VALUE INVESTING
A Sporting Bet On Value

By Stephen Bland (TMFPyad)
August 16, 2002

Not at first glance your typical value play, and certainly no PYAD share, Sportingbet (LSE: SBT) (http://www.sportingbet.com) has some attractions I feel. Note though that it is quoted on AIM, which in my view makes it somewhat more risky, though the market cap is not that small. The company is primarily an online bookmaking concern.

Here is the usual:

Price: 61p
52-week share price high/low: 168p/58p
Market Cap: £93m
EPS y/e 31/03/02 normalised: 8.7p
EPS lowest forecast y/e 31/03/03: 13.5p
Forecast 2003 P/E: 4.5
Historical yield: nil
Forecast 2003 dividend: 2.6p (forecast yield 4.2%)
P/TBV: none -- negative tangible assets due to large goodwill
Net cash: £4m at 31/03/02
One-year relative weakness: 23%
Directors own 19%, other majors 53%

The shares have collapsed in 2002, much faster than the background bear market, having been at a high of 158p in the early part of the year. On 4th July 2002, the company stated that it was not aware of any business reasons for the dramatic share price fall. This may have to do with its online business, perhaps becoming tarred with the discredited tech brush. Essentially though, the Internet is just a medium for what is one of the world's oldest types of business -- gambling. I suspect that as soon as money was invented, or possibly earlier, people began to gamble.

The company has not been on the market very long, only since around the beginning of 2001. Earnings per share (EPS) showed losses for the three years to 2001, but the 2002 provisional results show normalised earnings of 8.7p for a historical price to earnings (P/E) ratio of 7. No dividends have been paid so far, so it is only on a broker's forecast that any yield is expected at all. It is, though, the house broker, for what it is worth.

The company has expanded very substantially, both organically and by acquisition, and described itself in the preliminary 2002 results as "one of the most profitable Internet businesses in the world." Not on the face of it a particularly meaningful statement, given the appalling inability of Internet businesses in general to make profits. 2002 was, though, their first move into profit and this is very significant in my view.

The company operates around the world, with a strong presence in the US, and claims 608,000 customers in their June 2002 first quarter report, an increase of 49,000 on the previous quarter. In the first quarter, the directors also talked of profits being 'in line with expectations for the full year', despite reporting a loss in those three months. However, this is justified by seasonality, the first quarter stated to be the quietest for sports betting.

As far as value goes, there is a massive amount of goodwill on the balance sheet arising from acquisitions. Deducting this from shareholders' funds at 31st March 2002 leaves a negative figure, so an asset play it most definitely is not, leaving us with a leg short of the traditional value player's downside minimisation criteria. It does, though, have a very low P/E, net cash, and if the dividend forecast proves accurate, a yield, though not an especially high one. Anyone contemplating the shares must be prepared though for the dividend forecast to prove optimistic with the possible result that there will be no yield for next year. As far as I can ascertain, the directors have not indicated that a dividend will be paid in 2003.

Some of the usual small cap additional risk elements apply here. For example, there are only two forecasting brokers, one of whom is the house broker, though I have used the lower one for my EPS figures above, derived from the non-house firm. It is though the house firm that is forecasting a dividend for 2003, the other one is not. Also, being on AIM involves less onerous stock exchange requirements.

Not then a company into which one might sink the farm, but for some perhaps an interesting value side bet on the basis of a very low P/E and net cash, particularly for those that might fancy the smell of the bookmaking business, online style, where the recent sharp fall of Sportingbet has dragged it somewhat into value territory.

Incidentally, the old betting mug's rhetorical question "Have you ever seen a poor bookie?" is not true. Bookies do not invariably make huge profits, even though the mugs invariably lose on balance. After taking account of all their costs and the competition in the market, in practice profits fluctuate quite a lot, so you might sometimes see a bookie of modest means, if not actually reduced to living in a cardboard box.