Small-cap online betting firm 32Red (LSE: TTR) moved higher this morning after announcing the acquisition of Roxy Palace Casino for £8.4m in cash and shares.
Payment will be with £2m of cash from 32Red’s net cash balance of £7.0m and 10m new shares, which are worth around £6.6m at today’s 66p share price.
According to 32Red, Roxy Palace generated net gaming revenue (NGR) of £10.1m last year, and earnings before interest, tax, depreciation and amortisation (EBITDA) of £1.6m.
32Red reported NGR of £32.1m and EBITDA of £5.4m in 2014, so Roxy Palace should add about 30% to 32Red’s NGR and EBTIDA.
The £8.4m paid for Roxy Palace is 5.3 times EBITDA, which also looks reasonable to me, especially as both companies use the same gaming platform. This should mean that 32Red can find some cost savings and have little difficulty integrating its operations with those of Roxy Palace.
Is 32Red a buy?
My calculations suggest that the additional earnings generated by Roxy should broadly cancel out the dilutive effect of the 10m new shares issued to pay for this acquisition. This means that earnings per share forecasts could remain largely unchanged for next year.
Assuming I’m right, 32Red shares now trade on a 2015 forecast P/E of 12.7, falling to a P/E of 9.6 for 2016, based on the latest forecasts from the firm’s broker.
The stock also offers an appealing, cash-backed dividend yield of about 4%.
I think 32Red looks good value and could be an interesting buy.
However, I am concerned that the firm’s small size could means it lacks the defensive advantages of scale enjoyed by competitors such as Ladbrokes (LSE: LAD), Betfair Group (LSE: BET) and William Hill (LSE: WMH).
3-point comparison
32Red is a specialist business focusing on online casinos, poker and bingo websites only. In contrast, Ladbrokes, Betfair and William Hill all offer a wider range of sport and gaming services.
Ladbrokes and William Hill also have high street branches too, while Betfair only operates online.
Here’s how the four firms compare in terms of valuation, yield and profit margins:
|
2015 forecast P/E |
2015 forecast yield |
Operating margin |
|
|
32Red |
12.7 |
3.8% |
10.6% |
|
Betfair |
32.8 |
1.4% |
21.1% |
|
Ladbrokes |
18.6 |
5.1% |
5.5% |
|
William Hill |
16.0 |
3.2% |
17.4% |
Earnings have crumbled at Ladbrokes and the firm is in the middle of a cost-cutting business review and an attempted merger with Gala Coral. It’s hard to guess how things will eventually pan out, but Ladbroke’s combination of high debt, low dividend cover and an uncertain outlook is a turn off for me.
Betfair is very profitable and generates a lot of free cash flow, enabling it to fund growth without debt. However, the firm’s forecast P/E of more than 30 looks demanding to me. Earnings per share are expected to fall slightly this year before rising in 2016, but if future growth falls below expectations, the firm’s shares could fall sharply.
William Hill looks more appealing. This year’s forecast P/E of 16 should fall to 14.5 in 2016, and the firm’s steady dividend growth has been consistently covered by free cash flow in recent years. Debt levels are reasonable and Hill’s operating margin of 17% is three times that of high street peer Ladbrokes.
For a long-term mix of income and growth, I believe William Hill could be a sensible buy.
