The Motley Fool

Is this stock a buy after announcing a £15m acquisition?

Online gaming software specialist Playtech (LSE: PTEC) has announced a £15m acquisition today. It has purchased 90% of the issued share capital of bingo hardware and software provider ECM Systems. Does this make Playtech a buy for the long term?

Playtech’s acquisition of ECM seems to be a sound move. It helps to improve Playtech’s position within the UK bingo market, since ECM is a leading provider and licensor of digital bingo software. In financial year 2016 ECM reported revenues of £9.1m, and adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) of £4.5m. As such, a price of £15m seems to be fair given the financial performance of ECM.

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The deal provides Playtech with increased scope to provide omnichannel solutions to bingo operators by connecting their retail and online operations, as well as providing a platform to supply Playtech content. Furthermore, ECM’s complete customer support facility provides technical and repair services for all current and legacy products. This is in addition to its extensive range of handheld devices that could prove popular in an increasingly digital industry.

Looking ahead, Playtech is forecast to increase its bottom line by 21% in the next financial year. When combined with a price-to-earnings (P/E) ratio of 16.1, this equates to a price-to-earnings growth (PEG) ratio of only 0.8. This indicates that Playtech offers growth at a very reasonable price and could deliver strong share price gains over the medium-to-long term.

Low rank?

Certainly, Playtech’s outlook is more positive than sector peer Rank Group (LSE: RNK), which is expected to record a fall in earnings of 1% in the current financial year. This has the potential to hurt investor sentiment in the stock and could lead to underperformance in the short run. However, with Rank having a P/E ratio of 12.2, it continues to offer good value for money and could be subject to an upward rerating in the long term.

Where Playtech has a clear advantage over Rank is with regards to its income prospects. Playtech currently yields 5% versus 3.8% for Rank. Playtech’s dividends may be covered 1.3 times versus 2.2 for Rank, but with Playtech having superior earnings growth prospects its dividend appeal is likely to remain higher than Rank’s for some time yet.

Of course, the gaming industry has been the subject of intense M&A activity in recent years. Sector consolidation seems likely as it provides greater size, scale and diversity in what is becoming an increasingly competitive market. Therefore, while relatively small, Playtech’s acquisition of ECM is very logical and it provides the company with a new growth space for the long run.

As such, now could be good time to buy Playtech, with the company offering growth, income and value appeal. Today’s acquisition should enhance its income and growth prospects and could help to boost its share price performance over the medium term.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.