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The gambling technology company and sports bar operator has big plans to expand in the US
August 30, 2018

The opening of the sports betting market in the US has presented Sportech (SPO) with a huge opportunity. Sports betting had previously been banned in all but four states in the US, but the repeal of the Professional and Amateur Sports Protection Act in May has fundamentally changed the landscape for gambling. Sportech owns and operates gaming venues and sports bars in the US. More importantly, its systems provide technology for gaming companies, sports teams and racetracks, handling around $12bn (£9.6bn) in bets every year, so it has a big stake in the liberalisation of the US betting market. 

IC TIP: Buy at 63p
Tip style
Growth
Risk rating
High
Timescale
Medium Term
Bull points

Liberalisation of US sports betting
Big exposure to US
Cash to fund US expansion
Lower costs with Toronto headquarters

Bear points

No dividend
US liberalisation might falter

Analysts at broker Peel Hunt say the company has all the right ingredients for further success in the States: a licence in Connecticut, business-to-business relationships across the country, competent partners, and a new management team based in North America with long experience of the gambling business. They expect 2019 “to be a big year”. Whitman Howard, another broker, thinks that 26 states are likely to pass legislation allowing sports betting that will be worth an estimated $7.5bn in online revenue. Of these states, Sportech has relationships with operators in 21 of them, with online revenue potential of around $6.4bn.

Sportech has completed an agreement with Sportradar for sports betting data, trading, risk management and technology platforms. Management believes the deal should allow it to offer a comprehensive sports betting platform. Its sports bars already operate in Connecticut, but soon they should be allowed to take bets, once the relevant legislation is passed.

The company has also received regulatory permission to open eight more sites in the state. Peel Hunt's analysts expect a cash profit upside of somewhere between £3m and £9m from the opportunity in Connecticut alone. Whitman Howard estimates that Sportech has around a quarter of the market share in Connecticut, which would generate about $35m in revenue and $4m in cash profits just from over-the-counter betting. Add in the Connecticut venues, which could contribute an additional £4m to £5m in cash profits, and together this would increase cash profits in 2019 by 70 per cent.

Sportech is also looking to launch mobile betting through an app. Chief executive Andrew Gaughan says the team is brainstorming branding ideas for an app that would reflect sports betting. The company already has relationships with business-to-business operators in a number of states through its horse racing technology business, which could perhaps be expanded to include sports betting, too.

Meanwhile, it has sold its football pools business, Sportech Racing, for €2.8m (£2.5m). The sale officially closed in July, and the proceeds will be used to invest in the US. The company has £12.5m cash and no debt, so looks well placed to fund its US plans. It also slashed 39 per cent off corporate costs by moving its headquarters from London to Toronto. Its bosses wanted a North American headquarters since the focus for growth is the US. They said they’d consider a dual-listing (perhaps on the Toronto exchange), but would not drop the London listing altogether. Management is  also considering changing the reporting currency to US dollars to limit the impact of changing exchange rates on profits. 

There are risks: in a deeply religious country, perhaps more states than expected will be adverse to the idea of allowing sports betting, licences could prove expensive, or there may be more entrants to the market to increase competition. It’s difficult to speculate on the likelihood of these scenarios, but they could become real enough. 

SPORTECH (SPO)

   
ORD PRICE:63pMARKET VALUE:£118m
TOUCH:61-63p12-MONTH HIGH:87pLOW: 32p
FW DIVIDEND YIELD:nilFW PE RATIO:24
NET ASSET VALUE:28pNET CASH:£12.5m
Year to 31 DecRevenue (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2015100.411.14.0nil
201698.613.85.0nil
201766.21.50.6nil
2018*70.95.62.1nil
2019*75.06.72.5nil
% change+6+20+19
Normal market size:10,000   
Matched bargain trading    
Beta:0.7   
*Peel Hunt forecasts