I have been a fan of the company for most of this year having initiated coverage when the price was 12.5p, although a surge of buying meant that the majority of you will have bought in at around the 13.75p level ('A share to hit the jackpot', 11 February 2013). Importantly, with the fundamental case for investing firmly in tact, and the technical favouring a continuation of the share price rally, I expect a further re-rating of the shares towards my conservative target price of 21p, and beyond.
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.
Marketing efforts paying off
The company has also been successfully promoting SuperCasino.com as the headline sponsor of Celebrity Big Brother 2013 which runs through to Friday 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 have been shown on all coverage, including all Celebrity Big Brother and Celebrity Big Brother support programming, online and video on demand. And these TV marketing efforts have helped to boost Netplay’s net revenue from TV by 27 per cent in the first half to end June.
The increase in brand awareness and online marketing efforts has also helped drive tablet and online gaming, a segment which now accounts for a third of all new depositing casino players and 28 per cent of net revenues. Customer retention and acquisition rates also tell a positive story: new depositing casino players increased by 31 per cent in the six-month period to 32,618 accounts; average quarterly active depositing players increased by almost a third to 29,311 accounts; and net revenue surged by 36 per cent to £14.2m.
In turn, this produced cash profits of £2.7m, up from £2.3m in the first half last year, and with cash generation strong, cash balances rose by £2.6m to £14.9m. Moreover, with pre-tax profits and EPS up by almost half to £2.3m and 0.82p, respectively, the board lifted the interim dividend by 20 per cent to 0.18p a share. The company can certainly afford it as that net cash pile is worth 5.1p a share alone, or 4.5p if you strip out customer balances of £1.8m.
Importantly, this momentum has continued into the current quarter and revenue is up 17 per cent year-on-year, and by 29 per cent in the past six weeks following a tough July when the exceptionally hot weather impacted player retention. And with NetPlay continuing to invest heavily in marketing, including both TV and most notably online, where player values are higher, there is little reason to expect these heady growth rates to slow anytime soon.
Market share gains
In fact, Netplay has been winning market share and analyst Johnathan Barrett at broking house N+1 Singer believes the company has lifted its share of the UK online casino market from 3.9 per cent last year to around 4.5 per cent in the first half. This makes Netplay the seventh largest operator in the market which is expected to grow by 15 per cent to almost £800m this year.
Moreover, by delivering a good service, the company has been able to reduce churn rates and boost spending by customers. Mr Barrett calculates that over 40 per cent of Netplay’s net revenue is now being generated by customers who have been registered over 12 months and 56 per cent of net revenue comes from those who have been registered over six months. This is important as the returns made from existing customers are greater than from new ones, so customer retention is critical to overall profitability.
Conservative earnings estimates
Since the half-year results, analyst Johnathan Barrett at broking house N+1 Singer is maintaining his forecast that Netplay will post full-year revenues of £28.4m and cash profits of £5m, up from £21.8m and £4.3m, respectively in 2012. On this basis, full-year pre-tax profit and diluted EPS are both expected to rise by 25 per cent to £4.6m and 1.5p, respectively. Mr Barrett is now looking for a year-end cash pile of £16.2m - the equivalent of 5.6p a share - or £300,000 above prior estimates.
True, these estimates are in line with prior forecasts. Analysts Amisha Chohan at Sanlam Securities and Michael Campbell at Daniel Securities are maintaining their 2013 pre-tax profit estimates at £4.6m and £4.7m, respectively, to produce EPS of 1.53p and 1.6p. However, following a 38 per cent increase in new depositing casino players in the third quarter, Mr Campbell believes his forecasts are well underpinned. I would agree and still see potential for Netplay to beat these estimates if current revenue trends continue.
For 2014, both Daniel Stewart and Sanlam are 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 swell to over £20m, or almost 7p a share. Johnathan Barrett of N+1 Singer has similar forecasts, pencilling in a cash pile of £20.6m at the end of next year.
So, with the balance sheet under geared, and cash generation strong, this opens the possibility of a cash return to shareholders, expansion into other markets or a further scaling up of the business. Any of these options would be well received.
Low valuation
Assuming NetPlay hits what are now looking conservative 2013 and 2014 estimates, the shares are still too lowly rated in my opinion.
That's because, once you strip out net cash from the current share price of 19.25p, NetPlay TV is trading on a modest 2013 PE ratio of 9.25, falling to a bargain basement seven times 2014 earnings estimates. There is a decent dividend, too, as the board paid out 0.375p a share in 2012 and, on the basis of a 0.5p a share full-year pay-out, the yield is 2.5 per cent with the payout covered three times. But with so much cash being generated by the company, analysts believe there is scope to increase the payout sharply.
Needless to say, I continue to rate NetPlay shares a buy on a bid-offer spread of 18.5p to 19p. It's worth noting that Daniel Stewart has a price target of 25p, Sanlam has a target of 22p and N+1 Singer has a valuation range between 22.5p to 26p on the shares based on this year’s earnings estimates, rising to a range 27p to 31p next year. These are not unrealistic target prices and my target price of 21p is looking conservative. The shares continue to rate a buy.
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