Have the days of big profits for small gambling companies come to an end? Shares in this Aim-listed betting company seem to be saying that they have. The shares have halved in price since the middle of January and currently look very unloved.
Investors are beginning to fret that its years of strong growth have come to an end. A fund manager with a big stake in the company has disposed of quite a few shares recently, although it still owns more than 10%. So why are markets spooked?
Gambling is a very competitive business and there’s no shortage of places for punters to part with their cash. But NetPlay TV (Aim: NPT) seems to have carved out a reasonable niche for itself. The bread and butter of its business is its Jackpot 247 casino brand, which is screened on ITV 1 and Sky channels.
The company has recently extended its deal with ITV for another three years and has increased the TV coverage from four to six nights per week. It also owns the SuperCasino brand that’s showing on Channel 5.
Meanwhile, it bought Vernons.com last year in an effort to branch out into other areas, such as bingo and sports betting.
Current trading is reasonable, with revenues during the second quarter of this year growing by 5%. NetPlay has grown its number of new players by 38%, with lots of these playing on tablet computers and mobile phones – a key requisite of a successful betting business these days. However, the World Cup has led to business being a little subdued compared to last year.
The big risk is that the introduction of a point of consumption tax from December this year will hammer profits. NetPlay has said that this would have cost it £1.7m last year – 41% of total trading profits. However, it claims that a combination of cost cuts and market share gains can now limit the potential damage.
More remotely, there’s the fact that NetPlay’s gaming activities are based in Alderney, where it pays no corporation tax and no UK VAT. If that were to change – it is not expected to at the moment – then profits could take a further hit.
So there’s quite a lot to worry about on the tax front. But City analysts think that profits can stay stable with earnings per share of 1.6p and a dividend per share of 0.6p. At a share price of 12.2p, that implies a forward price-to-earnings ratio (p/e) of 7.6 times and dividend yield of 4.9%.
What’s more, the firm has £12.2m of cash on its balance sheet – equivalent to 4.1p per share. Stripping this out puts the company on a p/e of just five times. That seems low enough to gamble on if you’re willing to take the risk.
Verdict: a very risky buy