The key take for me in the latest trading update the 32 per cent organic net gaming revenue (NGR) growth in the business. The headline numbers show a 63 per cent rise in NGR to a record £30.4m in the six-month period, but this includes a £5.8m contribution from last summer's bolt-on acquisition of Roxy Palace. The underlying growth rate is important because analysts predict like-for-like NGR growth of 28 per cent for the year as a whole, and 39 per cent including Roxy Palace, so the company is trending above these robust targets. The performance was even more impressive when you consider than 32Red was up against a very active sports market including the European football championships from mid-June which could have pulled casino customers away.
This positive trend is likely to continue too. Wagering in July, a period that was also competing with Wimbledon and the end of the European football championships, maintained the impressive first-half growth rate albeit gross casino win margin wasn't as high. I would also flag up that 32Red's Italian operation continues to build critical mass, so much so that analysts believe it will break-even this year. The board led by chief executive Ed Ware is comfortable with Numis Securities forecasts that point towards cash profits rising more than two thirds to £11m based on full-year NGR rising by 39 per cent to £65m to boost pre-tax profits by more than three quarters to £10.5m. On this basis, expect EPS of 11.3p, up from 7p in 2015, and another 10 per cent hike in the dividend per share to 3.08p, implying 32Red's shares are being rated on 12 times earnings estimates and offer a 2.3 per cent dividend yield.
In fact, the rating is even more attractive because the year-end net cash balance is expected to rise by a quarter to £12.9m, a sum worth 15p a share. This means that 32Red's shares are trading on a cash-adjusted PE ratio of less than 11 for 2016, hardly a punchy rating for a business thriving in the post-Point of Consumption (PoC) gaming market, winning customers from operators unable to compete in the more onerous tax environment, and with potential to continue to grow at market-leading rates. Indeed, by more effectively target marketing customers, 32Red is achieving high returns on its marketing spend, while also benefiting from reduced competition as uneconomic operators exit the market. A sponsorship deal with Leeds United for the 2016/17 football season, and the return of 32Red sponsored Glasgow Rangers to the Scottish Premier League, can only help develop the brand.
In the circumstances, I would recommend running your healthy profits with 32Red's shares trading on a bid-offer spread of 134p to 135p, targeting a move back towards the March 2016 all-time high of 186p. Run profits.
