It’s also true that I underestimated the negative impact on investor sentiment resulting from the introduction of a point of consumption tax at the end of this year. Last week, I set my stall out on NetplayTV whose shares, having doubled last year, are now trading slightly below my original recommended buy in price (‘Betting on a recovery’, 16 September 2014).
An update on 32Red is warranted too in light of what was a robust showing in the first half this year. In the six month trading period, the company grew net gaming revenues by a fifth to £15.7m driven by a 20 per cent rise in active casino players to just over 50,000. 32Red recruited over 23,500 new players in the period at a cost of £180 each, but still managed to maintain player yields at around £400. Mobile is playing a key part as customers betting on tablet and smartphone now contribute a third of total casino revenues, up from 17 per cent a year ago, and accounts for half of all new players.
Importantly, these positive trends have been maintained into the second half with underlying revenues rising 23 per cent in the 12 weeks since the June half year-end. And with losses at the fledgling Italian operation narrowing, reported cash profits increased from £1.9m to £2.3m. In turn, this boosted 32Red’s net cash pile by £1.5m to £4.9m, or the equivalent of 6.6p a share, and enabled the board to lift the first half dividend by a quarter to 1p a share.
Gaming analyst Ivor Jones at brokerage Numis Securities expects a similar outcome for the full-year payout, pencilling in a normal dividend of 2.2p, up from 1.8p in 2013. On this basis, the shares offer a prospective dividend yield of 3.9 per cent. Mr Jones is also maintaining his adjusted EPS estimate at 7.3p, up from 6.1p in 2013, based on a 20 per cent increase in adjusted pre-tax profits to £5.7m. In the first half, 32Red reported adjusted EPS of 3.32p, up from 3.07p in 2013, so there is a second half bias to the numbers.
Still, those forecasts seem sensible enough to me as in the first half of 2014 32Red reported £2.1m of underlying pre-tax profits after deducting £400,000 of losses from its Italian operation, but after adding back non-cash amortisation charges and share option costs. On the same basis, the company reported underlying pre-tax profits of £1.7m in the first six months of 2013 after deducting £600,000 of losses from the Italian operation. In other words, the company is generating decent growth in its core business.
It’s also Mr Jones’ opinion that the High Court challenge by a number of online gaming companies, including 32Red, to the government’s point of consumption tax will succeed before its implementation in a few months time. If he is proved correct, then this would act as a major catalyst for the shares – and of NetplayTV, too - which are now trading on 8 times fiscal 2014 earnings estimates. Factor in the company’s cash pile, and the cash adjusted forward PE ratio is only 7.
It’s my view that irrespective of the outcome of the legal challenge by the Gibraltar Betting and Gaming Association to the planned new licensing regime, there remains significant upside to 32Red’s shares. It would also appear that investors have now come to terms with these issues as the shares have been trading sideways since March, indicating that they could be basing out.
So having initiated coverage on the shares 14 months ago when the price was 51.75p (‘Game on’, 7 July 2013), and last updated my advice when the price was 53p (‘Punting on a recovery’, 22 July 2014), I rate 32Red shares a very decent bet on a risk-reward basis over the next three months. So does chief executive Ed Ware who splashed out almost £50,000 buying shares in his company at 56.875p each post results.
Trading on a bid offer spread of 56.5p to 57p, and offering over 50 per cent upside to my realistic target price of 89p, coinciding with January’s high, I would definitely be a buyer at this level.
■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
