The eye-catching news for me was the fact that despite facing a £3.3m increase in betting and gaming duties, reflecting the impact of the UK government’s point of consumption (PoC) tax duty which came into force at the end of 2014, the company’s underlying cash profits only declined by £900,000 to £2.7m. More focused marketing, and strict discipline on return on investment meant that like-for-like adjusted cash profits actually increased by £1.8m even though net revenue declined by 4 per cent to £26.2m. Moreover, online gamers are proving more profitable with average revenue per active depositing player on the casino-only brands rising by 4 per cent to £328. Client acquisition costs are also below the industry average. The company operates a number of online interactive gaming services under a UK remote operating license and Alderney gaming licence, including SuperCasino.com, Jackpot247.com and Vernons.com, and its television services can be viewed every evening on ITV and Channel 5.
Importantly, having increased its client base of active depositing players by 14 per cent to 115,874 last year, this positive trend has continued into the new financial year. In fact, it has actually accelerated with active depositing players up 16 per cent year-on-year, and the business reporting a 26 per cent increase in new depositing players.
Netplay is well funded to make sure this momentum is maintained. Indeed, with the benefit of strong cashflow – almost four fifths of cash profits were converted into operating cashflow - the company ended 2015 with net funds of £13m, or 4.4p a share, and that’s after acquiring Otherside, an online marketing, product development and technology business for £2.7m last summer. The acquisition contributed £200,000 to cash profits since the deal completed on 11 August and the company’s board are on the look-out for other bolt-on acquisitions to deploy its bumper cash pile on.
It certainly makes sense to do so given that Netplay is faring far better than some investors believed it would in the post-PoC environment, so is not only in a good position to develop its product offering and win new business from weaker rivals, but has the cash available to take advantage of investment opportunities. In fact, with net funds of £13m on its year-end balance sheet, it’s in such a strong financial position that the board are returning £3m of this sum through a dividend of 1.02p a share, two thirds of which represents a special payout of 0.68p a share and the balance is a slightly higher final dividend of 0.34p a share. The total ordinary dividend of 0.56p a share for the financial year is covered 1.36 times over by adjusted EPS of 0.76p. This means shareholders can expect a payout equating to 10 per cent of the current market capitalisation on 9 June 2016.
The capital return also focuses the mind on the value on offer because after stripping out net funds of 4.4p a share from Netplay’s current share price, the shares are in effect being rated on a cash adjusted PE ratio of 7.5 for last year, a valuation that fails to acknowledge the obvious potential to redeploy the cash pile on earnings accretive acquisitions. It also fails to acknowledge the progress Netplay has made in the post-PoC environment.
So, having advised buying the shares at 8.5p in my 2015 Bargain shares portfolio, collected dividends of 0.55p a share last year with a further 1.02p a share due to be paid on 9 June, I have no reason to change my positive stance given the strong start to the new financial year and intention of the board to redeploy the cash on more earnings enhancing acquisitions.
Trading on a bid-offer spread of 9.5p to 10p, I continue to rate Netplay’s shares a decent value buy.
Please note that I have written two columns today.
MORE FROM SIMON THOMPSON...
I have written articles on the following companies recently:
■ Plethora Solutions: Take profits at HK$0.079 ('On the takeover trail', 14 March 2016)
■ Somero Enterprises: Buy at 150p; target 185p ('A solid buy', 15 March 2016)
■ 32Red: Run profits at 150p ('32Red in the money, 15 March 2016)
■ Communisis: Sell at 44p ('Patience running short at Communisis', 15 March 2016)
■ Global Energy Development: Sell at 27p ('Global Energy plays waiting game', 15 March 2016)
■ Raven Russia: Sell at 30p ('Raven Russia battens down the hatches', 15 March 2016)
■ Stadium: Buy at 122p, new target price 150p ('Switch on for bumper gains', 16 March 2016)
■ French Connection: Buy at 42.75p ('Return to profitability looms for chic operator', 16 March 2016)
■ Fairpoint: Run profits at 159p ('Fairpoints to make', 17 March 2016)
■ Netplay TV: Buy at 10p ('Netplay's shares spin higher', 21 March 2016)
■ Satellite Solutions Worldwide: Buy at 5.5p, target 9p to 10p ('Blue sky tech play', 21 March 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
