Investors Chronicle

July 18, 2014 6:12 pm

Highlights from this week’s Investors Chronicle

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Buy: Imperial Tobacco (IMT)

Enlarged US market share should boost depressed volumes and the acquisition of the Blu brand demonstrates commitment to the fast-growing ecigarette market, writes Harriet Russell. A forward price/earnings ratio of 12 remains undemanding.

News that the US’s second- and third-largest tobacco companies are merging is good news for Imperial.

To minimise concerns over squeezed market competition, Reynolds American and Lorillard will sell the Kool, Salem, Winston and Maverick brands, as well as the next-generation Blu ecigarette brand, to the British tobacco group. The combined company will hold on to the leading US menthol cigarette brand, Newport, as well as Camel and Vuse, Reynolds’ ecigarette product.

Imperial’s newly-acquired brands – for which it plans to pay just over $7bn – will triple its share of the US market to around 10 per cent.

In addition, Imperial’s UK-based rival British American Tobacco (BAT) – which owns 42 per cent of Reynolds – will inject $4.7bn into the newly-enlarged company to maintain its stake.

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Sell: Bwin.Party Digital Entertainment (BPTY)

Wider industry trends are not encouraging and with the shares languishing at 86p, we reiterate our sell advice, writes Harriet Russell.

A merger and a change of name in 2010 has not improved the fortunes of Bwin. Party Digital Entertainment much.

A potential break-up, looming regulatory changes and high-profile mergers elsewhere in the sector – particularly the $4.9bn bid for market leader PokerStars from Canadian groups Amaya Gaming and Rational Group have weighed heavily on the betting group’s shares.

Activist investor Spring Owl – spearheaded by former Bear Stearns gaming analyst Jason Ader – spooked investors earlier this year when it submitted a 37-page manifesto proposing a spin-off of the group’s US assets and a break-up of the regulated and unregulated businesses.

The company’s most recent trading update is mixed at best, with strong revenue from sports betting only partially offsetting a poor performance across its poker and casino websites.

Encouragingly, the World Cup has boosted trading since June.

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Hold: Quindell (QPP)

Breathless highs and agonising lows have become the norm of late at Quindell, which provides software, consultancy and outsourcing to insurers and telecom providers.

Quindell’s latest release attempted to address concerns about its over-reliance on acquisitions to drive growth. It has tweaked its strategy to prioritise business execution, integration and cash generation.

It said first-half sales rose 117 per cent and are on track to hit £800m-£900m this year and less than 10 per cent of that increase stemmed from businesses acquired in the past year. Services revenue more than doubled to £293m, while solutions revenue soared by 176 per cent.

The company also batted away questions about cash flow, saying it had generated over £220m in the period.

All of which could help improve sentiment, which has been depressed since US shortseller Gotham City Research first questioned the group’s accounting and strategy back in April.

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Simon Thompson column: A punt worth taking

Shares in Aim-traded online gaming company Netplay TV remain under pressure, falling about 5 per cent to a 12-month low after a second-quarter trading update. In fact, the price has retreated almost 40 per cent since hitting a multiyear high of 24.25p in January.

Netplay TV’s share price chart is ugly, but there is no getting away from the fact that the shares are massively oversold. From my point of view, there is far more upside potential than downside risk on investment grounds.

This week’s second-quarter trading update revealed a 38 per cent rise in new depositing players and a third increase in quarterly active depositing players. More than 50 per cent of all new customer registrations came from mobile or tablet, highlighting the importance of this channel in driving future growth. The trend here is obvious as 36 per cent of net revenue was derived from mobile and tablet in the second quarter this year, up from only 26 per cent at the same stage in 2013.

Admittedly, net revenue only rose by 5 per cent to £7.4m in the latest three-month trading period, held back by the distraction of the Fifa World Cup and a modest softening of marketing spend on Netplay TV’s Supercasino brand on Channel 5.

Last year, Netplay reported revenues of £28.5m, cash profits of £5.2m, pre-tax profits of £4.9m and earnings-per-share of 1.6p.

Analyst Johnathan Barrett at brokerage N+1 Singer expects current year revenues to rise to £31.6m, but cash profits only to edge up to £5.3m as a result of the introduction of a point of consumption tax (POC) at the end of this year. Netplay’s board has already gone on record to say that if the new POC tax had been in place last year it would have wiped £1.7m off profits.

The company is taking steps to mitigate the impact of the introduction of the new tax, however. A consolidation of the company’s UK and overseas operations into one location is also being considered to take costs out of the business.

Incorporating the impact of the POC tax in next year’s numbers, Mr Barrett predicts that pre-tax profits will be flat in 2015 – as in 2014 – assuming revenues rise to £36.9m.

However, it is worth pointing out that this news is already fully factored into the share price. That’s because Netplay ended last year with £13.9m of net cash, or the equivalent of 4.7p a share. With the benefit of robust cash generation, net funds are expected to rise to £16.9m by the end of this December, equating to 5.7p a share.

In other words, strip out net cash from the current share price and Netplay TV’s shares trade on a miserly six times this year’s earnings estimates.

The undervaluation becomes even more pronounced on an enterprise value to cash profits basis. Deduct the likely year-end cash pile of £16.9m from Netplay’s market capitalisation of £45m, and the company is trading on only five times cash profits. On any basis, Netplay shares offer value.

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