What is Gamesys and what explains its recent gains?

Under-the-radar growth stock

Gamesys is an online operator of casino and bingo brands. You may recognise it by its previous guise: Jackpotjoy. Last year, the latter acquired the former, rebranded itself as Gamesys Group and became a member of the FTSE 250. 

Among Gamesys’ key qualities, at least according to the company, are its strong cash generation, proprietary technology, and geographic spread. Brands operating under the parent company include Rainbow Riches Casino, Monopoly Casino and, as you might expect, Jackpotjoy.  

Based on recent trading, these aren’t empty claims.

Strong results

Earlier this month, Gamesys reported a very encouraging set of interim results to the market. These included a 101% jump in reported gaming revenue (to £340m), thanks to a strong performance in the UK and “exceptional growth” in Asia.

In line with its strategy, revenues in the latter jumped 92% year-on-year. This, Gamesys explained, was down to attracting more customers, the launch of its online gaming ‘stalwart’ InterCasino brand’ and ongoing momentum in Japan.

Although revenues in Europe fell, they rose 2% at the company’s Rest of World operations, with 37% growth achieved in the US. All told, adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) soared 75%. 

With numbers such as these, it’s perhaps no surprise Gamesys has managed to reduce its debt burden. A maiden interim cash return of 12p per share was also announced.

It now plans to bring in a progressive dividend policy “to align the Group with its listed peers” while keeping some money on the side for potential growth-enhancing acquisitions.

A 33%/67% split should mean a combined total dividend of 36p per share for the current year. That’s a pretty attractive yield of 3.1% based on Gamesys’s share price as I type. Remember – this is primarily a growth stock.

Still cheap

Despite all this good news, Gamesys’ shares still trade at less than 9 times forecast FY20 earnings.

That looks like a cheap price to pay so long as the company really is able to continue reducing its debt burden (a remnant from when it was owned by private equity). It certainly looks cheap compared to peers such as Mecca-owner Rank which trades on a P/E of almost 17 for FY21.

Positively, Gamesys stated that trading had continued to be buoyant into Q3. As a result, management now predicts full-year gaming revenue and adjusted earnings will come in “comfortably ahead” of previous expectations.

Clearly, some of this news is now reflected in the share price. Nevertheless, the still-low valuation suggests more gains could be on the cards. 

Best of all, the company looks like a good defensive pick in a highly uncertain market climate. There is, after all, a chance the coronavirus could return with a vengeance later in 2020 and people are again asked to stay indoors. In such a scenario, I struggle to see why the FTSE 250 member won’t continue raking in the cash. 

Gamesys isn’t risk-free. Nonetheless, if you’re looking for growth stock at a very reasonable price, the shares certainly warrant consideration.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

In only a couple of months, however, these stocks have bounced back strongly. Indeed, those who had the courage to buy William Hill back in the middle of March will have seen their money grow an incredible 200% since.

With lockdowns now beginning to ease around the world, is there still time to get on board? Let’s start by taking a quick look at today’s trading update.

Game off

All things considered, this morning’s statement could have been a lot worse.

While a flagging retail arm meant that total revenue declined 5% in the 10 weeks before the coronavirus hit, the company was still making great strides online over this period. Overseas growth, particularly in Spain, Italy and the potentially-very-lucrative US market was strong in this part of the business. 

From 11 March to 28 April, however, net revenue tumbled 57%. That fall was partly due to the closure of the company’s entire retail estate as a result of the pandemic.

It wasn’t all bad. Encouragingly, the FTSE 250 member said today that online activity had not declined as much as expected. Punters were continuing to bet on sports like table tennis and football in emerging markets. Others were switching to games offered by the company. Interestingly, the introduction of a ban on customers using credit cards had not led to a material drop in activity.

William Hill has also done its bit to mitigate the impact of the coronavirus on its finances. Costs have been cut and dividend payments have been suspended. Having come to an agreement with its lenders, the FTSE 250 stock said that it finished the trading period “in a strong financial position with significant headroom“. 

FTSE 250 recovery play?

Shares in William Hill were racing ahead of the pack again in early trading, This suggests that investors believe the company still offers value. Are they right?

Well, as the company itself noted, there are signs that the sporting calendar could be about to get back on track. Football in Germany, for example, is expected to resume this month, albeit behind closed doors. Horse-racing is likely to return to the UK in June, having already restarted in France.

