The reason for the substantial re-rating in the past six months reflects the fact that the shares were hardly overpriced to start with when I rated them an outstanding buy in September at 73p ('Building momentum', 29 Sep 2015), but more importantly the penny has finally dropped with investors that the company is one of the winners in the post UK point of consumption tax marketplace. For example, having posted a 20 per cent rise in net gaming revenue to a record £18.6m in the first half of 2015, trading trends since then imply acceleration in the growth rate through August and September. Improvements in customer retention and reactivation of players, focused digital marketing investment and softer competition in the new tax environment are all helping to drive up customer numbers and support their spend.
Following upgrades at the time of the half-year results at the end of September, analyst Ivor Jones at house broker Numis Securities expects full-year EPS of 6.5p in 2015, rising to 10.5p this year based on a two-thirds rise in cash profit to £10m and a third rise in revenue to £60m. I would flag up that 40 per cent of the increase in cash profit in 2016 is expected to come from last summer's earnings-accretive acquisition of online casino Roxy Palace. And with the company boasting a cash-rich balance sheet - 32 Red is expected to have ended last year with net funds of more than £6m, or 7p a share - then shareholders can expect the dividend to rise sharply, too: both Mr Jones at Numis Securities and Eric Opara at Edison Investment Research forecast a dividend per share of 2.64p for the 2015 financial year, rising to 2.9p in 2016. On that basis, the shares are rated on a cash-adjusted PE ratio of 13 for 2016 and offer a prospective dividend yield of 2 per cent.