Bwin.Party under pressure

Investors might be reassessing how to get the best odds from gaming sector shares after a poor trading update from German-focused betting company Bwin.Party Digital Entertainment (BPTY). It was a performance, however, which stood in stark contrast to almost all if its competitors.

Bwin.Party faces the difficult task of shifting its operational focus - retrenching, in effect - from unregulated markets to countries with markets that are regulated. Unfortunately, regulated markets are already highly competitive. Moreover, Bwin's reliance on poker for a good proportion of its income is under pressure as the major players have all reported falling yields - essentially, the market for those who are prepared to play late into the night and possibly lose all of their money is looking saturated. That's why the fall in the group's first-quarter revenues - down 17 per cent year on year to €180m (£155m) - was so pronounced. Management also reckons that its shift of focus will see full-year revenue fall by 10 per cent this year. But the group is still on track to meet previous guidance on cash profit margins - after having identified savings of €70m a year in 2013 - with more due in 2014 and 2015.

Investec Securities says...

Buy. We expected 2013's first half to be a difficult transition period and we would use any weakness - first-quarter revenue was soft, although the cash profits outlook is unchanged - to pick up stock in an emerging growth story. We expect uncertainty in Germany to continue to weigh on the valuation, but we increasingly believe a market exit is unlikely. Meanwhile, the cost rationalisation story - and better earnings quality - is coming through. Most importantly, the potential US upside is significant and has been assisted by the positive news that PokerStars may not be able to buy its way into the New Jersey market. On that basis, our price target increases from 140p to 180p and we upgrade to buy from hold. Expect 2013 pre-tax profit of €119m, giving EPS of 12.4¢.

Numis Securities says...

Buy. It is early days for the group's strategy - announced with the 2012 results. Out has gone scatter-gun marketing to new players in countries where regulation is uncertain and, with it, a chunk of costs. What will remain is a business focused on improving services to, and retention of, existing customers and expansion into new markets - of which the US is the most important. We expect to see the first evidence of success in the third quarter of this year. We've reduced our 2013 cash profit forecast in line with consensus - to €155m from €162m - because of weak current trading, while leaving our forecasts for other years unchanged. Expect EPS of 13.9¢ for 2013 - our price target stands at 200p.