After a recent sell-off there is a good opportunity to invest in online gaming stocks, said Deutsche Bank, where the sector is targeting structural growth markets but is trading at a “deep valuation discount”.
“We see the scope to create value from another wave of consolidation, with rising regulatory and marketing costs encouraging a drive for scale, given material cost synergies,” the German bank's analysts said in a note to clients.
Three to buy
Deutsche initiated coverage of the sector with GVC Holdings PLC (LON:GVC) as its top 'buy'-rated pick, with the Ladbrokes and Sportingbet owner offering “premium growth, lower volatility (due to a particularly strong trading platform), a compelling strategy for the US through its MGM partnership and a track record for delivering value through consolidation”.
While corporate governance concerns have weighed on the stock's valuation, there is 42% potential upside to the target price of 910p, backed by a dividend yield that is forecast to grow from the current 5%.
William Hill PLC (LON:WMH), with a target price of 197p, was another 'buy' as the bookmaker has been underperforming operationally and has implemented what the analysts thing is a “high-risk/high-cost” strategy of rolling out under the William Hill brand in the US.
Yet, the takeover of Caesars Entertainment Corp (NASDAQ:CZR) by Eldorado Resorts Inc (NASDAQ:ERI) “could be fortuitous” as Eldorado owns 20% of William Hill US, “and we would consider it to be an obvious potential purchaser once it has absorbed Caesars”.
At the smaller end, Deutsche sees JPJ Group PLC's (LON:JPJ) valuation as “particularly attractive” post a low-risk integration of the £490mln Gamesys acquisition, which is expected to complete in September.
JPJ, which changed its name from Jackpotjoy as it moved to a premium LSE listing last summer, has “a capital-light model and prodigious free cash flow conversion, which should drive cash returns to shareholders” from the second half of 2020, once leverage drops below 2.5 times.
JPJ, which should also be added into the FTSE mid-cap index upon completion of the Gamesys deal, was given a target price of 1,000p.
Texas hold-em
Deutsche had more reservations about three other players in the sector, all given 'hold' ratings.
Playtech PLC (LON:PTEC), where the core B2B technology business has been hit hard by a collapse in revenues from unregulated Asian markets, has diversified into online financial trading and Italian retail betting, but it’s not gone as smoothly as hoped, leading to a low valuation, with some risk to forecasts and “less scope for bid interest” compared to others.
888 Holdings PLC (LON:888) is seen as vulnerable to a bid, and has had bid approaches from Ladbrokes and William Hill in the past, with downward pressure expected on EPS forecasts.
Flutter Entertainment PLC (LON:FLTR), the recently renamed Paddy Power Betfair, was flagged by the analysts as a "high-risk play in the US" as it has material start-up losses but a strong brand in the form of FanDuel.
Flutter has a strong balance sheet and "scope for further share buybacks" but share price performance is expected to be "held back by its premium valuation (although it does have the most conservative approach to presenting its numbers)".