SportingBet - Compelling valuation within the Gaming sector
Turkey contributed £10.2m (before costs) to European profits in the first half of FY12, before its sale, i.e. the rest of the Europe/emerging markets division lost £10.6m after central costs to produce a net £0.4m profit (Exhibit 3). So our £1m estimated loss for FY12 already reflects considerable H2 benefits from cost-cutting measures. The Q3 profit of £2.1m was slightly flattered by a currency gain while the seasonally weak Q4 will bear Spanish reactivation costs of about £2m, hopefully partly offset by the benefits of Euro 2012. A full year benefit of cost-cutting underpins our expectation of break-even for FY13 and management has said that it will adjust costs to ensure that this remains the case. Any increase in profitability will be reinvested in newly regulated markets (e.g. more marketing). This would principally be in Spain and Greece but possibly also Germany (where the licensing situation remains confused). Newly regulated markets do require a significant investment: meeting detailed IT, compliance, product and customer-registration requirements is no small matter, particularly when - as in Spain - the small print is only finalised at the last minute. Then there is the issue of land-grab: both new and existing competitors spending heavily on marketing to establish/re-establish brands in what is likely to be a more liberal marketing environment.
In the case of Greece, we assume a return to the drachma would halve sterling revenues (to say £9m) but many costs would also be in drachma (notably the marketing partner’s revenue share) so we believe the impact on profit would be modest. Greece passed an online gambling law in 2011 proposing a licensing regime (with a 30% profits tax), but complaints have been filed with the EU that it unfairly favours the state monopoly, OPAP. Given Greece’s current political and economic worries it is unclear when licences may be issued, but Sportingbet is already accruing and paying gaming taxes.
Turkey website sale: Dilutive, but a much better regulatory profile Selling the Turkish website business was dilutive (estimated profit/net income contribution £20m in FY12 versus £27m in FY11), but significantly improves the group’s risk profile and quality of earnings. Net income from EPC was £3.1m in Q312 (Q2: £2.6m). This is cash received as part of the earn-out (75% of adjusted profit), net of costs (mainly provision of the platform under the Transitional Services Agreement and some content costs).
We assume high rates of marketing expenditure may also restrain FY14 profits, but at this stage the range of possible outcomes is fairly wide and depends in part on the economy.
July 2012 | www.financial-spread-betting.com | 35