Investment Column: Playtech's California deal is a good bet
Capital Pub Company; Creston
Wednesday 22 June 2011
Our view: Buy
Share price: 335p (+15.25p)
Investors could be forgiven for greeting news of another poker deal with a resigned shrug of the shoulders. Why, then, did Playtech's shares take off as if the company had been dealt a pair of aces yesterday?
The AIM-listed gambling software group yesterday announced a licensing agreement with the California Online Poker Association (Copa), which is made up of a coalition of Native American governments and licensed card rooms in the Golden State. Its Sciplay International joint venture will also provide Copa with "play-for-fun" internet games.
To any poker player, "play for fun" without real money is much like going in the bath with wellington boots on. But that's not really the point.
These deals provide Playtech with a firm foothold in the market for when – and it is only a question of when – the US government legalises online gaming, not least for the tax revenues.
If the federal authorities play slow, California may beat them to the post. With a yawning budget deficit of its own and a loud and vociferous lobby from enthusiasts (it's America's biggest poker market), it could go down the route of state licensing. Either way, Playtech is sitting pretty. But even though yesterday's deal may take months or even years to realise its potential, Playtech's shares look like winners on valuation grounds. The company trades on under 10 times forecast earnings for this year, falling to 8.5 times on the estimates for next year; and it yields 5 per cent.
Playtech has had its issues: it took a long time to find a finance director and a move from AIM to the London Stock Exchange's full list was delayed, albeit largely for technical reasons.
We first backed the shares at 478.2p in February 2010 and then said "hold" at 419.75p in November. They've been on the slide recently and there are risks, not least if William Hill exercises its call on the two companies' joint venture. All the same, the stock looks very cheap, given its potential. We're ready to switch our stance.
Capital Pub Company
Our view: Hold
Share price: 200.5p (+9.5p)
The Capital Pub Company posted annual profits up 48 per cent yesterday and came out fighting after news on Friday that it had received two takeover approaches in as many months from Fuller, Smith & Turner.
Capital, which has 34 pubs primarily in London, said Fuller's second 200p-a-share offer in April, which valued its equity at £53.9m, "substantially undervalues" its business.
This was despite Capital's shares closing at 155.5p on Thursday. Capital said its sales are up 20 per cent over the past 10 weeks, that it had resumed paying dividends, and that it planned to grow to up to 50 pubs over the next two years. It also cast itself as a "scarce and valuable asset", as the last remaining independent freehold London-based pub company.
Furthermore, the group said that Fuller's indicative offer values the group at 8.9 times historic underlying earnings, which is less than the 9.8 multiple paid by Young & Co Brewery for Geronimo Inns and only slightly more than Greene King's recent purchase of Realpubs.
Certainly, Capital, which grew profits to £4.1m in the year to March, has real momentum, though its shares now trade on a forward earnings multiple of 16. Some City analysts believe Fuller's may come back with a bid in excess of 250p, but we are not convinced of the rival's appetite extending to much beyond 200p.
Our view: Buy
Share price: 120p (+8p)
The latest financial year marks a decade of operations for the communications group Creston, and boss Don Elgie was popping the champagne corks yesterday. He said 2011 had been a "significant and successful year" with revenues up 7 per cent to £67.8m.
Creston reported that it had pretty much wiped out its £25m of debt and tripled its full-year dividend to a record high of 3p. There was a downside in the Insight division, where revenues dropped 7.5 per cent, and there is one significant contract renewal which could provide a downside risk.
That said, at 6.7 times forward earnings, the stock is cheap, particularly as management looks like it has a "clear view of its strategy", as Charles Stanley noted. We agree and believe Creston has some strong prospects for growth.
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