Calling all value investors! James Faulkner on NetPlayTV

The World Cup and a new gambling tax have conspired to see shares in NetPlayTV (NPT) languish of late, but this has led to the emergence of deep value. I first uncovered the shares at 11.75p back on the old WatsHot site, and they peaked at 23.75p back in January. At the current 14.375p they are once again looking excellent value.

At first sight, a UK-focused television operator might not seem the most attractive gambling play, but NetPlay (NPT) is in the process of becoming much more. NetPlay operates a number of interactive gaming services, including Supercasino.com and Jackpot247.com. These services can also be viewed 24 hours a day live on Sky Channel 862, every evening on FIVE, and 5 nights a week on ITV1.

The addition of the smartphone and tablet platforms to NetPlay’s offering completes the proposition to provide a complete interactive gaming experience of TV, online, mobile & tablet. This ‘converged’ model is unique to NetPlay, providing it with the opportunity to win new customers for its nascent mobile & tablet platforms through its core TV and online channels. Increased investment in advertising & marketing spend appears have paid off in recent years, and the profits from new customers are being ploughed back into the business.

Cards on the table…

NetPlay hit a speedbump yesterday, when it announced that net revenue derived from its SuperCasino platform was slower in the latter part of the second quarter of 2014 “as result of the Football World Cup and a moderate softening of the marketing output for SuperCasino on Channel 5”. 

However, it is to be hoped that this is nothing more than a short-term blip, as the World Cup will clearly have distracted attention from other forms of gambling during the period. Accordingly, the directors expect that with the World Cup having come to an end, revenues will return to similar levels as those seen at the beginning of the quarter. Moreover, NetPlay is achieving particular success with its Mobile and Tablet operations, with Q2 being the first quarter where over 50% of all new customer registrations have come from mobile or tablet. In addition 36% of net revenue was generated through mobile and tablet in the quarter (Q2 2013: 26%).

Also causing concern is the upcoming change in legilsation regarding online gambling. The current legislation (Point of Supply) enables offshore operators, such as NetPlay, to offer services to UK customers as long as they are regulated in another EEC country or a country on the ‘white list’, such as Gibraltar. The operators are not required to pay the 15% gross profit tax that onshore operators (land based or online) are obliged to pay. The potential introduction of a POC (Point of Consumption) tax would tax online companies on the basis of location of their customer.

According to estimates from Sanlam Securities, assuming POC is implemented at 15% of Net Gaming Revenue in December 2014, NetPlay could incur a tax charge of £0.4 million in FY14, rising to a full year impact in FY15 and FY16 of £5.4 million and £6 million respectively. All told, the lower than anticipated SuperCasino growth coupled with the introduction of POC appears likely to cause a hiatus in EBITDA growth between FY13 and FY15, which has weighed on the share price.

Fancy a flutter?

Given that the impact from the World Cup appears likely to prove short-lived, and that EBITDA growth is forecast to resume following a full year’s impact from POC in FY15, we can now turn to the value case for NetPlay.

At the end of 2013, net cash balances stood at £13.9 million (£12.2 million excluding customer funds). Underlining NetPlay’s cash generative nature, the cash position is forecast to rise throughout FY14 and FY15, to reach £23.6 million by the end of FY16 by Sanlam’s reckoning – this against a current market cap of just £42.5 million.

By FY16 the broker is also forecasting EPS of just over 2p, which suggests an ex-cash rating of just over 3x two years out. The company services markets that are already regulated for online gaming, so it doesn’t face the same level of regulatory risks as others in the sector, and yet it still trades at a significant discount to the sector.