Bet on 32Red comeback

While it is early days since the introduction of PoC at the start of November last year, there are already some positive signs for 32Red. In January, the group announced its fifth consecutive year of double-digit growth, with net gaming revenues up 26 per cent to £32m. What's more, it ended 2014 with record monthly revenues in December - after the introduction of PoC. And 2015 is also off to a good start. With strong cash flow, management says the business has "never been in better shape" as sales during the first 20 days of the new financial year rose 31 per cent. And while 32Red admits it's too soon to tell the effects of the new licensing regime, the company has noted that a number of rivals have indeed withdrawn from the UK, which has left it well-placed to mop up the vacant market share.

We think 32Red has done a good job of handling the changing regulatory environment so far. It chose to tackle the challenge of PoC differently to its peers. Groups such as NetPlay TV (NPT) and 888 (888) hiked marketing budgets to snare more customers before the introduction of the tax. The strategy was: more customers, higher revenue, less impact on profitability. But these strategies have not proved successful across the board. NetPlayTV admitted overspending, issued a profit warning and the new management team is rearranging budgets this year. By contrast, 32Red curbed its marketing spend. This was the case with its Italian business, too, as the country has also gone through recent regulatory changes.

The strategy has left the group with a tidy cash pile. It also gave management the confidence to pay a special dividend in 2013 and to seal a strategic acquisition in early September last year. It bought the UK customer database of the Go Wild casino from Go Wild Malta Ltd and Go Wild's British customers were migrated to the 32Red platform around 15 September 2014. At the time, commercial director Matt Booth called the deal "low risk" and "seamless". Following this, announcing half-year results at the end of September, the group raised the dividend by a quarter to 1p a share to demonstrate management’s confidence for the future. Now, marketing will ramp up again, both at home and abroad.

With net cash of almost £5m the group is well funded for its marketing to drive to exploit growth opportunities in the new regulatory environment. The strong cash position will also support the hearty dividend yield, which is forecast at 5.2 per cent this year.