Analysts upbeat on online gambling

Specialist online writers in several media this week started to paint a somewhat rosier picture of the online gambling sector, with the senior Moneyweek journo Eoin Gleeson setting the tone. Gleeson pointed to the PartyGaming deal with the US Department of Justice (see previous InfoPowa reports) as a positive move that would enable Party and possible rival companies in the business to move forward with M&A activity, raise capital for further development, or become more attractive targets for investors or even acquisition.

Gleeson posits that a change in mood from the US authorities may have helped, spearheaded by the attempts of House Financial Services Committee chairman Barney Franks to overturn the Unlawful Internet Gambling Enforcement Act which is likely to be reintroduced to Congress later this (April) month, now that a more enlightened administration is in power. The agreement with PartyGaming was also struck just a couple of weeks after the European Commission complained that the US ban was discriminatory and even a breach of World Trade rules, which is also a positive development.

But at the end of the day it may have been sheer pragmatism that won, observes Gleeson.

He quotes Daily Telegraph writer Alastair Osborne, who wrote earlier: "The US's real motive in passing its King Canute-like anti-gambling legislation was entirely protectionist. It was all about making sure the big, established [land] casinos on the Las Vegas strip weren't overtaken by the nifty online newcomers."

Matthew Goodman in The Times notes: "But Las Vegas has recently hit the wall with gambling revenues falling sharply. So some of its biggest operators, such as Harrahs, the group that owns Caesars Palace, are now thought to fancy a move into online gambling. And a settlement with PartyGaming could be a big step towards full legalisation. The American authorities also seem to have concluded, as they did with Big Tobacco, that it's better to regulate and tax the vice industry than to pursue a ban that is unpopular and difficult to enforce."

Gleeson points out that PartyGaming's $105 million US settlement will put a dent into its cash flow for some years, but make it an overall more attractive proposition for the future. The company has invested heavily in advertising to keep and acquire customers, but it has become apparent that online gambling firms will need to scale up to reduce costs if they are going to survive.

Pulling off a big acquisition will be tough in a market where credit is hard to come by, Gleeson opines before identifying Playtech as probably the best stock in the Internet gambling sector.

"This company provides the platform for gamblers to come together over the internet to play casino, poker and bingo online," Gleeson writes in explaining his choice. "The average daily earnings growth is a healthy 8 percent this year compared with the last quarter of 2008.

"No gambling business is recession-proof, but Playtech is robust: it operates in 45 countries and is expanding into sports betting. A 29 percent stake in William Hill [Online] is also paying off handsomely, with the average daily income from the group 40 percent higher in the first eight weeks of 2009 compared with 2008.

"That helped lift pre-tax profits to Euro 41.45 million last year from Euro 26.85 million the year before," he concludes, observing that Playtech also has a strong pipeline of new potential licensees, with a large number of online gambling groups buying up its software to broaden the range of games they offer.

Gary White of The Daily Telegraph seems to agree: "There are exciting prospects for the [Playtech] group in the next two years," he writes. The shares trade on a modest forward p/e of ten and offer a healthy dividend yield of 5.0 percent.

Reuters news services coincidentally carried the recommendations of broker firm Daniel Stewart, which identified Playtech, William Hill and Sportingbet as its three top "buys" in the online gambling sector.

The broker issued a "buy" recommendation and 64 pence price target on Sportingbet, which rose 5.7 percent to 60.25 pence. The broker highlights Sportingbet's strength in Spain, Greece, and Australia and a number of Eastern European territories, and says it will play an active role in industry consolidation.

Daniel Stewart keeps its "buy" stance and 543 pence target price on Playtech, which gained 0.6 percent to 457.75 pence. It says Playtech has solid expected European upside and strong performance potential in Asia.

The William Hill group is Daniel Stewart's third top pick as a buy, with a 225p price target, saying its discount to the sector following its GBP 350 million rights issue was excessive. William Hill shares were up 0.1 percent to 188p and the rights issue, placed to help the business pay off debt, was a success, although operating profit at financial year-end dipped 1 percent.

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