It is no secret that gambling is absolutely huge in Europe. The current market size is generally agreed to be around $116 billion. It is no exaggeration to say that gambling is as old as the human race itself. It is, however, with the arrival of Internet that gambling went en masse all over the world.
Believe it or not, even the gambling companies are subject to natural business laws, which dictate continuous evolution and innovation. Innovation today for a gaming operator means playing to the demands of the player who wants the game here and now. As well as the development of ever more sophisticated online gaming, the future is also in development of live TV gambling and development of gaming via mobile platforms.
One of the pioneers in this race is AIM listed NetPlay TV. NetPlay is Britain’s largest interactive TV gaming company (www.netplaytv.plc.uk). Established in 2000 and listed on AIM in 2001, NetPlay develops gaming brands that can be played online, over TV and over mobile phone (Bingo, BlackJack, fixed odds games, mobile quiz games, etc). The company boasts commercial partners such as Virgin Media, FreeView, Turner Media, STV, FreeSat and Five.
At end of 1H2009 NetPlay’s main assets included:
Supercasino.com :round the clock broadcast of Live Roulette and BlackJack games on FreeView 48, FreeSat 851, FreeView CNN Channel 84 and Sky Channel 866
Eurotelemillions.com :TV draw show, launched in partnership with Channel 5 and Trinity Mirror Group, supported every weeknight with national advertising
Bingos.com :Lucky Numbers (UK’s only mobile subscription quiz game, won live on TV each week
Beatthebrain.com :mobile quiz game in partnership with Fox’s FX Channel and CN Radio Group
Challengejackpot.com : took over production in April 2009 on behalf of Virgin Media, contract to run until 2013, Live TV Roulette and host of other games, airs continuously on Virgin Media 141 and Sky 860, intend to move this to mobile platform in 2H2009
As gross bets continue to rise, by 31% in 1H2009 (total £204m), the management is busying itself with working new deals to advance itself in its market niche.
A recent string of news includes plans to begin integrating into mobile www.supercasino.com and www.challengejackpot.com brands during 2H2009, a launch of fixed odds betting terminals through StanleyBet International, starting the rollout with some 400 shops in Italy, a launch of live interactive TV casino in Scotland and a signing of a broadcasting deal with Channel 5 - through an RTL distribution deal which could potentially secure more deals across Europe.
NetPlay’s capital structure is almost entirely made up of equity, worth £12.5m (there is £399k worth of current debt). Debt to Capital ratio is therefore negligible. The cost of capital is a tad above 9%.
1H2009 revenues were £9.3 million (£10.1m in 1H2008). The result, however, is more impressive than it seems. The 1H2009 revenue figure excludes discontinued premium rate telephony business (Abstract Games, contributed £4.4m of revenues in 1H2008). The logic to sell off the business was to position the company as a serious contender for partnerships with Tier 1 broadcasters.
With Abstract Games gone, NetPlay’s gross income margin has slipped from 30% of revenue in 1H2008 to 24% of revenue in 1H2009. As a result of foreign exchange losses, much higher depreciation charges (tangible assets = £0,2m, website development = £0,2m, databases = £0,5m, domain names = £0,1m, goodwill and TV licences) and higher number of shares outstanding, the EPS at end of 1H2009 totalled negative 2.59 pence (negative 0.14 pence for 1H2008).
Over on the balance sheet total assets declined from £21,6m at 1H2008 to £19,1m at 1H2009. Reduced goodwill and lower cash balances were to blame. Cash balance stood at £1,4m at end of 1H2009 (£3,7m at end of 1H2008). Total liabilities have also declined from £8,8m at 1H2008 to £6,6m at 1H2009. The main reason for the drop is a reduction in financial liabilities. Balance sheet liquidity is currently an indicator to monitor, as current commitments exceed current assets. Current Ratio is 0.78.
As a result of an operating loss and working capital movement net cash used in operations during 1H2009 was £499k (generated £2,7m of cash in 1H2008). CapEx amounted to just over £1m during the period. 4,4m of new shares have been placed in the period and no dividend is currently being paid.
Is the current share price of 29.50 pence justified? It is undervaluing the company, if you ask Panmure Gordon. They pen down Netplay’s value at around 34 pence a share.
Higher long term value may well be justified if you consider the following: both 888 (LSE: 888) and Party Gaming (LSE: PRTY) run a net income margin of around 14% of revenue.
Although NetPlay’s business has a somewhat different model, it is still very much capable of achieving a similar margin in medium term future. This is so because:
a) There is a clear long term trend forming, whereby online games are migrating to TV and mobile, thereby playing into the company’s business model,
b) NetPlay is sparing no expense setting up scalable infrastructure (software deal with PlayTech will ensure back office is good enough for Tier 1 broadcasters),
c) The broadcasters themselves are seeing decreased revenues from advertising and so are keen to exploit alternative revenue steams, such as gaming
d) Ofcom now allows televised games during night-time broadcasting slots, thereby benefitting NetPlay strategically; traffic is expected to be on the up and
e) Future opportunities in Europe exist with opening up of new markets (France, for instance, is soon to liberalise its gaming legislature allowing foreign companies to set up shop, although competition is expected to be strong with 888, Party Gaming and William Hill “monitoring the situation closely”).
f) the current gaming market is very fragmented - bingo in the UK is a prime example with over 260 UK bingo sites alone – more sector consolidation is on the cards
So, if you assume that a 14% net income margin is achievable, NetPlay’s return on equity will run at just over 22%, and this will make for a highly profitable business.
The company is run by entrepreneur Martin Higginson (owns 16% of equity). Another 30% of NetPlay is owned by Direct Force Training (whose is also one of the founders of PlayTech).