For its part, Hill said that it was currently planning to ‘power up’ its operations through a “staged opening of the UK retail estate in the second half of 2020″. Notwithstanding this, it did say that it would be withdrawing all future guidance on earnings.

With the shares still around 45% lower than where they were trading at the start of 2020, I can’t help but feel there’s still some money to be made. This is especially true given that the company is nicely positioned to benefit from the huge growth of gambling in the US as rules are gradually relaxed. 

I certainly wouldn’t go ‘all-in’ on William Hill though. After all, no one knows just how successful the lifting of restrictions will be. News of a second wave will almost certainly obliterate the gains made since March as events get postponed again. It’s a bet worth taking, in my view, but I’d be inclined to build a position gradually.

The post This FTSE 250 stock has jumped 200%+ since the market crash. Would I buy now? appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Having been under sustained pressure over 2018 on the back of regulatory changes, is there anything in today’s announcement to suggest that the shares are a decent contrarian buy? Yes and no.

A “challenging year”

Despite a “challenging year” for all bookmakers, CEO Peter Jackson said that the £4.9bn cap had “regained its mojo“.

Revenue rose 9% at constant currency to £1.87bn in 2018 with the company seeing 5% growth online and an increase in market share in the UK.

That said, reported pre-tax profit came in at £219m — down 11% on that achieved in 2017. Earnings per share were also 6% lower due to investment across the pond. 

On the topic of growth opportunities in the US, Mr Jackson remarked that the decision to overturn the federal ban on sports betting last May had “the potential to be the most significant development to occur within the sector since the advent of online betting” and justified the company’s speedy swoop for the FanDuel brand.  

As far as 2019 was concerned, the Dublin-based business stated that trading had started in line with expectations and that it was seeing “good momentum” across its divisions, despite the inevitability of further regulatory pressure.

In perhaps the most bizarre part of today’s report, PPB also informed the market of its desire to change its name to Flutter Entertainment to reflect the “increased diversity” of its brands and operations. What an awful name!

Contrarian buy?

After losing over 30% of its value since shares peaked last May, one might suspect the shares would now be changing hands at a very reasonable price.

Not exactly. Trading on a little over 18 times expected earnings, the stock still looks pretty expensive compared to rivals and the market as a whole.

Having maintained its 200p full-year dividend, a trailing yield of 3.3% certainly isn’t awful, but there are companies in the FTSE 100 with far more tempting payouts. 

With further investment likely and net debt rising fast, I can’t see this situation changing anytime soon. 

Better price?

Of course, Paddy Power isn’t the only company wanting a piece of the action in the US. 

Shares in fellow FTSE 100 constituent GVC (LSE: GVC) rose strongly yesterday after the company released some very decent full-year numbers. Pro forma net gaming revenue came in 9% ahead of last year (at £3.57bn) with pro forma underlying EBITDA also rising 13% (to £755.3m).

Hailing a “transformational year” following its acquisition of Ladbrokes Coral, CEO Kenneth Alexander stated that effective marketing and a bumper World Cup had meant GVC had performed “ahead of expectations and materially ahead of the market”. Now the world’s biggest sports-betting and gaming operator, he believes the company is well-placed to deal with the forthcoming regulatory hurdle and tax increases in 2019. 

Recent momentum certainly shows no sign of slowing with the firm reporting an 11% rise in net gaming revenue since the start of the year to 24 February compared to over the same period in 2018. 

Taking into account its lower valuation (12 times earnings), higher dividend yield (4.6%) and US joint-venture with MGM Resorts, I’d probably bet on GVC over Paddy Power Betfair.

That said, neither compares to my personal favourite in the sector.

The post Is this out-of-favour FTSE 100 growth stock now a great contrarian buy? appeared first on The Twelfth Magpie.

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• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended GVC Holdings and Paddy Power Betfair. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Are today’s less-than-comforting full-year numbers — not to mention a cut to the dividend — an indication that investors should continue to avoid the troubled £1.6bn cap?

I think so. 

High street woes

To be clear, the huge drop in profits was expected. 

As a result of the government’s decision to restrict the maximum stake on all fixed-odds betting terminals to £2 from April, the company has needed to write down the value of its high street estate by a whopping £882.8m.

