To recap, Netplay is the company behind gaming websites 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 six nights a week on ITV1. The agreement with ITV was extended in mid-March and now runs to 2016. Netplay has also taken a punt on the new Big Brother 2013 show on Channel 5. The company's SuperCasino.com brand is the headline sponsor of the reality television show, which is being aired every night for 11 weeks from mid-June until the end of August.
If Netplay’s second quarter trading update to the end of June is anything to go by, then the growth the company has enjoyed over the past couple of years is showing little sign of waning. In fact, the business attracted 19 per cent more new depositing casino players in the three month period than in the second quarter in 2012. More importantly, the number of active depositing casino players rose by a quarter to over 28,000 which in turn drove total net revenues up by a third to £7.1m. As a result, total net revenues were up by 36 per cent in the half year period. This was well above analyst expectations.
Earnings upgrades
Analyst Johnathan Barrett at broking house N+1 Singer notes: “The seasonally weaker second quarter was expected to yield much lower results. However, the strong underlying momentum should carry through to the second half given further substantial marketing investment. Investment is driving the growth and the value of the customer database and resulting in over 40 per cent of revenue being derived from players over 12 months old.”
Mr Barrett notes that revenues will now be “around £14.2m for the first half of 2013, which is well ahead of our £13.4m previous expectation and cash profits of £2.7m for the period are ahead of our £2m forecast even after substantially increased marketing investment”.
Netplay will continue to invest heavily in marketing, including both TV and most notably online, where player values are higher. N+1 Singer now expects full-year revenues to be £28.7m (up from the prior forecast of £27.1m) and full year cash profits to be £5.1m (£4.8m previously). On this basis, N+1 Singer lifted both its pre-tax profit estimate and diluted EPS estimates by 6.3 per cent to £4.6m and 1.53p, respectively, post today’s announcement. This means that profits are set to rise by at least £1m compared with last year to drive EPS up by over a quarter from 1.2p to 1.53p. Mr Barrett is looking for a year-end cash pile of £15.9m - the equivalent of 5.4p a share - bang in line with estimates from analyst Amisha Chohan at broking house Sanlam Securities.
But I believe there is obvious scope for upgrades at the interims in September as Sanlam notes that “the benefit from the extension of the ITV contract and potentially the sponsorship are expected to come through in the third quarter of 2013”. In turn, that is likely to lead to upgrades to 2014 estimates as currently broking houses Daniel Stewart and Sanlam Securities are both forecasting revenues of £29.8m, cash profits of £5.9m, pre-tax profits of £5.35m and EPS of around 1.8p. On this basis, the cash pile would be over £20m, or almost 7p a share. Johnathan Barrett of N+1 Singer has similar forecasts.
Low valuation
Assuming NetPlay hits what are now looking to be increasingly conservative 2013 and 2014 estimates, even after today’s upgrades, the shares are still too lowly rated. Daniel Stewart has a price target of 25p, Sanlam has a target of 22p and N+1 Singer has an intrinsic value of between 20p and 21.4p on the shares. These are not unrealistic target prices.
That’s because once you strip out net cash from the current share price of 17.5p, Netplay TV is trading on a modest 2013 PE ratio of 8, falling to a bargain basement 5.8 times 2014 earnings estimates. There is a decent dividend, too, as the board paid out 0.375p a share in 2012, or a third of EPS of 1.2p. On that basis, the historic yield is 2.1 per cent with the payout covered over three times. But with so much cash being generated by the company, analysts believe there is scope to increase the payout sharply. In fact, Mr Chohan at broking house Sanlam and Mr Barrett at N+1 Singer both expect the pay-out to be lifted to at least 0.45p a share this year. On this basis, the prospective yield is almost 3 per cent.
So ahead of what is set to be a bumper set of half year results on 10 September, and in most likelihood one accompanied by an upbeat trading update which could lead to further earnings upgrades, I continue to rate Netplay shares a trading buy on a bid-offer spread of 17p to 17.5p.
Finally, I published two articles yesterday. The first highlighted a company which has just issued a bullish trading update and signalled a major break-out on its chart ('Short-term trading buy', 8 July 2013). The second was a company in the gaming sector which is not just anomalously valued, but is also set to release a bumper trading update very shortly ('Game on', 8 July 2013).
MORE FROM SIMON THOMPSON...
For more of Simon's columns, see his IC homepage...
View Simon's Bargain Shares portfolio
Simon's first book, Trading Secrets, is published by Pearson Education under the FT Prentice Hall imprint and is available from Amazon at £12.94 including postage and packaging
