© Chris Batson/FT

In Israeli slang shtuss means foolishness. That it was also once the name of a backroom casino game reflects the country’s traditional view on gambling. Not any more. Online operators have emerged as some of the biggest successes in Israel’s tech boom.

Gambling software group Playtech, founded by Israeli billionaire Teddy Sagi, was leading the pack. Shares hit a record high this summer as takeovers lifted profits. Then the company warned that a government crackdown on gambling websites in Malaysia would affect full-year earnings. Analysts at UBS estimated a 10 per cent reduction in the €330m forecast for full-year earnings before interest, taxes, depreciation and amortisation. The UK-listed shares, which fell 22 per cent on the day, have struggled to get back their mojo. This too looks like shtuss.

What separates Playtech from its peers is a focus on the software that sits behind gaming websites. Like the companies it supplies, its earnings are still ultimately dependent on the health of the global gaming market. But the company’s intellectual property creates a higher barrier to entry when compared with those it serves.

Sales and earnings growth averaging 30 and 20 per cent respectively in the past decade highlight the rewards for operating in so-called “grey” markets, where the legality of online gambling is debatable. But Malaysia serves to highlight the risk in owning Playtech, which sources half of revenues from such markets.

Concerns over Mr Sagi’s freewheeling style should also subside as his influence wanes in line with his shareholding. Shares in online casino 888 now trade at a 50 per cent premium to those of Playtech, valued on forward earnings. And 888 still makes a third of sales in unregulated markets. This gap will narrow. Revenues from grey markets may decrease as regulation increases, but this will also reduce uncertainty.

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