Going forward, management expects this new rule will reduce profitability from this part of its business by £70m-£100m and could lead to the closure of “up to 900 shops“

The full impact will clearly depend on how punters respond. Hill might believe that its status as the largest operator puts it “in a strong position to capture market share” but I still need to be convinced. 

Attempting to put a positive spin on things, CEO Philip Bowcock stated that recent regulatory decisions had at least given the firm some “much needed clarity“, allowing it to devise a new five-year strategy and set a target of doubling profits by 2023.  I think the latter may be too optimistic.

It wasn’t all bad…

Don’t get me wrong – there were some positives. Revenue climbed 2% to £1.62bn with the company also reducing net debt by 40% to £308.1m. 

Like others in the space, Hill is also seeing growth online. 

Here, operating profit climbed 11% before a £17m hit from new measures surrounding customer due diligence. The acquisition of Mr Green — completed back in January — should help maintain this momentum going forward.

That said, the key driver of growth for the company going forward will surely be the US sports betting market. Having been “first out of the blocks“, Hill now has a 34% market share (by revenue) across the seven regulated states.

Worth a punt?

I don’t think there’s a stock that I’ve changed my opinion on more times over the years than William Hill. Right now, I’m pretty negative.

Based on an expected 42% drop in earnings over 2019, the shares now trade on a forecast P/E of 16. That’s far too rich for me, despite the aforementioned growth opportunities over the pond. While no doubt attractive, it can’t be forgotten that the business is already operating in a very crowded market and that competition for this new prize will surely only become more intense as the months pass. 

The 9% reduction in the dividend from 13.2p per share in 2017 to 12p per share is also another bitter pill to swallow. Granted, it’s not as big a cut as that seen at this FTSE 100 retail stalwart but, with the shares on something of a losing streak (down 40% in the last 12 months alone), Hill’s income credentials were one of the few things keeping me interested. 

Personally, I think there are far better stocks in the gaming/gambling sector as things stand. Indeed, so positive am I on one in particular that I’ve actually gone ahead and taken a position. You can read all about it here.

The post This FTSE 250 stock is on an awful losing streak and today’s news won’t help appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Decent form

Perhaps the biggest highlight from today’s update related to its digital offering. Given how vital it is for most companies — particularly those in the gambling industry — to provide customers with a quality online service, investors will be comforted by the 18% rise in net revenue during the last quarter (from the start of October to the end of December).  When looked at separately, net revenue from Ladbrokes.com was 17% up compared to last year. Coral’s equivalent revenue also rose, by 13%.

Elsewhere, multi-channel sign-ups across both companies “remained strong” with 140,000 customers signing up to the Connect card or Grid service. Given the benefits that come from geographical diversification, a 45% jump in net revenue from Ladbrokes in Australia was also very encouraging.  

It wasn’t all great news. UK net revenue dipped 4% compared to the same period in 2015. Like-for-like over-the-counter stakes also fell 5%. Nevertheless, full-year proforma operating profit at the group is now expected to be in the range of £275m-£285m, with Ladbrokes standalone operating profit around £101m and Coral Group standalone profit in the ballpark of £179m. The former is in line with the market consensus; the latter in line with management expectations. This compares favourably to operating profit of £235m in 2015.

Signing-off the update, CEO Jim Mullen hailed an “encouraging start” for the new company, even if “the sporting gods” did not give Ladbrokes Coral quite the results it was looking for in this trading period. 

Temptingly cheap? 

At the time of writing, shares in Ladbrokes trade on a price-to-earnings (P/E) ratio of just over 11 for 2017, based on a predicted 47% rise in earnings per share. Ordinarily, any stock releasing a fairly positive update on this valuation would seriously grab my attention. Not so much here.

While the gambling industry has shown itself to be rather resilient in times of economic uncertainty, there’s no escaping the fact that it remains susceptible to political meddling. Only last month, it was reported that a cross-party group of MPs were demanding that the maximum stakes on fixed odds betting terminals should be drastically reduced, from £100 to £2, to minimise the possibility of heavy losses and “societal harm“. Given the huge estate operated by Ladbrokes Coral, any new legislation announced by the government could have a massive impact on profits and see its shares plummet. Is that a risk worth taking? With so many other opportunities in the market, I’m not so sure.

