Playtech sits on war chest

After the excitement caused by a suspected raid on Ladbrokes' shares, the market's attention turned to operational activities at Playtech (PTECH). Since selling its profitable share of William Hill Online to William Hill (WMH), the company looks to be in an changeover phase after what many analysts concluded was an average third quarter for the gaming software specialist.

The overall numbers were reasonably robust with overall quarterly revenues increasing by 16 per cent to €90.6m (£77m). However, there was considerable divergence between the main business segments. For example, casino games made up 52 per cent of overall sales and underlying growth here was a respectable 24 per cent in the quarter to €46.8m. However, the uncertain quarter endured by many gaming companies seemed to affect the services division and when the benefits from acquisitions are stripped out, divisional sales actually fell by 18 per cent quarter-on-quarter to €22m.

Much of this is beyond Playtech's control as price wars ahead of regulatory taxation in the UK next year and a general drive to recruit as many customers as possible have eaten into the sector's profit margins. This is most noticeable in bingo and poker where growth was either flat or in substantial decline. The market expects that Playtech will offset these declines with further acquisitions.

Deutsche Bank says...

Buy. Management continues to be confident of achieving its financial objectives this year, which implies meeting an estimate for cash profits of €171m and EPS of 51¢. However, this update still raises more questions than answers. We think the weakness in services revenues is a potential issue. Whilst management remains confident on the full-year 2013 outcome, hitting consensus revenue of €367m looks a stretch given that current fourth quarter revenue is up only by an estimated 12 per cent.

Investec says...

Hold. Looking through the figures, against our full-year 2013 estimates, the casino business looks fine for now (forecast revenue of €188m), while our group revenue forecast of €399m look a touch high - we are currently assuming second half year-on-year revenue growth, excluding the William Hill unit, of 20 per cent. On that basis, we see no reason to positively adjust our advice and the shares are factoring in a material portion of upside from use of the group’s net cash, which was €523m in the third quarter, and management has not yet given any clarity on it will be used. Furthermore, there is limited scope for assuming a big uplift from the Ladbrokes software deal in the near-term (or ever). We forecast full-year pre-tax profits of €154m and EPS of 50.8¢.