Playtech promises much more

After a recent sell-off, Playtech's strongest-ever quarterly performance, coupled with a better-than-expected first half, has sent its share price to a seven-month high at 749p. While the internet gambling technology firm is not as exposed to regulatory risk as others in the sector, it isn't out of the woods yet. But if it continues to beat forecasts like it says it will, Playtech could re-rate.

Total revenue rose by nearly 29% in the three months to 30 September, driven by rapid growth at its casino business to €62.4 million (£49.3 million), up a third. Sport revenue more-than doubled to €7.1 million thanks to the World Cup, and income from its services operation was up 19% at €34 million.

"Looking ahead, the management team is confident of exceeding current market expectations for the full year," said chief executive Mor Weizer.

It has less cash than the same time last year, at €402.4 million, but Playtech had a successful period operationally. It launched Casino and Live with Skybet, GazzaBet for RCS Media in Italy and a white-label deal with Trinity Mirror. On the acquisition side, it bought Aristocrat Lotteries and a 33.3% stake in BGP.

But regulatory risks still remain, as the Responsible Gambling Trust study is set to report within weeks, and the government continues to discuss restrictions on gaming machines. JPMorgan quotes Paddy Power's estimate that by only allowing machine bets of over £50 to be placed over the counter or through an account, gaming machine growth could fall by 5%, downgrading earnings per share (EPS) estimates.

JPMorgan notes that Playtech is not as exposed to these risks as others in the sector, but warns that online gambling, which is driving top-line growth, is not regulated.

But Panmure Gordon was confident after the update, upgrading its cash profit forecasts by around 6% to around €204 million. On Panmure's guidance, Playtech trades on 15 times forward earnings and with an EV/EBITDA multiple of 10.4 times.

"We retain our 'buy' recommendation and 800p price target with Playtech holding around 16% of its market capitalisation in net cash, whilst revenue growth remains strong," said the analysts.

Strip out forecast year-end net cash of about 115p, and Playtech trades on a very modest 12.4 times earnings estimates for 2015.

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