The notion that a £1.2bn FTSE 250 growth stock is somehow ‘secret’ seems absurd. Nevertheless, I suspect Gamesys (LSE: GYS) may not be a company name most retail investors will recognise. Having climbed 120% since mid-March to an all-time share price high, this could be about to change.
What is Gamesys and what explains its recent gains?
Under-the-radar growth stock
Gamesys is an online operator of casino and bingo brands. You may recognise it by its previous guise: Jackpotjoy. Last year, the latter acquired the former, rebranded itself as Gamesys Group and became a member of the FTSE 250.
Among Gamesys’ key qualities, at least according to the company, are its strong cash generation, proprietary technology, and geographic spread. Brands operating under the parent company include Rainbow Riches Casino, Monopoly Casino and, as you might expect, Jackpotjoy.
Based on recent trading, these aren’t empty claims.
Earlier this month, Gamesys reported a very encouraging set of interim results to the market. These included a 101% jump in reported gaming revenue (to £340m), thanks to a strong performance in the UK and “exceptional growth” in Asia.
In line with its strategy, revenues in the latter jumped 92% year-on-year. This, Gamesys explained, was down to attracting more customers, the launch of its online gaming ‘stalwart’ InterCasino brand’ and ongoing momentum in Japan.
Although revenues in Europe fell, they rose 2% at the company’s Rest of World operations, with 37% growth achieved in the US. All told, adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) soared 75%.
With numbers such as these, it’s perhaps no surprise Gamesys has managed to reduce its debt burden. A maiden interim cash return of 12p per share was also announced.
It now plans to bring in a progressive dividend policy “to align the Group with its listed peers” while keeping some money on the side for potential growth-enhancing acquisitions.
A 33%/67% split should mean a combined total dividend of 36p per share for the current year. That’s a pretty attractive yield of 3.1% based on Gamesys’s share price as I type. Remember – this is primarily a growth stock.
Despite all this good news, Gamesys’ shares still trade at less than 9 times forecast FY20 earnings.
That looks like a cheap price to pay so long as the company really is able to continue reducing its debt burden (a remnant from when it was owned by private equity). It certainly looks cheap compared to peers such as Mecca-owner Rank which trades on a P/E of almost 17 for FY21.
Positively, Gamesys stated that trading had continued to be buoyant into Q3. As a result, management now predicts full-year gaming revenue and adjusted earnings will come in “comfortably ahead” of previous expectations.
Clearly, some of this news is now reflected in the share price. Nevertheless, the still-low valuation suggests more gains could be on the cards.
Best of all, the company looks like a good defensive pick in a highly uncertain market climate. There is, after all, a chance the coronavirus could return with a vengeance later in 2020 and people are again asked to stay indoors. In such a scenario, I struggle to see why the FTSE 250 member won’t continue raking in the cash.
Gamesys isn’t risk-free. Nonetheless, if you’re looking for growth stock at a very reasonable price, the shares certainly warrant consideration.