There are decent prospects of further capital and income gains too if the latest trading update is anything to go by: the company has just reported a 39 per cent rise in net gaming revenues in the first 19 weeks of the 2016 financial year, representing an acceleration on the 35 per cent run rate at the time of my update in mid-March.
Including the contribution from last summer’s earnings enhancing acquisition of Roxy Palace, 32Red’s net gaming revenue is currently up 71 per cent year-on-year which gives credibility to forecasts from analyst Wyn Ellis at brokerage Numis Securities that the company’s full-year net gaming revenue will rise by a third to £65m. Embedded in that estimate is an assumption of underlying sales growth of 26 per cent this year and Mr Ellis is “increasingly confident that the company will at least meet our forecasts”.
He has a point as 32Red has been more efficiently target marketing customers, is achieving higher returns on its marketing spend, has improved its customer relational management activities to retain customers more effectively, and continues to benefit from reduced competition in its gaming markets, reflecting the exit of uneconomic operators in the post-Point of Consumption (PoC) tax regime. I feel all these factors are likely to drive the business forward in the coming months and so does Mr Ellis who sees “clear upgrade potential if the current strong momentum is maintained”.
Numis is currently maintaining his prediction that cash profits will rise by 71 per cent to £11m this year to almost double pre-tax profits from £5.9m to £10.5m and lift EPS from 7p to 11.3p. On this basis, expect a hike in the full-year dividend from 2.8p to 3.08p and, with cash generation strong, expect another rise in the year-end net cash balance to around £13.7m, up from £10.3m at the end of 2015. That cash sum is worth 16.3p a share which means that 32Red’s shares are trading on a cash-adjusted PE ratio of 11.9 for 2016, hardly pricey for a business thriving in the post-PoC duty 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, Numis believes the business is capable of increasing net gaming revenue to £79m next year and with the benefit of operational gearing this would likely deliver cash profits of £14m and pre-tax profits of £13.4m. On this basis, the broking house expects 2017 EPS of 14.5p and a further hike in the dividend to 3.39p, implying that the shares are rated on 10.5 times forward earnings, or only 9.3 times on a cash-adjusted basis, and offer an attractive prospective dividend yield of 2.2 per cent. News of a sponsorship deal with Leeds United for the 2016/17 football season can do no harm in developing the brand either. The company also sponsors Glasgow Rangers which has just won promotion to the Scottish Premier League.
In the circumstances, I would recommend that you continue to run your healthy profits with 32Red's shares trading on a bid-offer spread of 149.5p to 151p, targeting a move back towards the March 2016 all-time high of 186p. Run profits.
