Playtech Valuation

It was a supposed to take me an hour or two but then ended up taking a whole weekend…

…Being a customer of online gambling and knowing very well how recession-proof my tendencies are to engage in such activity, I wanted to value the online gambling companies I was familiar with. I thought WTH, the space has very limited analyst coverage and thought it might be a good place to look. I started with valuing B2C operators like Amaya (pokerstars), Paddy Power, Betfair etc but then converged more to the B2B companies given the much more appealing margins. Upon valuing companies in that space, I narrowed my search down to a company called Playtech (PTEC-LON).

Brief Summary

Playtech is a 17-year old B2B company that supplies software solutions to online gambling companies (aka B2Cs, aka operators, aka licensees). Most operators are not capable of maintaining an in-house software development team that can produce solutions that meet customer needs while also satisfying extensive regulatory requirements. The company has grown to a dominant position (70% market share) through in-house growth capex and sensible acquisition strategy. They are very shareholder oriented.

 

Playtech Thesis

For the next five years, Playtech will continue to enjoy their unassailable position as a supplier of software solutions for the online gaming market. Playtech boasts multiple long term contracts, multiple software and service deliverables that are highly customizable and adaptable to a wildly divergent regulatory environment. Put them at the center of a growing industry where switching costs are very high while operators remain fragmented and it is easy to see why you wouldn’t want to be Playtech’s competitor.

Their 3-year revenue CAGR is 20%. I expect revenue will increase at a pace faster than the online gambling market in the short term and in-line in the long term. Aside from FX challenges, they are likely to see some volatility in earnings as a result of regulatory changes and markets closing or opening. In addition, increased regulation and taxes will put pressure on future earnings.

The consolidation trend in the operator space is not ideal for Playtech as it increases the likelihood operators will have the financial flexibility to backwardly integrate. For the first 5 years there is an incredible mote around this business – they will enjoy little market competition but consolidation in the operator space, trends towards backwards integration, and new competition will all contribute to put pressure on margins. Playtech will continue to make sensible acquisitions and have a shareholder-friendly executive team.

**Look for them to continue to attempt to penetrate the CFD (Contract for Difference) market through acquisitions. A possible reason for this is that Teddy Sagi is a majority shareholder in several CFD companies. As their forays into the CFD market has been stuffed by regulators thus far, I do not include the successful/unsuccessful penetration of the CFD market into my growth figures.

What I like about PTEC:

  • February 2015, Playtech announced that Finland’s national gaming operator had signed a 20-year online contract extension
  • Large sustainable mote (~5 year life)
  • Value accretive growth potential
  • Shareholder friendly policies
  • Software company with large scale-potential trading at a forward P/E of 11.5
  • Multiple long term contracts and considerable pricing power

Why is it trading at a low multiple? In order of importance….

  • A majority of their revenue is generated from unregulated markets (citizens of a lot of countries engage in online gambling but it isn’t formerly recognized by their government. It is possible that the gov could shut down online gambling entirely. This happened in the US in 2012 http://www.cardplayer.com/poker-news/13127-black-friday-the-day-that-changed-online-poker).  They have increased this from 36% in 14’ to 41% in 15’
  • Online gambling is misunderstood by general public and receives low analyst coverage
  • Former CEO, Teddy Sagi, is an ex-felon that owns ~20% of the company
  • They do not appear positioned to gain access to the US online gambling market (if it ever opens)
  • Uncertainty around CFD (Contract for Difference) market penetration

Catalysts

  • Earnings
  • Opening of regulatory markets
  • More buybacks/Special Dividends