Although not immune to developments in this hyper-competitive industry, I think peer GVC (LSE: GVC) — with its focus on online and mobile services to other businesses as well as punters — might be a better bet for those still drawn to gaming and betting stocks. Shares in the £1.8bn cap owner of brands such as Foxy Bingo and bwin have sprinted ahead of the competition over the last 12 months, rising 33%. With earnings per share expected to shoot up by over 70% this year, there could be more upside ahead. So long as this happens, a P/E of 12 for 2017 seems reasonable. A well-covered, forecast yield of over 4% is also likely to appeal to income-chasing investors. 

The post Why I won’t be backing Ladbrokes Coral Group plc despite its low P/E appeared first on The Twelfth Magpie.

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Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended GVC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

The merger is now likely to go ahead

It’s a little like the supermarket sector in the UK, with a rapid transition to online trading, growing numbers of retail outlets, and a close-fought battle between an increasing number of competitors. In order to preserve profit margins and earnings, this is leading to consolidation in this fast moving industry.

In the past few months, the second and third most popular betting firms — Ladbrokes (LSE: LAD) and privately-owned Gala Coral Group Limited — have been in advanced talks to join forces. A larger company would mean lower overheads and more funds to spend on the all-important marketing and advertising that drives this sector.

The question with this merger has always been just what the competition authorities would allow. After all, Ladbrokes owns 2,154 shops in the UK, and Gala Coral operates 1,850. Put these two together, and they would very substantially out-muscle William Hill, and would arguably be too powerful a force in the UK bookmaking industry.

So the Competition and Markets Authority (CMA) has had to perform a delicate balancing act. And the news today that it will allow the merger to proceed, as long as 350 to 400 shops are sold, sounds a fair compromise. The merger is likely to be cleared once this transaction takes place.

And the CMA’s logic seems clear: when the market place is as crowded as betting is, it becomes harder to argue that reducing the number of competitors raises monopoly concerns.

And this has been welcomed by investors

Not surprisingly, investors have welcomed this news by pushing Ladbrokes’ share price up more than 10% at the start of trading today. After all, the new company would have a dominant position in this sector.

If we now assess the investing credentials of Ladbrokes, I think it certainly holds appeal. It is moderately priced at a current P/E ratio of 12.60, with a dividend yield of 4.28%. Although the degree of competition in this sector means there won’t be rapid growth, I think that this is worth considering as a dividend investment.

As well as its UK company, Ladbrokes has shops in Ireland, Belgium and Spain, and a growing online betting business. Expanding internationally and through apps and the internet seems to be this company’s most likely route to future riches.

Overall, my top pick in this industry remains the small cap online firm GVC, as this has greater prospects for growth, and is still reasonably priced. But for those who are on the look out for income investments, Ladbrokes could certainly be of interest.

The post Ladbrokes plc rockets as merger with Gala Coral Group Limited set to go ahead appeared first on The Twelfth Magpie.

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Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Although regarded as a “merger of equals”, Paddy Power shareholders will receive an 11% premium to its share price, based on yesterday’s closing price. This is mostly down to the special dividend of €80 million that Paddy Power shareholders would receive immediately prior to completion.

Following today’s announcement, shares in Paddy Power and Betfair rose by 17.2% and 17.5%, respectively. The double-digit percentage gains recorded by the share prices of both stocks reflect that the market views the merger as a win-win proposition for the shareholders of both companies.

Paddy Power and Betfair are two of the fastest growing gaming companies in the industry, and the combination of the two companies would create an even more powerful competitor in the gambling industry. The combined company would generate revenues of £1.1 billion and will become a market leader in many markets, including the US, UK, Ireland, Australia, and much of Continental Europe.

Betfair has a strong online betting franchise and unparalleled popularity with its betting exchange, whilst Paddy Power has a retail, mass market business and a strong presence in Australia. The two companies have highly complementary assets, and the merger of the two should create significant revenue and cost synergies. Management intends to retain both brands, but there is still significant scope to eliminate duplication, given the overlaps in online operations and geographies.

One area this could have a significant effect is with product development costs. The gambling market is evolving quickly, and companies face costly investments to develop new products and features to attract customers to their online and mobile betting platforms.

With increasing regulatory pressure and higher taxes in many markets, the need to expand is increasingly important. Scale has become a byword in the corporate board rooms, and acquisitions is the quickest way to grow. M&A activity in the gambling industry has picked up recently, with Ladbrokes and Coral agreeing a merger in June, and Bwin.party in talks with potential suitors.

