With recession on the minds of every investor, I thought it time to look at the performance of “sin stocks.” Sin stocks refer to shares in businesses considered unethical, immoral or unsavoury. Traditionally, it has been applied to alcohol, gaming, tobacco and more recently cannabis growers.
Playtech, the subject of this write-up, owns one of the top software platforms to run gaming websites as well as player account management solutions; it is already benefiting from an explosion in gambling on the internet, which is projected to grow from US$57 billion in 2021 to US$153 billion by 2030. Alongside the proliferation of mobile devices and acceleration in internet speeds, which have increased online spending, the gambling industry has made itself even more attractive through technological innovations such as linking millions of online casino, poker and slots players together to boost liquidity and create mega jackpots.
In July, Playtech said that it was trading ahead of expectations. In the light of that, broker Peel Hunt has already upgraded by more than 10% to eps of 46 cents (40p) for the current year.
Profits rise 850% in 12 years
Founded in 1999, a new era began for Playtech with the arrival of current CEO Mor Weizer, a qualified accountant and former technical consultant at Oracle. Under his watch, revenues and EBITA profits soared from €66m and €44m, respectively, in 2007 to €1,508m and €383m in FY’19 before the pandemic disruption clipped them back. Much of that growth came via acquisitions as management sought to diversify and build market share in regulated markets. Landmark deals included PTTS (a marketing and technology platform) for £204m in 2011; BGT, a provider of software for self-service betting terminals for €138m; and largest of all, the €846m purchase of Snaitech, an Italian betting company focused on gaming machines and retail sports betting shops in June ‘18. Playtech also dipped its toe into financial trading (Finalto) but this business was later seen as a distraction and has just been sold.
Two divisions
Playtech operates from two divisions, which generated the following in FY’21:
• Gaming B2B (€554m sales) 49% EBITDA profit
• Gaming B2C (€584m sales) 51% EBITDA profit
Gaming B2B
Having originally focused on the UK, Playtech has transformed into a global business, serving 150 licensees across over 30 countries. Playtech is unique in that not only does it provide the software to run gaming websites and provide the content to run online casinos, poker, blackjack, slots, sportsbooks and lottery but it also provides support services. These include CRM and marketing consultancy, payment processing advice and customer services. Casino contributes over 60% sales with sports and services each in the mid teens.
A key attraction is that Playtech has built an impressive omnichannel platform to cater for licensees’ every need. The platform allows gamblers to move seamlessly between different games and channels using a single account, which means they can walk into a shop to place a sports bet on its self service betting terminals, cash it out on their mobile walking home and even open a new bet on their computer the next day. That makes it easier for operators to streamline their offering, drive cross-selling, increase player loyalty and optimise lifetime values.
Product flexibility
Playtech usually charges customers a 10-15% royalty on their sales - so it does well when they do - and contracts are anywhere between three years to over five. Customers are charged the maximum if they wanted the Jackpot liquidity options which pools hundreds of players in a central network plus the latest “bonus” features. As well as offering around 1,000 top of the range slot games on its platform (with an annual €200m R&D budget ensuring plenty of new ones) Playtech also hosts around 6,000 third party games thanks to an alliance with Scientific Games, BGT and Quickspin. The latter is charged a royalty of c. 3% of their sales.
When it started out, Playtech offered a one stop shop contract, which assumed clients were UK-focused and didn't have any real gaming software of their own. However, the business model has been tweaked following an unprecedented wave of gaming mergers in recent years including GVC swallowing up Ladbrokes to become Entain; fantasy sports firm FanDuel acquiring Flutter (owner of Paddy Power) and American hotel and casino group Caesars buying William Hill. This increased the risk of losing contracts and Playtech nearly lost Ladbrokes’’ (top three customer) work because it already possessed many of the gaming functions and needed to eliminate duplication. Fortunately, a new deal was agreed with the UK part replaced by Entain's overseas businesses including Germany and Spain alongside new and improved functionality. As a result, revenues from Entain (new Ladbrokes owner) have increased.
