Numis makes Playtech its top pick for global cover

Numis makes Playtech its top pick for global cover

Tuesday, September 6, 2016 Posted by Andy McCarron
Analysts say geographic diversification is key to online success

Weighing into the debate surrounding the attractions of regulated versus overseas-licensed or so-called grey markets, analysts at Numis suggest geographic diversification of revenues is a better guide to the attractiveness of an operator rather than a strictly regulated approach.

Current thinking among investors is that regulated earnings attract a higher earnings multiple because of their more reliable characteristics and the likelihood that revenues will be recurring given a clear and robust licensing framework. Meanwhile, the size of the market should also be larger due to a greater degree of faith on the part of the consumer and with more channels open to marketing and advertising.

But in a note to clients, Numis analyst Richard Stuber suggests the model of assigning one value to regulated earnings and another to unregulated is “far too simplistic”. “There are many shades of grey, ranging from the outright illegal, such as Singapore and many states in the US, though to opaque, such as Germany,” he said.

Stuber’s arguments come in a sector note that points to Playtech as being his top pick, with its diversified earnings stream, in terms of geography and spread of clients, its leading technology and its track record both in trading and value-enhancing M&A.

For the sector as a whole, Stuber suggests investors need to look to how well diversified a company’s earnings are in terms of geography. He points to the example of the reliance on the UK on the part of many of the top names in the sector as being problematic, despite its long history of being perhaps the premier, and most stable, regulated market.

He added: “Whilst the UK is still one of the most attractive markets for operators (market size and product choice), operators that have had high exposure to this market have been subject to the 15% point of consumption tax, 25% machine gaming duty and at the same time increasingly onerous operational requirements including FOBT limits, time-outs and restrictions on advertising.”

To hammer home the point, Stuber says that while more markets will surely regulate in the near future – with all that brings in terms of new taxes – these markets can also be unpredictable.

“If the operator has broad exposure to multiple markets, it is likely that the regulatory ‘bite’ over a short period will be less material,” he added. “Contrary to conventional perception, we think that grey market exposure can be beneficial, as long as the operator is well-diversified across multiple geographies.”

Stuber suggested that geographic diversification was one important attribute of sector winners, with scale and momentum being the other factors that will often determine those that are doing well from those that are falling behind. With regard to the first of these, Stuber notes that the recent spate of M&A activity has resulted in immediate benefits for those involved.

“In recently announced mergers, potential cost savings represent between 7% and 14% of the combined controllable cost base (i.e. excluding betting taxes),” he said, suggesting that the large variation can be explained by "geographical overlap between the merging parties and the split between retail, where there are fewer cost synergies to be had, and online".

Totally Gaming says: The interesting thing to note about what Numis says in its analysis is that geographic diversification is now seen to be replacing the old debate around regulated and unregulated earnings that has dominated for the past few years. It is a subtle shift, and brings into the equation arguments about the quality of grey market earnings. While it shows that nothing is set about how companies are viewed and judged, it at least helps keep the strategic advisors busy.

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