnings accretive acquisitions. They have ample funds to do so.
Sound fundamentals
It's also worth noting that the Vernons.com acquisition is complimentary to a business that is performing robustly, rather than one that is being made to bolster weak trading in the core business.
For instance, in a third quarter trading statement, Netplay revealed that the contribution to profits from the mobile and tablet segment soared 171 per cent on prior year to account for 40 per cent of all new depositing casino players and a third of total net revenue. At the same stage last year, mobile only accounted for 14 per cent of NetPlay's total revenue. The growth largely reflects an increase in brand awareness and online marketing efforts, including a major sponsorship deal of Big Brother and Celebrity Big Brother on FIVE, which proved very successful and contributed to a 30 per cent surge in new depositing players increasing on the same period last year. This segment accounted for 15,566 customers, up from around 12,000 in the same period last year.
Interestingly, customer retention and acquisition rates also reveal a positive story: average quarterly active depositing players increased by 28 per cent to 28,890 accounts; and net revenue surged by 19 per cent to £6.5m in the third quarter. And with NetPlay continuing to invest heavily in marketing, including both TV and most notably online, where player values are higher, there is little reason to expect these heady growth rates to slow anytime soon.
The company's web offering is clearly proving attractive to punters as Netplay’s share of the UK online casino market has increased from 3.9 per cent last year to around 4.5 per cent, making the company the seventh largest operator in a market which is expected to grow by 15 per cent to £800m this year.
Furthermore, by delivering a good service, the company has been able to reduce churn rates and boost spending by customers. In fact, analysts estimate that over 40 per cent of Netplay's net revenue is now being generated by customers who have been registered over 12 months and 56 per cent of net revenue originates from those who have been registered over six months. This is well worth noting because the returns made from existing customers are greater than from new ones, so customer retention is critical to overall profitability.
Anomalous valuation
So, with Netplay's business performing strongly, its balance sheet under geared, and cash generation strong, this opens the possibility of a triple whammy of higher cash returns to shareholders, further expansion into other markets and a scaling up of the business. All of which are likely to be well received by shareholders.
But even before factoring in upside from additional deals, the shares are hardly over rated on 6.5 times prospective earnings net of cash. I am not the only one thinking along these lines as Daniel Stewart has upgraded its price target from 25p to 27p and N+1 Singer has a valuation range between 28p to 32p for next year based on the aforementioned earnings estimates. In the circumstances, my 24p target looks conservative.
The technical set-up also favours further upside as a break-out above 20p would dramatically increase the chances of a run up in the share price back to the April 2010 highs around 28p. There is virtually no technical resistance to impede the path. Beyond that the September 2009 highs of around 30p provide the next resistance level. In the circumstances, I have no hesitation in upgrading my fair value target price again from 24p to 28p and would use the current share price break-out above 20p as a major buy signal.
Needless to say, offering 40 per cent potential upside to my target price, and ahead of a pre-close trading statement in early January, I rate NetPlay shares a very strong buy on a bid-offer spread of 19.75p to 20.25p.
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■ First Property Group ('On rock solid foundations', 28 October 2013)
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■ Sanderson ('Running bumper profits', 29 October 2013)
■ IQE ('A conundrum to solve', 29 October 2013)
