Chairman Clive Jones noted at the meeting that second quarter average daily net revenues continue to grow compared with the same period last year. I understand that for the five weeks to Monday, 5 May, average net daily revenue was up 17 per cent on the same period in 2013. That is encouraging after a trading blip in February when the company’s brand SuperCasino saw its margin reduced to 1.5 per cent from an average of 2.8 per cent over the prior 12 months as a result of several VIP winners. The margin has since returned to 2.8 per cent in March.
Moreover, in line with Netplay’s stated marketing strategy, SuperCasino has signed up for the second consecutive year to be the headline sponsor for hit reality television series Big Brother and Celebrity Big Brother from June to September. In addition, the company has announced that its Vernons.com brand will sponsor the Walkabout chain of 38 sports bars in the UK until May 2015.
Post the trading update, analyst Johnathan Barrett at brokerage N+1 Singer is maintaining his current year pre-tax profit estimate of £5.7m implying that profits are set to grow more than 16 per cent from the £4.9m reported in 2013. On this basis, expect a 20 per cent boost in EPS from 1.6p to 1.9p. In turn, this earnings growth underpins forecasts of a 0.6p a share dividend this year, covered more than three times by net earnings, representing a 20 per cent hike on 2013. This means with the shares priced on a bid-offer spread of 16.5p to 16.75p they are trading on a miserly nine times earnings estimates and are well supported by a forward dividend yield of 3.6 per cent.
It’s worth noting too that Netplay ended last year with £13.9m of net cash, or the equivalent of 4.7p a share. Moreover, with the benefit of robust cash generation net funds are expected to rise to £17.7m by the end of December. That equates to 6p a share. In other words, strip out net cash from the current share price and the shares are trading on a little over six times this year’s earnings estimates.
The undervaluation becomes even more pronounced on an enterprise value to cash profits basis. Deduct the likely year-end cash pile of £17.7m from Netplay’s market capitalisation of £49.5m, and the company is trading on a modest 5.2 times current year forecast cash profits of £6.1m. To put this into perspective, rival 32Red (TTR: 60p) is rated on 6.6 times enterprise value to cash profits, while sector peers trade in the range 8 to 9 times cash profits. On any basis, Netplay shares offer value.
Market overreaction
It is also clear that investors have overreacted to the forthcoming introduction of the UK government's point of consumption (POC) tax which comes into force in December. Netplay’s board has stated that if the new POC tax had been in place last year then this would have wiped £1.7m off profits. However, the company’s senior management team has also taken steps to mitigate the impact of the introduction of the new tax.
For instance, contractual offset agreements with suppliers, where revenue generated is linked to the amount payable to a supplier, have been amended so that the potential additional cost of the POC tax will reduce the amount payable to these suppliers. A consolidation of the company’s UK and overseas operations into one location is being considered to take costs out of the business too. NetPlay also looks well positioned to make market share gains in the inevitable consolidation within the industry as weaker players exit.
Moreover, even if we assume the POC tax had been in effect for the whole of last year, then the shares are still only trading on a cash adjusted 10 times historic earnings per share. That’s hardly the catastrophic fall in earnings that some would have you believe. And irrespective of the forthcoming POC tax, Netplay’s revenues continue to grow, so the impact of the new tax is being offset by the profit lift. In fact, analysts at N+1 Singer predict revenues will rise from £28.5m last year to around £32m in fiscal 2014, hardly the sign of a company that has gone ex-growth as the current rating implies.
Interestingly, from a technical perspective, the share price decline this year could finally be basing out. For starters, there is clear positive divergence on the 14-day relative-strength indicator (RSI) whereby the share price made a new low last month, but the RSI didn't confirm the low. In addition, the moving average convergence divergence (MACD) indicator has given a positive cross over, albeit the signal line is below zero.
In the circumstances, and although the shares are unchanged since my last update six weeks ago, I feel that there is a decent opportunity to buy into a lowly rated company at an attractive valuation and one offering significant upside for the medium-term. Mr Barrett at N+1 Singer notes that "Netplay shares looks exceptional value... and the company is a highly valuable strategic asset". I would agree and, at 16.75p, the shares rate a buy ahead of the release of the second-quarter trading update on Thursday, 10 July. My fair value target price is 28p.
■ Simon Thompson’s new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
