Playtech partners and invests in leading brands in regulated and newly regulated markets to deliver its data-driven gambling technology across the retail and online value chain. Playtech provides its technology on a B2B basis to the industry’s leading retail and online operators, land-based casino groups and government-sponsored entities such as lotteries. The company’s major geographical market is in Europe but it has a global reach. Playtech currently trades at GBP4.60 ($7.81) per share, giving it a market cap of about GBP142 million.
We believe Playtech is an undervalued company with the potential to generate strong cash flow and is in an industry that has tremendous growth potential. Chart 1 shows the price-to-weighted value growth of the company and Playtech is undervalued since its weighted value growth, which consists of revenue, net income, operating cash flow and free cash in order of increasing weights, is much higher than its share price growth. This incorporates the risk of the industry Playtech is in. We believe the company has significant value to offer at current prices given its prospects and strategic approach to increasing the value of its business.
The investment case for Playtech is that the company’s increasingly diversified global offering is expected to accelerate its organic sales growth across both its B2B and B2C spaces. Global regulated gambling markets in Europe and the Americas are expected to grow substantially, and Playtech is strategically positioned to capture this growth opportunity given its product offering, structured agreements, and Software as a Service (SaaS) that allows the company to serve almost any operator across the globe. Margins are also expected to expand if Playtech’s approach of high operating leverage in its B2B business within its Live and SaaS segments is successful. The Live casino business is expected to be the key driver for its B2B segment as the company has invested in multiple studios currently operational with several more under construction and is margin-accretive.
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The gambling market is also in a supercycle, mainly driven by the expansion of regulated markets such as Europe and the Americas, and regulating markets. The company is well-positioned to capture opportunities from rapidly shifting consumer and technology trends, mainly by investing in innovation. The strong technology offering by Playtech gives it access to vast amounts of data, enabling it to generate a network effect. For the B2C segment, the underpenetrated online segment is expected to drive the segment’s growth. For example, the Italian market, which is one of the top two gambling markets in Europe, is still underpenetrated at 26% compared to 58% in the UK, which means a large addressable market is available. Furthermore, the average revenue per online customer acquired from retail sites is more than three times higher than those acquired directly through online channels, and given Playtech’s Snaitech brand has a strong retail presence and utilises a cross-selling approach, it is expected to generate higher margins from the total addressable market.
Playtech’s financials have been excellent over the past five years, especially its operating cash flow and free cash flow, except for 1HFY2021, as shown in Chart 2. In terms of financial safety, solvency should not be an issue as the company has a net debt-to-equity ratio of 12.2% with an interest coverage ratio of 3.3 times. Playtech also trades very cheaply, with 42%, 51% and 61% discounts for its forward P/E, forward EV/Ebitda and forward P/B ratios respectively compared to global peers. This compares to 48%, 63% and 74% respectively for the same ratios compared to regional peers, indicating that it is an attractive pickup. This is illustrated in Chart 3.
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The company has seven “buy” calls, one “hold” call, and no “sell” calls, with an average target price of around 60% above its current trading price. Based on our in-house valuations, we believe that the intrinsic value of the company is at least over 50% above its current trading price. Investors seeking high-growth stocks with a large risk appetite and capacity can consider taking a bet on Playtech.
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