Gamble of the week: A punt on a niche betting firm

published 8 August 2014

Have the days of big profits for small gambling companies come to an end? Shares in this Aim-listed betting companyseem to be saying that they have.The shares have halved in price since the middle of January and currently look very unloved.

Investors are beginning to fret that its years of strong growth have come to an end. A fund manager with a big stake in the company has disposed of quite a few shares recently, although it still owns more than 10%. So why are markets spooked?

Gambling is a very competitive business and there's no shortage of places for punters to part with their cash. But NetPlay TV(Aim: NPT)seems to have carved out a reasonable niche for itself. The bread and butter of its business is its Jackpot 247 casino brand, which is screened on ITV 1 and Sky channels.

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The company has recently extended its deal with ITV for another three years and has increased the TV coverage from four to six nights per week. It also owns the SuperCasino brand that's showing on Channel 5.

Meanwhile, it boughtVernons.com last year in an effort to branch out into other areas, such as bingo and sports betting.

Current trading is reasonable, with revenues during the second quarter of this year growing by 5%. NetPlay has grown its number of new players by 38%, with lots of these playing on tablet computers and mobile phones a key requisite of a successful betting business these days.However, the World Cup has led to business being a little subdued compared to last year.

The big risk is that the introductionof a point of consumption tax fromDecember this year will hammer profits.NetPlay has said that this would havecost it £1.7m last year 41% of totaltrading profits. However, it claims thata combination of cost cuts and market sharegains can now limit the potentialdamage.

So there's quite a lot to worry about onthe tax front. But City analysts think thatprofits can stay stable with earnings pershare of 1.6p and a dividend per shareof 0.6p. At a share price of 12.2p, thatimplies a forward price-to-earnings ratio(p/e) of 7.6 times and dividend yield of4.9%.

What's more, the firm has £12.2mof cash on its balance sheet equivalentto 4.1p per share. Stripping this out putsthe company on a p/e of just five times.That seems low enough to gamble on ifyou're willing to take the risk.

Verdict: a very risky buy

Phil spent 13 years as an investment analyst for both stockbroking and fund management companies.

After graduating with a MSc in International Banking, Economics & Finance from Liverpool Business School in 1996, Phil went to work for BWD Rensburg, a Liverpool based investment manager. In 2001, he joined ABN AMRO as a transport analyst. After a brief spell as a food retail analyst, he spent five years with ABN's very successful UK Smaller Companies team where he covered engineering, transport and support services stocks.

In 2007, Phil joined Halbis Capital Management as a European equities analyst. He began writing for MoneyWeek in 2010.