Share tip of the week: a punt on online gambling

published 12 November 2010

The latest batch of money printing by the US Federal Reserve (also known as QE2) has sent stockmarkets across the globe rallying. Faced with buying frenzies like this, it can be hard to keep your cool. So the most important advice I can give investors now is this: don't get suckered into buying any old rubbish, just because everyone else is piling in. Stay focused on undervalued firms with positive cash flow, sound balance sheets and strong fundamentals.

Take Playtech, the world's largest listed gambling software supplier. Its IT platform offers online, TV and mobile games, including casino (67% of sales), poker (20%), bingo (7%), and sports-betting (6%), which are promoted via its partners within Europe (62%), Asia (32%) and the rest of the world (6%).The games are sold to blue-chip clients, such as Betfair, Paddy Power and Ladbrokes, on a revenue-sharing model.

Playtech also owns 29% of William Hill Online and a 10% stake in Sportech, the UK football pools operator. It's also just dipped its toe in the key US market by organising a partnership with US lottery provider, Scientific Games. All in all, this puts Playtech in an ideal position to benefit when governments around the world decide to regulate online gambling. Globally, e-gaming is thought to be worth $26.6bn, with the size of the total gambling industry coming in at $335bn.

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Tip of the week: Playtech (Aim: PTEC), rated a BUY by Collins Stewart

Collins Stewart expects 2010 revenues and underlying earnings per share (EPS) of €143.6m and €0.37 respectively, rising to €157.2m and €0.40 in 2011. The balance sheet seems rock solid, with net cash of €32m, and there is a 3.6% dividend yield. I'd rate the stock on a 15 times multiple. Adjusting for the cash, this gives an intrinsic worth of around €5.65 a share (or 490p).

Internet gambling stocks are not for the faint-hearted, given the sector's past regulatory woes, along with its exposure to the economic cycle, and the fact that it relied on just five licencees for 49% of revenues in the first half of this year. For British investors, there are also the usual foreign-exchange considerations.

However, with Playtech planning to move up from Aim to the main London Stock Exchange, the company seems to be one of the few with sufficient scale and reputation to win in this growing, yet competitive industry. Collins has a price target of 552p.

Recommendation: BUY at 396p

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.