Learning from that experience Playtech tweaked its business model, breaking up the original package into smaller components or modules. So, for example, “Player Protect” (where its “Bet Buddy” machine learning analytics identifies and manages at risk gambling behavioural patterns and encourages players to take breaks) but not the UK casino and poker modules.
Four key growth opportunities
Playtech has four major growth opportunities that could lift the shares substantially over the next 2-3 years. First, the business is moving away from supplying physical gaming or betting shops to servicing their online equivalents (digital revenues are now c. two thirds EBITDA profit and is rising).
Second, is innovation. Playtech licenses the software to drive gaming websites and concepts in live casino gaming including “Adventures Beyond Wonderland” where punters play online with real croupiers. These feature a revolving studio and augmented reality with dealers dressed as iconic characters taking charge of the “wonderspins wheel” where the numbers are replaced with beloved characters from the famous Alice in Wonderland story such as the doormouse, white rabbit, dodo etc. Each character has a multiplier attached, so if you land on a character with a 4x multiplier, your payout is multiplied by 4. Meanwhile, bonus features include magic dice, which are rolled to determine whether or not you progress from the bottom to the top of a 4x6 board with high multipliers on the top level.
Such innovation has pushed at an open door with demand for Playtech’s services, which are provided to gaming operators such as Entain (the former GVC), Flutter, Caesars, Rank, Skybet, Betfred and Bet 365, going through the roof.
Third, while the more mature UK and European markets (72% revenues) provide the majority of divisional B-2-B revenues, a huge opportunity is emerging in the Americas, where turnover rose 67% to €101m (21% revenues). Here, the largest opportunity is in Mexico (sales: €90m), tapping a population of 129 million people, through a joint venture (profit share, equity participation) with Caliente (Caliplay) and Columbia with W Play. There are six joint ventures in all (with attached call options said to be worth €622m - an 81% uplift over H1 ‘21) and while a planned listing of Caliplay as a SPAC in New York has been postponed due to market conditions, management are working on an alternative independent “vehicle” for it. Playtech additionally operates in Brazil, Panama, Costa Rica, Peru and Guatemala.
Although earlier stage, North America also provides huge growth opportunities for Playtech with 26 States (covering 144 million people or 45% of the population) having green lit sports betting while six allow i-gaming (casino, poker, bingo etc.). The group has licenses in five states and Live Casinos have recently been launched in Michigan and New Jersey, with Pennsylvania and Indiana on the way.
Snaitech growing rapidly
The fourth major opportunity lies in Playtech’s B-2-C division (51% group sales), which is dominated by Snaitech, the oldest and largest gaming operator in Italy. This business franchises the right to operate c. 1,600 betting shops and corners (betting terminals in non-betting premises) to individual operators, the majority of which are in Northern Italy. The concessions operate 54,000 amusements with prizes (AWPs) gaming machines and 10,000 video lottery terminals (VLTs), with the latter paying out more in prize money (85% versus 70%).
While the Pandemic hit this business hard, the online business has recovered well with sales up 130% to €230m and EBITDA rising three-fold to €135m between FY’19-’21. With online penetration still low at 27%, analysts expect further strong progress.
Encouragingly, there are now signs that the retail betting and gaming machines sides, where EBITDA has fallen from €117m to €47.3m in the same period, are recovering now that Covid-19 restrictions have been lifted.
Price target 800p
What nicely protects the downside is the prospect of a bid. Since late last year, the company had been in talks with no fewer than three suitors and the shares at one point climbed to 775p although only one, Australia-based Aristocrat Leisure, made a confirmed bid at 680p a share last February. The most recent suitor, TTP, broke it off, blaming “underlying market conditions” but that was before the recent upgrade to profit guidance and disposal of Finalto, which has reduced net debt / EBITDA to just c. 1x FY’22 forecast EBITDA, leaving plenty of firepower for investment.
The shares, hit hard because of the general malaise, now look excellent value trading on a lowly prospective PE of c. 12, versus previous peak PEs of well over 20x.
Peel Hunt’s price target is 800p. I am a buyer.