Both companies also released their trading updates today. Despite the pressures affecting the industry, both Betfair and Paddy Power are showing robust growth in revenues and earnings. Betfair saw revenues in the three months leading up to 31 July rise 15% to £135.4, despite a tough comparable period last year, which included the 2014 World Cup.

In the first six months of 2015, Paddy Power’s underlying operating profits grew 68%, whilst net revenue increased 25%. Its latest results also showed the importance of the mobile channel, as mobile net revenue accounted for 67% of online revenue, with 78% of active customers transacting via mobile.

The post A Merger Between Paddy Power Plc And Betfair Group Ltd Is A Win-Win Proposition appeared first on The Twelfth Magpie.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

GVC has a stonking dividend yield

Throw in a dividend yield of 9.22%, rising to 10.36%, and most investors can see this company is a no-brainer of a buy. This is a business that is churning out cash, most of which is turning into dividends. And it has hardly any debt.

Online betting is a huge and growing industry with a bright future. However, this optimistic picture is tempered by increasing regulation and taxation in the industry. Yet GVC, which owns the sportingbet brand, has been seen as one of the long-term winners in this sector.

All this means that, when I heard GVC was bidding for bwinparty digital entertainment (LSE: BPTY), I had mixed feelings. Compare the market capitalisations and the valuations and you will understand my concerns.

GVC is worth £266 million compared to bwin’s £963 million. But while GVC has a single-digit P/E ratio, bwin’s 2015 P/E ratio is 23.28, and it’s 2016 P/E ratio is 22.57, with a dividend yield of 2.62% rising to 2.82%.

Much of bwin’s value is in its brands: bwin, partypoker, Foxy Bingo and InterTrader. This firm’s strength is the booming online gaming sector, and this is something which GVC wants a slice of.

And I’m just wondering if the bwin bid is a little too much excitement

The trouble is rival firm 888 has already made a bid, which means that we have a takeover battle. 888’s bid valued the company at £900 million. But GVC is trying to gazump the firm with a £1.03 billion offer in cash and shares.

If GVC succeeds, it would be a transformational deal, and the business would be one of the world’s most innovative online entertainment companies, combining online betting and gaming and producing an estimated £95.6 million in synergies.

I think the trend in gaming apps is only just getting under way, and I have always felt that investing in GVC was a great way to buy into this trend. By going all in with its bid for bwin, GVC is showing it means business. This is a very audacious bid; but, given GVC’s track record in making acquisitions work, I think it can pull it off.

However, I just wonder whether many GVC shareholders might just be hoping that the deal falls through. Then we could settle back into watching the share price steadily rise, and the dividend cheques roll in.

You see, I rather like the quiet life.

The post Does GVC Holdings PLC’s Proposed Takeover Of Bwin.party Digital Entertainment Plc Make It A Buy? appeared first on The Twelfth Magpie.

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• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?

Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has recommended GVC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

The new firm will be called Ladbrokes Coral and will have indicative sales of £2.1bn and earnings before interest, tax, depreciation and amortisation (EBITDA) of £392m, according to Ladbrokes.

However, this deal isn’t enough to hide the cracks in Ladbrokes’ finances. Today’s deal was announced alongside a 66% cut to the 2015 dividend, which will fall to 3p, and a placing of 92.4m new shares, worth around £118m at today’s prices.

The reduced dividend payment means that despite trading close to a five-year low, Ladbrokes shares now offer a prospective yield of just 2.3%.

In my view, directly owning shares in Ladbrokes might not be the best way to profit from this deal. Instead, investors might want to consider investing in Ladbrokes’ technical partner, Playtech (LSE: PTEC).

The profit machine

Playtech provides much of the gaming software used by Ladbrokes’ betting shops and online operations. It’s a ‘pick and shovel’ business — by providing essential tools and services to Ladbrokes, Playtech makes a reliable profit, even when Ladbrokes isn’t doing so well.

If the Ladbrokes-Gala Coral merger goes ahead, Playtech will receive a £75m one-off payment from Ladbrokes. This will be made up of £35m cash and £40m in Ladbrokes shares.

Playtech has also agreed to buy 22.9% of the shares being offered in today’s placing of Ladbrokes shares. Assuming the new shares are placed at the current share price of 128p, that means Playtech has agreed to put £27m of its own cash into Ladbrokes shares.

