New year analyst boost for Playtech

New year analyst boost for Playtech

Thursday, January 5, 2017
Canaccord reaffirms buy status despite financials division downgrades

Playtech received an early new year boost this week after analysts at Canaccord Genuity reaffirmed their buy recommendation on the stock despite having to revise downwards the prediction for the financials business.

The retail financial trading sector suffered a series of regulatory shocks towards the end of last year after new guidance and proposals on leverage limits, advertising and product suitability from the financial watchdogs in the UK, Cyprus and Germany.

The series of announcements saw the share prices of the major providers IG Group, CMC Markets and Plus 500 suffer large share price downgrades and Playtech was also hit as investors took a dim view of the prospects for its financials division.

Acknowledging the regulatory headwinds affecting the retail financial sector, the team at Canaccord nudged down their forecasts for EBITDA for 2016 from the financials division by €4.1m. Along with an adverse foreign exchange impact of €4.2, it means Playtech’s total EBITDA for this year is now estimated at €297.4m.

Simon Davies, analyst at Canaccord Genuity, said it was important to put the hit to the financials division in perspective. “It has been a year of considerable achievement at Playtech, but one where a strong underlying performance in its core online gaming activities has been somewhat over- shadowed by challenges to its materially smaller online financials business,” he said in a note to clients.

Pointing to a like-for-like growth rate in the gaming business for the first half of 17 percent, Davies said he expected to see double-digit growth for the business in the second half.

“The European market backdrop remained favourable, particularly in casino and sports, with strong growth in the major markets of UK, Spain and Italy,” he said. “The Sun Bingo contract kicked in late in the third quarter, and the pipeline remains strong, with Marca and Fortuna set to boost 2017.”

With regard to the financials division, Davies added that Playtech has been “applying self-help” by exiting introducing broker relationships and building a B2B model to lessen its on B2C exposure.

“This will have a negative impact on its 2016 performance, but provide more flexibility to offset any regulatory tightening; it also points to a significant reduction in the likely earn-out payment (maximum €250m, but now likely to be materially lower).”

Davies added that the regulatory tightening would also have a favourable effect for Playtech and others of the larger players in the market as it should drive consolidation.

Totally Gaming says: As the note makes clear, Playtech will likely be able to shrug off the issues currently afflicting the financials division in the short to medium-term, particularly given that the picture for gaming is so rosy-hued. Nevertheless, it will be interesting to see how the retail financial trading sector develops this year and whether Playtech considers future involvement to be non-core. The consolidation that Davies talks about cuts both ways.


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