Another roll of the dice

It can certainly pay handsome financial rewards to be patient as many readers were able to buy shares in companies I have recommended at sensible prices and subsequently made substantial profits by adopting this strategy. For example, shares in Trading Emissions (TRE), Communisis (CMS), Aurora Russia (AURR) and Netcall (NET) all came back after the initial buying subsided and all are now showing substantial gains.

Sometimes the shares simply don't come back to anywhere near my advised buy-in price. But that doesn't mean we can't make money by playing the patient game. For instance, a surge of buying in the shares of interactive gaming company NetPlay TV (NPT: 16.75p) meant that the majority of readers will have bought in around the 13.75p level, a 10 per cent premium to my advised buy-in price of 12.5p, in the five trading days after I published my article a month ago. Still, with Netplay's shares subsequently rising to a spread of 17.25p to 17.5p, then hundreds of you will have been in the fortunate position of sitting on paper gains of around 20 per cent in double-quick time.

The company's shares have since pulled back and stabilised around a bid-offer spread of 16.25p to 16.75p and, with preliminary results for the year ended 31 December 2012 due to be released on Tuesday 9 April, I think the next major move to take the price above my 18p conservative target price is now imminent. Not only would Netplay's shares give a repeat buy signal on the swing charts if that 17.5p high is taken out, but the fundamentals clearly support a valuation way in excess of this level, so we have a very positive technical situation supporting what remains a compelling investment case.

Strong customer acquisitions

To recap, Netplay 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, a 50 per cent plus increase over the course of 2012. Interestingly, the business is gaining traction with mobile and tablet players: this segment accounts for 31 per cent of all new deposits, a fourfold rise on a year ago. As a result, Netplay now has 25,376 active depositing casino players across all platforms (mobile, internet and television), a 13 per cent increase on the third quarter of last year.

Earnings upgrades

Importantly, after factoring in higher marketing spend and TV advertising, which has been pulling in the new players, these customer acquisitions are proving very profitable. In fact, analyst Johnathan Barrett at N+1 Singer, who upgraded his profit and earnings estimates by 16 per cent in September after bumper half-year figures, upgraded full-year numbers by a further 12 per cent last month. On that basis, expect Netplay to report in a few weeks' time that revenues rose by 20 per cent to £26.8m in 2012 and adjusted pre-tax profits increased by 50 per cent to £3.6m to produce EPS of 1.2p, up from 0.8p in 2011.

Interestingly, given the operational gearing of the business, the latest 12 per cent upgrade in earnings was driven by a modest 4 per cent 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 very good chance that earnings estimates for 2013 and 2014 could be exceeded, which opens the door for even more earnings upgrades. But even without them, the company looks too lowly valued.

Low valuation

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 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 are rated on only 11.5 times current year earnings estimates, falling to nine 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 which gives a prospective yield of 2.4 per cent.

If that isn't compelling enough, Netplay is a highly cash-generative business with a strong balance sheet. At the end of June 2012, 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 quarter of the current share price. In other words, strip out low-yielding cash and the shares, at 16.5p, are trading on a miserly nine 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 eight 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 five.

So, even after the recent re-rating, Netplay's shares are still deep into bargain basement territory and, in my view, my 18p target price is likely to prove very conservative. Ahead of the forthcoming results on 9 April, I rate the shares a trading buy and have lifted my target price to 20p.

TRADING UPDATE: Housebuilders on solid foundations

A few readers have been asking whether this is a good time to bank profits on my housebuilder first-quarter trade which is now showing a storming 14.3 per cent gain since the turn of the year. To put that into perspective, that is over 4 percentage points more than the gain on the FTSE 100 and a point more than the gain on the FTSE 250 index, of which all eight housebuilders are constituents. Moreover, the sector trade is generating the 'alpha' I had envisaged as anyone buying shares in the eight housebuilders and simultaneously buying a short ETF on the FTSE 100, is up almost 6 per cent in the past 10 weeks.

True, it is tempting to bank some gains, but I am inclined to let my profits run a bit longer as I always intended running this trade until the end of March.

FTSE 350 Housebuilders' performance table in 2013

■ Finally, I will be taking a four-week break during April to complete a book on 'Stock picking for profit', 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.

MORE FROM SIMON THOMPSON ONLINE...

Since the start of this year I have written no fewer than 42 online articles, all of which are available on my homepage. These include articles on the following companies this week:

US equity market trade (Profit from St Patrick's Day, 11 March 2013)

Raven Russia (A major buy signal beckons, 11 March 2013)