The confirmation that New Jersey is ready to open the first fully regulated online gaming regime in the US has produced a flurry of excitement among gaming companies keen on returning to a country that is home to the world's largest potential market for online poker and gambling. One of the main beneficiaries of this newfound optimism is poker and online casino specialist 888 (888). The company's shares have soared 62 per cent higher over the past 12 months as expectations built up over its partnership deals with US casino operator Caesar's Entertainment. However, the shares now look vulnerable given questions over whether the eventual opportunity compensates for current slow trading in 888's core businesses.
- Plenty of cash
- US still important
- Slower than expected third quarter
- More now riding on US presence
- Increasing grey market exposure
- Marketing costs running high
Gaming companies have had a generally poor third quarter, but 888's 2 per cent sales growth was well below what analysts had been forecasting. A disappointing quarter may not sound that dramatic, but, as Deutsche Bank analysts have pointed out, that weakening growth in poker - only 0.4 per cent in the first quarter - could impact on the company's remaining growth engine, casino, further down the line. And the lack of growth in poker is worrying in itself given that it accounted for 23 per cent of revenue last year. While cost-cutting and favourable foreign-exchange movements should help 2013 earnings, revenue needs to show reinvigorated growth in the next few months for 888 to avoid downgrades.
888 (888) | ||||
|---|---|---|---|---|
| ORD PRICE: | 172p | MARKET VALUE: | £605m | |
| TOUCH: | 171-172p | 12-MONTH HIGH: | 187p | LOW: 100p |
| DIVIDEND YIELD: | 2.5% | PE RATIO: | 17 | |
| NET ASSET VALUE: | 45¢ | NET CASH: | $100m | |
| Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m)* | Earnings per share (¢)* | Dividend per share (¢) |
|---|---|---|---|---|
| 2010 | 262 | 15.1 | 3.60 | nil |
| 2011 | 331 | 29.5 | 7.40 | nil |
| 2012 | 376 | 53.9 | 13.9 | 7.00 |
| 2013* | 399 | 65.0 | 15.0 | 7.00 |
| 2014* | 418 | 64.0 | 16.0 | 7.00 |
| % change | +5 | -2 | +7 | - |
Normal market size: 7,000 Matched bargain trading Beta: 0.78 *Deutsche Bank forecasts, underlying PTP and EPS figures £1=$1.60 | ||||
888 faces other issues aside from slowing growth. The industry in general has seen a trend towards rising costs, especially marketing costs. Online gaming is very susceptible to this due to the industry's high turnover of customers, and last year 888 spent a record $131m (£81m) on promotions, which meant the proportion of marketing costs to sales reached 35 per cent.
The sudden spike in costs is in part down to regulators in the UK preparing to impose a new tax on the industry. To offset this threat, a price war has broken out among gaming companies who are keen to secure market share before the so-called point of consumption tax is introduced in January next year. The UK accounts for around 41 per cent of revenues. The rating of smaller UK-focused rival 32Red (see table) illustrates the impact of such concerns on other companies.
How the gaming companies stack up
| Company | TIDM | Mkt cap | Price | Dividend yield | PE NTM | EV/EBIT NTM |
|---|---|---|---|---|---|---|
| Paddy Power | ISE: PLS | £2.8bn | 5,730p | 2.1% | 18.5 | 15.5 |
| 888 | LSE: 888 | £604m | 172p | 2.5% | 18.0 | 14.7 |
| Sportech | LSE: SPO | £176m | 86p | 0.0% | 16.4 | 12.5 |
| Ladbrokes | LSE: LAD | £1.7bn | 187p | 4.8% | 13.3 | 12.6 |
| William Hill | LSE: WMH | £3.5bn | 403p | 2.8% | 13.2 | 11.6 |
| bwin.party digital | LSE: BPTY | £966m | 119p | 2.4% | 13.1 | 14.8 |
| NetPlay TV | AIM: NPT | £55m | 19p | 2.0% | 10.6 | - |
| 32Red | AIM: TTR | £46m | 64p | 2.2% | 8.9 | - |
| GVC | AIM: GVC | £193m | 318p | 5.6% | 5.9 | 5.4 |
Source: S&P Capital IQ & Bloomberg
888's rating also seems to do little to reflect the risks associated with the fact that regulated revenues as a proportion of total sales has been falling over the past 12 months and this was 50 per cent at the last half-year stage - down from 80 per cent at the 13 March prelims. The only other UK company with a larger grey market presence is GVC (GVC), where over 90 per cent of sales are generated outside of a normal regulatory regime, which has seen its shares trading at an extreme discount to the sector (see table).
