The Investment Column: PartyGaming is well worth takinga flutter on

Blacks Leisure; Davenham
Click to follow
The Independent Online

Our view: Buy

Current price: 31.25p (+3.75p)

Buying any share is a calculated gamble, but since the US ban buying shares in an online gambling group has become, well, just a gamble. But PartyGaming is a business that makes real money and is growing fast, even without any presence in the US market, and there is a strong case for taking a flutter on the stock.

Yesterday's third-quarter results and key performance indicators, despite being in line with market forecasts, offer more support to the buy side argument. In comparison to the third quarter of 2006, revenue was up by 24 per cent to $115.7m (£56.4m), despite a 3 per cent fall in poker revenue. That was offset by a strong showing in casino revenue, up by 158 per cent to $36.7m and a 91 per cent increase in sports-betting revenue, albeit from a low base. Considering that the reporting period is typically the slowest of the year, an impressive return.

The world of online gaming is incredibly competitive. Low barriers to entry, limited regulation outside the US and widely available software means PartyGaming has to stay ahead of the pack.

But what PartyGaming offers that others struggle to is liquidity; an average of 65,000 players per day means punters can find a game to suit them, with plenty of opposition to test their wits against, at any time. That is a huge advantage.

Investors need to be aware this remains a high-risk investment. Getting new players is increasingly tough. At some point, the growth will plateau and the threat of recession will hit online gaming as much as it will hit everything else.

That said, PartyGaming, priced at just over 14 times forecast 2008 earnings according to house broker Dresdner Kleinwort, is a reasonably priced growth business. Although gambling is never for widows and orphans, for serious punters there could still be plenty of winnings left on the table at PartyGaming. Buy.

Blacks Leisure

Our view: Hold

Current price: 267.75p (+0.75p)

The Sports Direct founder, Mike Ashley, ought to be pleased. Blacks Leisure, in which he owns a near-30 per cent stake, has abandoned plans for a sale of its surf-wear chain Freespirit. Pleased, because Mr Ashley had threatened to oust the board of Blacks if it persisted in a sale of one of the fastest growing parts of the business, even if one gets the impression he might have enjoyed another boardroom tussle.

The news came as Blacks posted like-for-like sales growth of 3 per cent over the first half. Though the summer proved a wash-out for retailers, the outdoor specialist Blacks was one of the few winners with wellies and wet-weather jackets flying off the shelves.

However, the company was forced to slash prices in spring in a bid to clear winter stocks, hitting margins, which has meant Blacks, which also owns Millets, slipped into the red with pre-tax losses of £0.6m compared to profits of £0.1m in the first half last year. Blacks said the company is on track to meet full year expectations.

Yet uncertainty remains over a replacement for the chief executive, Russell Hardy, who quit in June, following a series of earnings alerts. Keith Fleming has been at the helm since then, but there are no clues yet as to whether he will stay on. The shares currently trade on 27 times 2008 forecast earnings. With more work to be done to stabilise the business, the issue of chief executive yet to be resolved and a bid from Mr Ashley remaining a possibility, investors should sit tight for further developments.


Our view: Buy

Current price: 290.5p (+51.5p)

At first glance, rejecting a bid in this market without consulting shareholders first, particularly for a lending company, might be considered rash – but that is what Davenham did yesterday.

The private equity group ACP Capital was prepared to offer shareholders 325p in cash per share – a premium of more than 30 per cent to Wednesday's closing price, but well below where the shares were trading before the credit crunch bit. So, in rejecting the offer, has Davenham's board done the right thing?

In the longer term, the answer has to be "yes". Davenham is not an ordinary lender. For starters, it only lends to businesses and on an asset-backed basis only. It has delivered strong growth by becoming a first port of call for businesses that the banks won't lend to, and then only by careful vetting of its potential borrowers.

September's full-year numbers were very solid – the loan portfolio rose by 33 per cent to £248m while pre-tax profits rose by 17 per cent to £12.1m, producing earnings per share of 33.4p. The shares trade on just 7 times forecast 2008 earnings, even taking into account yesterday's 21.5 per cent jump.

The company has not ruled out talking to ACP again, but on current form the bid was opportunistic and does not do the business justice. Today's AGM will give investors more to chew on, but at this level the market is pricing in a worst- case scenario – which is unlikely to materialise. Buy.