Designing software for the gambling business is a specialist industry where reputation counts for everything. That is why Playtech (LSE: PTEC), one of the world’s largest specialist gaming software producers, has been able to grow profit at a rate of 20% per annum for the past six years as sales have expanded at an average rate of 30% per annum.
Today the company reported yet more growth for the year to the end of December. Revenue for the period expanded 14% on a reported basis to €807m and reported net profit increased by 29% €248m. Adjusted diluted earnings per share ticked higher by 14% giving management the confidence to hike the overall dividend by 10%.
Unfortunately, it looks as if the market is not pleased with these figures as shares in the company have plunged by more than 10% in early deals, but I believe that this could be a great opportunity to buy.
Cash cow
As well as its impressive earnings growth, another of Playtech’s attractive qualities is the group’s cash generation. Free cash flow before dividends for the year was €160m and the firm ended the year with a cash balance, excluding client deposits, of €413m. Management is planning to use these funds for bolt-on acquisitions, which is a crucial part of the company’s growth strategy.
Still, despite Playtech’s impressive record of growth, and robust balance sheet that can fund more deals, the shares look cheap.
Based on current City forecasts, the shares are trading at a forward P/E of 11 and support a dividend yield of 4.4%, the payout is covered twice by earnings per share and, as mentioned above, is backed up with €413m of cash. This is why I believe that this company could be a starter investment for those looking for a home for their first £5,000. The shares are cheap, Playtech has a record of rapid expansion in a niche industry, and there’s a market-beating dividend yield on offer. What’s not to like?
Undervalued growth
Playtech isn’t the only company that I believe is suitable for beginner investors. VP (LSE: VP) is another undervalued income and growth play that I believe won’t let you down.
City analysts have pencilled in big things for this equipment rental business. Earnings per share are expected to expand by 67.3% to 79.4p for fiscal 2018, before rising 18% to 93.7p for fiscal 2019. This sort of explosive growth usually warrants a high valuation but that’s not the case with VP. Indeed, the shares currently trade at a modest forward P/E of only 10.7 falling to 9.1 for 2019. Analysts also expect the firm’s dividend payout to rise in line with earnings growth. On this basis, the shares are set to yield 3.3% by 2019, which is in line with the market average, but this is unlikely to be the case for long with the payout growing at a double-digit rate every year.
Like Playtech, VP also has a record of explosive profit growth. If the company hits City forecasts for 2018, it will have increased net profit by more than 100% in the space of five years on revenue growth of 50%. Over the same period, the per share dividend payout will have nearly doubled. As long as VP can keep this record up, and I see no reason why it can’t, it could make a great starter investment for your portfolio.
