With this in mind, I have been revisiting the investment case on a company I have been following in the online gaming sector, NetPlay TV (NPT: 18p). Shares in the Aim-traded company have produced significant gains for us since I first initiated coverage at 12.5p eight 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).
There have been several repeat buying opportunities since then which I have highlighted, so traders will have been rewarded dipping in and out of the shares. And after the company posted another upbeat trading statement today, yet another repeat buying opportunity has opened up. In fact, I strongly feel that the shares are primed for a move up to new highs way in excess of the 19.8p level which has capped previous rallies in both March and September this year. I have even raised my target price.
Third time lucky for chart break-out
Interestingly, following a drift in NetPlay's share price on profit taking from those highs post the half-year results in September, the price has found strong support at the 200-day moving average around 16.5p. In the process, the 14-day RSI has unwound to a neutral reading, so offering a base for a rally on good news flow. And that is exactly what has happened today with the price gapping up on the open on Wednesday, 16 October, following what can only be described as a very positive third quarter trading update.
In the three-month period, the contribution to profits from NetPlay's mobile and tablet segment increased 171 per cent on prior year to account for 40 per cent of all new depositing casino players and a third of total net revenue. At the same stage last year, mobile only accounted for 14 per cent of NetPlay's total revenue. The growth since then largely reflects an increase in brand awareness and online marketing efforts.
For instance, during the period NetPlay's SuperCasino.com signed a major sponsorship deal of Big Brother and Celebrity Big Brother on FIVE, which proved very successful and contributed to a 30 per cent surge in new depositing players increasing on the same period last year. This segment accounted for 15,566 customers, up from just under 12,000 in the same period last year.
More importantly, customer retention and acquisition rates also tell a positive story: average quarterly active depositing players increased by 28 per cent to 28,890 accounts; and net revenue surged by 19 per cent to £6.5m in the third quarter. This was a mightily impressive performance considering the exceptionally hot weather in the summer led to a reduction in the total number of players during the month of July.
In other words, the recovery in August and September reflects a return to the strong organic growth rates NetPlay has been enjoying for the past year. 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. Netplay is also the company behind gaming website Jackpot247.com and its 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.
Market share gains
The company's web offering is clearly proving attractive to punters as Netplay has been winning market share. 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, making NetPlay the seventh largest operator in a market which is expected to grow by 15 per cent to £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 estimates 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 originates from those who have been registered over six months. This is well worth noting because the returns made from existing customers are greater than from new ones, so customer retention is critical to overall profitability.
Conservative earnings estimates
Post the third-quarter trading update, Mr Barrett 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 £4.5m 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.
Analysts Amisha Chohan at Sanlam Securities and Michael Campbell at Daniel Securities forecast current-year pre-tax profit of £4.6m and £4.7m, respectively, to produce EPS of 1.53p and 1.6p. However, I still see potential for Netplay to beat these estimates if these strong revenue trends continue in the fourth quarter.
For 2014, both Daniel Stewart and Sanlam are forecasting revenues of £29.8m, cash profits of £5.8m, pre-tax profits of £5.4m and EPS of about 1.8p. On this basis, the cash pile would swell to more than £20m, or almost 7p a share. Johnathan Barrett of N+1 Singer 2014 forecasts are a tad higher at revenues of £30.6m, cash profits of £6m, pre-tax profits of £5.6m and EPS pf 1.9m. N+1 Singer estimates the cash pile will swell to £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
Moreover, assuming NetPlay hits what are conservative 2013 and 2014 estimates, the shares are very modestly rated and I have no reason at all to change my positive stance on the shares.
That's because, once you strip out the year-end net cash pile of 5.6p from the current share price of 18p, NetPlay TV is trading on a modest 2013 PE ratio of 8. The rating falls to a bargain basement 5.8 times 2014 earnings estimates net of a cash pile estimated to be worth 7p a share in December next year. 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 2.8 per cent with the payout covered three times. But with so much cash being generated by the company, there is clearly scope to increase the payout way above what analysts are forecasting.
Needless to say, I continue to rate NetPlay shares a buy on a bid-offer spread of 17.5p to 18p. 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 I have upgraded my target price to 24p. Offering 33 per cent potential upside to my new target, and ahead of a pre-close trading statement in early January, I continue to rate NetPlay shares a strong buy on a bid offer spread of 17.5p to 18p.
Finally, since the start of last week, I have published eight other articles on the following 11 companies or trading strategies:
■ Inland ('Property plays with foundations, 7 October 2013)
■ Terrace Hill ('Property plays with foundations, 7 October 2013)
■ Sanderson ('A smart tech share', 9 October 2013)
■ Pure Wafer ('Time to chip in', 10 October 2013)
■ US debt ceiling deadline looms ('Debt ceiling dilemma', 11 October 2013)
■ Air Partner ('Gaining altitude', 14 October 2013)
■ Polo Resources ('Targeting special situations', 14 October 2013)
■ Greenko ('Targeting special situations', 14 October 2013)
■ Randall & Quilter ('Bargain shares flying', 15 October 2013)
■ Oakley Capital Investments ('Bargain shares flying', 15 October 2013)
■ Marwyn Valu Investors ('Exploiting an arbitrage opportunity', 16 October 2013).
■ Entertainment One ('Exploiting an arbitrage opportunity', 16 October 2013).