If the merger goes ahead, this will leave Playtech with a stake in Ladbrokes worth around £67m at today’s prices. That’s a big vote of confidence, in my view.

Ladbrokes vs Playtech

Playtech’s expected shareholding in Ladbrokes suggests to me that the firm is keen to move beyond simply providing technology and wants to have a meaningful stake in branded betting businesses.

The group recently bought troubled financial trading firm Plus500, which it hopes to combine with its recently acquired TradeFX business.

In my view, Playtech’s online focus has a number of advantages over Ladbrokes’ large bricks-and-mortar estate.

Ladbrokes and Playtech both have very similar valuations and yields, but Playtech’s 27.9% operating margin highlights a key advantage over Ladbrokes — cash generation.

Playtech’s earnings per share and dividend are expected to rise by around 20% in 2016.

The same is unlikely to be true of Ladbrokes, in my view. Today’s placing will have a dilutive effect on earnings per share, while the extra earnings arising from the Gala Coal merger will be cancelled out by the effect of the shares being issued to Gala’s current private equity owners, who will have a 48.25% stake in Ladbrokes Coral.

In my view the combination of Ladbrokes and Gala Coral is logical, but investing in Playtech could be the best way to profit from this deal.

The post Why Playtech PLC Is The Jackpot Winner From The Ladbrokes PLC–Gala Coral Merger appeared first on The Twelfth Magpie.

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• Why Barclays shares could have a huge second half of 2026
• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Payment will be with £2m of cash from 32Red’s net cash balance of £7.0m and 10m new shares, which are worth around £6.6m at today’s 66p share price.

According to 32Red, Roxy Palace generated net gaming revenue (NGR) of £10.1m last year, and earnings before interest, tax, depreciation and amortisation (EBITDA) of £1.6m.

32Red reported NGR of £32.1m and EBITDA of £5.4m in 2014, so Roxy Palace should add about 30% to 32Red’s NGR and EBTIDA.

The £8.4m paid for Roxy Palace is 5.3 times EBITDA, which also looks reasonable to me, especially as both companies use the same gaming platform. This should mean that 32Red can find some cost savings and have little difficulty integrating its operations with those of Roxy Palace.

Is 32Red a buy?

My calculations suggest that the additional earnings generated by Roxy should broadly cancel out the dilutive effect of the 10m new shares issued to pay for this acquisition. This means that earnings per share forecasts could remain largely unchanged for next year.

Assuming I’m right, 32Red shares now trade on a 2015 forecast P/E of 12.7, falling to a P/E of 9.6 for 2016, based on the latest forecasts from the firm’s broker.

The stock also offers an appealing, cash-backed dividend yield of about 4%.

I think 32Red looks good value and could be an interesting buy.

However, I am concerned that the firm’s small size could means it lacks the defensive advantages of scale enjoyed by competitors such as Ladbrokes (LSE: LAD), Betfair Group (LSE: BET) and William Hill (LSE: WMH).

3-point comparison

32Red is a specialist business focusing on online casinos, poker and bingo websites only. In contrast, Ladbrokes, Betfair and William Hill all offer a wider range of sport and gaming services.

Ladbrokes and William Hill also have high street branches too, while Betfair only operates online.

Here’s how the four firms compare in terms of valuation, yield and profit margins:

Earnings have crumbled at Ladbrokes and the firm is in the middle of a cost-cutting business review and an attempted merger with Gala Coral. It’s hard to guess how things will eventually pan out, but Ladbroke’s combination of high debt, low dividend cover and an uncertain outlook is a turn off for me.

Betfair is very profitable and generates a lot of free cash flow, enabling it to fund growth without debt. However, the firm’s forecast P/E of more than 30 looks demanding to me. Earnings per share are expected to fall slightly this year before rising in 2016, but if future growth falls below expectations, the firm’s shares could fall sharply.

William Hill looks more appealing. This year’s forecast P/E of 16 should fall to 14.5 in 2016, and the firm’s steady dividend growth has been consistently covered by free cash flow in recent years. Debt levels are reasonable and Hill’s operating margin of 17% is three times that of high street peer Ladbrokes.

For a long-term mix of income and growth, I believe William Hill could be a sensible buy.

The post Is 32Red Plc A Better Buy Than Ladbrokes PLC, Betfair Group Ltd Or William Hill plc? appeared first on The Twelfth Magpie.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.