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A share set to hit the jackpot

A share set to hit the jackpot
February 11, 2013
A share set to hit the jackpot

But that is exactly what is on offer from gaming company Netplay TV (NPT: 12.5p), which issued yet another bullish trading update to shareholders a few weeks ago. The company operates a number of interactive gaming services under an Alderney gaming licence including Supercasino.com and Jackpot247.com. These services can be viewed 24 hours a day on Sky Channel 862, in the evening on FIVE, and for five nights a week on ITV1. New customers are certainly tuning in as Netplay attracted a further 2,000 new depositing casino players in the final quarter of 2012 to take this segment of the business to almost 14,000 customers, which in turn represents a 51 per cent increase over the course of 2012. Interestingly, the business is gaining traction with mobile and tablet players: this segment accounted for 31 per cent of all new deposits, a fourfold increase on a year ago. As a result, Netplay currently has 25,376 active depositing casino players across all platforms (mobile, internet and television), a 43 per cent rise on the fourth quarter of 2011 and a 13 per cent rise on the third quarter of last year.

Importantly, after factoring in higher marketing spend and TV advertising, which has been pulling in the new players, these customer acquisitions are proving highly profitable. In fact, analyst Johnathan Barrett at N+1 Singer, who had already upgraded his profit and earnings estimates by 16 per cent in September after bumper half-year figures, has just upgraded full-year numbers by a further 12 per cent. On that basis, last year's revenues are forecast to have risen by 20 per cent to £26.8m, which lifts both adjusted pre-tax profits and EPS by 50 per cent to £3.6m and 1.2p, respectively.

Interestingly, given the operational gearing of the business, the latest 12 per cent upgrade in earnings was driven by a just 3.8 per cent additional rise in revenues. That's worth noting because Mr Barrett has only modestly upgraded his 2013 and 2014 estimates based on Netplay "continuing to aggressively invest in marketing spend (circa 50 per cent growth), but without an automatic assumption that it achieves the same strong returns that have been generated by the recent strategy". In other words, if Netplay can maintain the momentum in attracting new signs ups, there is a good chance that earnings estimates for this year and next could be exceeded, which opens the door for further upgrades. However, even without them, the company looks too lowly valued.

For example, based on a 15 per cent rise in revenue this year, as N+1 Singer predicts, pre-tax profits are set to rise by 20 per cent to £4.3m to produce EPS of 1.4p. This assumes player growth of 15 per cent which, from my lens, looks conservative. The respective figures for 2014 are revenues of £33.6m, pre-tax profits of £5.4m and EPS of 1.8p. So, on that basis, the shares, trading on a spread of 12.25p to 12.5p, are rated on only nine times current year earnings estimates, falling to 7 times 2014 forecasts. Moreover, having paid a maiden dividend of 0.15p a share at the time of the half-year results in September, analysts expect a final dividend of 0.25p a share to be declared by the board when Netplay announces its full-year results in April. If they are right, then the prospective yield is 3.2 per cent.

If that isn't enticing enough, it's also worth pointing out that Netplay is a highly cash-generative business with a strong balance sheet. At the end of June, for example, the company was sitting on net cash of £10.5m and this is expected to have subsequently swelled to around £11.7m - the equivalent of 4p a share or a third of the current share price. In other words, strip out low-yielding cash and the shares, at 12p, are trading on a miserly 6 times 2013 earnings estimates. But it gets better because assuming Netplay hits those 2013 estimates, the year-end cash pile will swell even further to £15.1m, or 5.3p a share. To put that into perspective, unless the share price starts making progress, by the end of this year Netplay will be trading on only 5 times 2013 earnings net of cash. And by the end of 2014, when the cash pile is forecast to increase to £19.1m, worth 6.6p a share, net of cash, the forward PE ratio drops to three.

At that level Netplay's shares are deep into bargain basement territory and, in my view, offer a tantalising 44 per cent upside on a six-month basis to my 18p conservative target price. For good measure the share price is on the verge of major break-out. Strong buy.

■ Please note that I have released another two online articles today - A highly profitable arbitrage play, and Seeking alpha among the housebuilders - both of which are available on my homepage. I will also be releasing another online exclusive on Tuesday morning. Finally, I will be taking a four-week break during April to complete a book on 'Profitable stockpicking', my follow up to Trading Secrets: 20 Hard and Fast Rules to Help You Beat the Stock Market. The book will be published in early summer. Please note that my next online exclusive column will appear on my homepage tomorrow morning.

MORE FROM SIMON THOMPSON ONLINE...

Since the start of this year I have written no fewer than 24 online articles, all of which are available on my homepage. These include articles on the following companies or investment strategies:

Oakley Capital, Randall & Quilter, Inland, Terrace Hill, Heritage Oil, Cairn Energy, Polo Resources, Trifast, Noble Investments, Fairpoint (Bargain Shares for 2013, 8 February 2013)

Telford Homes, MJ Gleeson, Stanley Gibbons, Molins, Indigovision, Trading Emissions, Mallett, Bloomsbury Publishing, Rugby Estates, Eurovestech (How the 2012 Bargain Shares fared, 8 February 2013)

Future (Decision time after a bright start, 5 February 2013)

Sanderson (An 'app' online investment, 5 February 2013)

Aurora Russia ('Time to play Russian Roulette', 4 Feb 2013)

BP Marsh & Partners ('Hyper value gains', 31 Jan 2013)

Bellway ('Profit from the London property boom', 30 Jan 2013)

Telford Homes, MJ Gleeson, Mallett, Rugby Estates ('Taking profits after a winning streak', 28 Jan 2013)

Market timing ('Lessons to learn', 24 Jan 2013)

Communisis, Netcall ('Bumper trading gains', 23 Jan 2013)

Crystal Amber, API, Sutton Harbour ('More upside to come', 22 Jan 2013)

PV Crystalox Solar ('Seeing the light', 21 Jan 2013)

Bloomsbury Publishing ('A publisher for the digital age', 18 Jan 2013)

Housebuilders first-quarter effect and performance table on all my recommendations from the final quarter of 2012 ('Stockpicking Marvels, 16 Jan 2013)

Eros ('A share firmly in the picture', 15 Jan 2013)

Netcall ('Jumping the gun: take two', 15 Jan 2013)

Moss Bros, Communisis ('Jumping the gun', 14 Jan 2013)

Stanley Gibbons, MJ Gleeson, Spark Ventures ('Small cap wonders', 11 Jan 2013)

IQE, Trading Emissions ('A tech share worth buying now', 10 Jan 2013)

S&P 500 portfolio of dog shares ('Dog shares barking back', 8 Jan 2013)

Air Partner ('A share ready to take off', 7 Jan 2012)

FTSE 100 traded options strategy ('Highly profitable options', 3 Jan 2012)

Telford Homes, MJ Gleeson, Molins, Noble Investments ('Rampant bargain shares', 31 Dec 2012)