If I am right there could be a very sharp rally in the price over the next six weeks to my very conservative target price of 21p. The technical set-up certainly favours a share price rally, and with the half-year results scheduled for Tuesday, 10 September, we are virtually guaranteed the good newsflow needed to spark investor interest and buying activity to re-rate the shares.
Positive technical set-up and newsflow
Since NetPlay's shares hit a multiyear high of 19.8p on 15 March, the price has consolidated the steep gains we made earlier this year after I advised buying at 12.5p six months ago, although a surge of buying meant that the majority of you will have bought in at around the 13.75p level in the five trading days after I published that article ('A share to hit the jackpot', 11 February 2013). In my view, the sideways price action is very bullish as selling pressure has been met every time by investor buying on the dips, a trend that is usually the precursor to an upwards move when the consolidation period ends.
And with the 14-day RSI around 60, and the shares moving up above both the 20-day and 50-day moving averages, there is ample scope for a rally to start now. In fact, it would have appeared to have started, with the shares up 5 per cent today as investors warm to news that the company has just announced that its brand SuperCasino.com is the headline sponsor of Celebrity Big Brother 2013. The programme is due to air tonight and run through to 13 September. This is the second major sponsorship contract, following on from the successful sponsorship of Big Brother 2013. As part of the deal, NetPlay's SuperCasino.com branded bumpers will be shown from 9pm onwards on all coverage, including all Celebrity Big Brother and Celebrity Big Brother support programming, online and video on demand.
This new contract also indicates that the returns from the first Big Brother sponsorship deal has paid off. As Charles Butler, boss of NetPlay confirmed today: "The sponsorship deal with Big Brother is already showing positive results, and illustrates the fact that TV airtime, a key element of our marketing strategy of targeting new customers, remains highly effective. We are confident that the sponsorship of Celebrity Big Brother will continue to accelerate our customer reach and brand awareness." This latest news follows on from a very upbeat trading update a few weeks back.
Earnings upgrades
If NetPlay's second-quarter trading update to the end of June 2013 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 to end-June than in the second quarter of 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.
Interestingly, post the trading update, analyst Johnathan Barrett at broking house N+1 Singer noted: "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."
Mr Barrett points out 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 the second-quarter trading update in July. 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 further upgrades at the interims on Tuesday, 10 September as Mr Chohan at 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 very conservative 2013 and 2014 estimates, the shares are still too lowly rated.
That's because, once you strip out net cash from the current share price of 18.25p, NetPlay TV is trading on a modest 2013 PE ratio of 8.5, falling to a bargain basement six 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 payout to be lifted to at least 0.45p a share this year. On this basis, the prospective yield is 2.5 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 that could lead to further earnings upgrades, I continue to rate NetPlay shares a trading buy on a bid-offer spread of 17.5p to 18.25p. It's worth noting that 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. I maintain a conservative target price of 21p, but I would not be surprised at all to see this smashed if the interim results are as good as I expect them to be. Trading buy.
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