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Chipping in

Chipping in
January 12, 2016
Chipping in

The reason for the substantial re-rating in the past six months reflects the fact that the shares were hardly overpriced to start with when I rated them an outstanding buy in September at 73p ('Building momentum', 29 Sep 2015), but more importantly the penny has finally dropped with investors that the company is one of the winners in the post UK point of consumption tax marketplace. For example, having posted a 20 per cent rise in net gaming revenue to a record £18.6m in the first half of 2015, trading trends since then imply acceleration in the growth rate through August and September. Improvements in customer retention and reactivation of players, focused digital marketing investment and softer competition in the new tax environment are all helping to drive up customer numbers and support their spend.

Following upgrades at the time of the half-year results at the end of September, analyst Ivor Jones at house broker Numis Securities expects full-year EPS of 6.5p in 2015, rising to 10.5p this year based on a two-thirds rise in cash profit to £10m and a third rise in revenue to £60m. I would flag up that 40 per cent of the increase in cash profit in 2016 is expected to come from last summer's earnings-accretive acquisition of online casino Roxy Palace. And with the company boasting a cash-rich balance sheet - 32 Red is expected to have ended last year with net funds of more than £6m, or 7p a share - then shareholders can expect the dividend to rise sharply, too: both Mr Jones at Numis Securities and Eric Opara at Edison Investment Research forecast a dividend per share of 2.64p for the 2015 financial year, rising to 2.9p in 2016. On that basis, the shares are rated on a cash-adjusted PE ratio of 13 for 2016 and offer a prospective dividend yield of 2 per cent.

In my book, that valuation is still not too stretched and if you followed my earlier advice I would run profits as Numis's raised target price of 160p may still be reached. Run profits.

 

Netplay football pools talks terminate

The gains on 32Red are welcome given that the Aim-traded shares of Netplay TV (NPT: 7p) are languishing below the 8.35p buy-in price in my 2015 Bargain Shares Portfolio. True, the company has paid out dividends of 0.55p a share, but even taking these into consideration the holding is 7 per cent under water if you followed that advice 11 months ago.

The price is also down a quarter since my last buy recommendation at the time of the half-year results in September ('Small-cap value plays', 23 Sep 2015). I originally advised buying the shares at 12.5p almost three years ago ('A share to hit the jackpot', 11 Feb 2013), and they have had a rollercoaster ride since then, peaking at 24.25p in January 2014 before derating sharply on concerns of how the business would be impacted by the new UK point of consumption tax marketplace. I thought the derating had gone too far a year ago which is why I included the shares in my 2015 Bargain Shares Portfolio. So why haven't they re-rated like 32Red?

It's certainly not due to the company's finances as Netplay remains in an enviable position of having a cash-rich balance sheet: net funds of £13.9m at the end of June 2015 equate to two-thirds of the company's market capitalisation of £21.5m. The board's strategy is to use this cash to make earnings-accretive acquisitions, but it's clear that investors have been far from impressed by the progress made to date. In August last year Netplay acquired Otherside, an online marketing, product development and technology business, for £2.7m with an additional £500,000 payable 12 months after completion. Otherside reported cash profit of £600,000 on revenue of £2.6m in the 12 months to end-May 2015, so the bolt-on deal is earnings accretive. However, the lack of details provided by the company on the acquisition has not helped investor confidence.

Also, the shares had been suspended since Monday 21 December after the company entered into discussions with Sportech (SPO:60p) in relation to the potential acquisition of The Football Pools business. The board were obliged to suspend the shares in accordance with Rule 14 of the Aim Rules for Companies as the size of the acquisition meant it represented a reverse takeover. Netplay has now dropped out of the running, and the shares relisted yesterday, following news that Sportech subsequently received a number of indicative proposals for the Football Pools business and invited interested parties to submit their best and final proposals by mid-January 2016.

The failure to pursue the Sportech acquisition should not detract from the fact that the board still intends to deploy a cash pile estimated to be about £11.9m at the December 2015 year-end, or more than half the company's current market value, to make earnings-accretive acquisitions. It's my view the catalyst for a re-rating will be when the board finally deploy the cash on some smart-looking acquisitions. So, having run with the holding thus far, and with Netplay's shares rated on a miserly five times cash-adjusted earnings, representing a 60 per cent discount to the rating attributed to 32Red, I feel that the investment risk is skewed to the upside. The full-year dividend of 0.55p a share offers a prospective dividend yield of 7.9 per cent, too, albeit it is only covered 1.3 times by forecast EPS of 0.7p. Needless to say, I continue to rate Netplay's shares a buy.

Please note that I published 10 columns on 23 companies since the start of last week all of which are listed below and also on my IC homepage...

  

MORE FROM SIMON THOMPSON...

I have written articles on the following companies this week:

Grainger: Buy at 243.5p, target 280p; Dart: Take profits at 580p; Crystal Amber: Hold at 159p; Redde: Take profits at 203p; Burford Capital: Run profits at 196.5p; Renew: Run profits at 404p; Plethora Solutions: Speculative buy at 4.5p ('Stock check', 5 Jan 2016)

Elegant Hotels: Buy at 118p, target price 130p to 135p ('Check in for a profitable stay', 6 Jan 2016)

Safestyle: Run profits at 272p ahead of pre-close statement on 25 Jan 2016 ('Clear cut gains', 6 Jan 2016)

Epwin: Run profits at 143p, new target 170p ('Epwin on the acquisition trail', 6 Jan 2016)

GLI Finance: Recovery buy at 37.5p ('GLI shelves fundraise and its chief executive', 6 Jan 2016)

LXB Retail Properties: Buy at 97.5p, new six-month target 120p; Urban&Civic: Buy at 286.5p, target 325p; Conygar: Buy at 172p, target 200p ('Hot property, 7 Jan 2015)

Somero Enterprises: Buy at 139p, target 185p; 1pm: Buy at 70p, target 82p; First Property: Run profits at 53p; Avation: Buy at 145p, target 200p ('Small-cap value plays', 11 Jan 2016)

32Red: Run profits at 147p; Netplay TV: Buy at 7p ('Chipping in', 12 January 2016)

Cambria Automobiles: Buy at 87p, new target 95p; Vertu Motors: Buy at 76p, target range 85p to 90p ('Motoring ahead', 12 January 2016)

Global Energy Development: Hold at 24p ('Cash rich, but unloved', 12 January 2016)

 

■ Simon Thompson's 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 £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking