NetPlay TV - Gaining Traction and Market Share

http://www.netplaytv.plc.uk/

NetPlay TV Logo

NetPlay TV (LSE:NPT) is the UK's front runner in their TV gaming market. The company joined the AIM in 2001 and has since has a turbulent time with NetPlay disposing of their telephony business and leading their business with the interactive TV gaming format that they are continuing to pursue today. The company owns two main brands, SuperCasino and Jackpot247 which use TV as a medium and the Internet as the interface. NetPlay has continued to captialise on its market share over the last few years, and this is starting to translate through to encouraging financial results. Having entered 2013 with a share price of 11.5p, the market has started to wake-up with a current share price of 18.25p and that has been accompanied by an increase in liquidity. NetPlay has circa 294m shares in issue meaning that the market capitalisation stands at £53.57m. NetPlay does not provide the most useful services, but it seems to be gaining significant traction.


In my opinion, NetPlay has a robust technical position. The company is clearly a recovery play based on it's share price performance since 2011. The log chart shows steady gains over the last two years with there only really being a few short periods of downward movements. Positively, the recent period of sideways movement that has commenced since February, is trending upwards, with a pattern of higher lows, albeit similar highs. Therefore it looks like an ascending triangle pattern is close to completion (over the next 2 months). Any breakout is highly likely to be towards the upside. The ceiling is unsurprisingly built around round-number resistance of 20p, and that has been tested twice. A break through that leaves 25p as being the next immediate target. That is based upon the lack of resistance levels past 20p plus the extrapolation of the ascending triangle's stem. Normally the breakout move replicates the initial move (from early 2013) in percentage terms. That possibility is backed by volumes which have remained high over the last few weeks.

There is substantial institutional backing in NetPlay the majority of shares held by institutions. Henderson Global Investors is the largest holder who own just under 26% of the total shares in issue. The 10 largest shareholders hold just under 50% of the total shares. CEO Charles Butler recently exercised an option to purchase 3m shares at 4p but immediately sold an equivalent amount back into the market. Furthermore, Non-Executive director Andrew Lapping sold 6.1m shares in mid-September, at around 18p. The obvious question would be, why? No explanation was given in the RNS so whilst assumptions could be made, there is unlikely to ever confirmation of the reason. Nonetheless, shortly after the sale, Miton Group increased their holding by just short of 1.7%. The offloading is likely to have caused a short-term overhang in the market (probably around a week's worth). Directors selling shares is rarely a good sign, but without reasoning, not too much can be read into it. Lapping also sold shares in NetPlay back in April so it would seem that he is intent in reducing his holding in a long-term perspective, rather than as quickly as possible.

As previously noted, NetPlay operates through two main brands, SuperCasino and Jackpot247. The former is shown on live TV every night on Channel 5 whereas the latter is shown 6 days a week on ITV. Jackpot247 and SuperCasino are also both shown on their own TV channels on Freeview and Sky respectively. During 2012 the company experienced an impressive 62% in new depositing players and that was aided by an extensive marketing campaign that included banners on London buses and buildings, and TV advertisements. The rapid increase in players was also helped by an increased focus on developing mobile and tablet compatibility.

Two notable developments have taken place that have aided the growth progress. The first was the confirmation of an extended agreement with ITV. Charles Butler, CEO of NetPlayTV, said: "I am delighted to announce our new three year deal with ITV. We have been working with ITV since 2010 and this new agreement will significantly increase our customer reach. It is testament to the success of the format to date and will reinforce our proven strategy of using TV to target new customers. We look forward to working with ITV and further building on the significant success that has been achieved to date."  The second set of developments regard the sponsorship of both Big Brother 2013 and Celebrity Big Brother 2013. The deals should improve NetPlay's customer reach and help the momentum (in terms of the number of new depositing players) continue.
NetPlay released its H1 results for 2013 back on September 10th. The main points are shown in the table below. The figures shown for the revenues are recategorised, and the revenues shown are those as they were restated.
 
Between 2010 and 2012, the company managed to almost double revenues and made a significant improvement in EBITDA, profits, EPS and the cash balance. The cash balance increase was driven by strong cash generation and that has allowed for a dividend to start to be paid. The interims point to a further improvements in all departments. The 2012 FY EPS came in at 1.27p which means that NetPlay is trading on a PE ratio of 14.3x, which is at the lower end of the range for betting/gambling companies. for the past year, a fairer PER based on peer valuations is around 18x which is around 23p.

For the growth rates that NetPlay is showing, it should therefore be valued around the same level as another growth company, 32Red (LSE:TTR), which is on a PER of 23x. That equals a share price of 29p. 32Red does pay out a much larger dividend than NetPlay, but its cash balance is consequently much lower. A healthy cash pile and no debt is one of the points I like to see in a growth company thus NetPlay ticks that box with the cash representing over a quarter of the market cap. Trade payables are at £6m, but that figure hasn't really declined over the last few sets of results, and even if it were to need repayment, it could easily be funded. The net payables figure is around £4.7m. The cash figure net of player balances is £13.1m.

The catch though is that NetPlay has a very significant cash balance. Stripping that back to £5m removes £9.9m from the market cap, or £43.67m. Assuming the same number of shares in issue, that is equivalent to a share price around 14.9p. That makes a PER of just 11.7x, which makes NetPlay undervalued. That valuation is confirmed when estimating the results for the current year.  On a purely symmetrical basis, the H1 EPS doubles to 1.64p for the full-year. At a share price of 18.25p, that translates to a PE ratio of only 11, and an even lower PER when stripping out some of the cash again. Based on these figures, NetPlay should be trading at closer or even above, 25p.

Based on the 2012 figures, the dividend yield stands at 2.05%. Factoring in the 20% rise for the interim payment and carrying the same 20% forward for the final results reaches a total dividend of 0.45p that is a yield of 2.47% which is not too bad and is in line with broker estimates. Full year estimates for 2013 are revenues of around £28m, pre-tax profits around £4.62m and EPS of circa 1.55p. That means the H1 results shows NetPlay to be on track to meet those results and even possibly beat them, especially in the forecast EPS. A hot July expectedly has meant that growth during the month was slightly sluggish, so that could bring the results back into line.

Driven by the marketing and sponsorships, active players rose by almost a third and results were forecast to be in line with expectations. Average daily net revenues were up 17% year-on-year.
CEO Charles Butler commented: "I am pleased to announce that following such a strong 2012, the Company's growth trajectory has continued with significant increases in all of the Group's KPIs. Our investment in mobile and tablet continues to deliver positive results, and accounted for 28% of net revenue during the period. In addition, our accelerated investment in pure online marketing is continuing to have a positive impact. This complements our existing TV marketing and represents the Group's broadened marketing strategy, which underpins both our current and future growth. The Company continues to perform strongly, and looks forward to exploring further growth opportunities this year and beyond."

The growth in NetPlay's online presence has been through an increase in online marketing spend on both advertising, and buying up certain keywords such that NetPlay appears higher up the search engine results. That move may well turn out to be an astute move. Whilst many of the big name gambling companies have already secured large market shares in the area, growth potential for the sector remains steady. In 2012 alone the online gambling sector was worth £2.28bn which was over 80% up on 2008. A research study found that the top 5 companies (Paddy Power, Betfair, Bet365, William Hill & Ladbrokes) controlled over 50% of the sector. Whilst sports betting remains the highest-growth arena, Bingo and the Casino sectors remain highly lucrative.

image courtesy of Hakan Dalhstrom on flickr
However, there is a slight deterrent. The government announced in its 2012 budget that it intends to impose a tax on remote gambling on a 'place of consumption' basis. Previously, many gambling firms have been set up in locations such as Gibraltar meaning that even though the customers were based in the UK, the companies could pay low tax rates. NetPlay's gaming operations are set up in Alderney where there is a zero percent tax. The government plans are for a 15% gross profit tax rate to be imposed and that will definitely have an adverse impact on the company's profits. The Remote Gambling Association and KPMG have actually conducted a study that apparently shows that a tax on gross profits above 10% would be reckless and could force unintended consequences including some companies going out of business - the 15% figure may yet be subject to some leeway.

However, that is only set to come into play in December 2014 at the earliest - based on the current growth trajectory, I reckon that impact is perhaps overstated. Several companies in the sector have seen their share prices come off their peaks, in reaction to the news, but for a small growth company it is perhaps less important compared to a more mature company. A further point to add to this is that if necessary, the company can expand overseas, and that is primarily down to the flexibility their cash balance gives. Some areas in Europe such as Italy and the Netherlands have been touted for this, but the regulatory environments will be crucial. A few brokers have price targets. Sanlam Securities have a 22p/share target and Daniel Stewart are more optimistic with a 25p/share target.

The question that investors have to ask themselves is whether the negative impacts of the tax rate are worth passing up NetPlay shares for. I certainly don't think that is the case. The tax is not immediate and what is clear is that the shares are already undervalued on a number of metrics. With over a year until the tax comes into force, the company has ample time to take mitigation measures, and combined with the growth rates, it really is not that big an issue. Furthermore, the 15% rate could still be subject to change, but in any circumstances it is unlikely to cap off what has already been an excellent rise during 2013. The technical position remains highly encouraging and an initial target of 25p is not out of the question - that is a level at which both technicals and fundamentals match up. A highly cash generative, cash-backed, growth play. I have put a 'Buy' tag on NetPlay.

3 comments:

  1. Good company pick whoever won the comp. Well done!

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  2. Looks a neat recovery play. Surely at 15% the tax is not catastrophic anyway?

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  3. Excellent overview. Great for newbies!

    ReplyDelete