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.

Strong results

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.

Still cheap

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.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

After many years of private equity ownership, this company went public in January 2017 and has struggled to attract investor interest ever since. This lack of investor interest could be something to do with the fact that the business’s former owners lumped it with a lot of debt and, until 2018, it was heavily loss-making.

However, in recent years, the company’s fortunes have started to improve. 

JPJ reported a net profit of £15m for 2018 and net debt declined from £311m to £287m. City analysts are expecting further progress on all fronts this year. They’ve pencilled in a net profit of £76m for the year, and earnings per share of 98p, which puts the stock on a forward P/E of 6.7.

Clearly, the market is sceptical that JPJ can hit this target. Nonetheless, I think this could be an excellent opportunity for savvy investors to snap up a bargain which has the potential to more than triple in value from current levels.

Making progress

In my view, JPJ needs to prove to the market that it is making substantial headway reducing debt and growing earnings. Luckily, it is doing just that.

According to its results for the six months ended 30 June, the company generated free cash flow of £30.8m during the first half of the financial year, allowing it to reduce net debt to £270m. Management expects borrowing to decrease further during the rest of the year as gaming revenues expand. Gaming revenue increased 14% year-on-year during the first six months of 2019. 

Following this growth, management says that it is “confident” that the company can meet full-year earnings expectations. To help complement growth, the group acquired sports betting business Gamesys in June. Management expects the acquisition to complete in the third quarter of 2019. 

As the company continues to invest in growth and reduced debt, I think the market should take a more favourable view of the business. It might take some time, but with the rest of the sector trading at a forward P/E of around 16, JPJ looks severely undervalued. In my opinion, the potential rewards far outweigh the risks of investing here. 

Cash cow

Another stock that I think has the potential to double your money is homebuilder Barratt Developments (LSE: BDEV).

Barrett is an income and growth play. City analysts have the stock yielding 7% this year and the same again in 2020. On top of this, shares in the business trade at an undemanding nine times forward earnings. 

Thanks to booming demand for the company’s properties, powered in part by the government’s Help to Buy scheme, Barratt’s earnings per share have increased at a compound annual rate of 30% over the past six years. I think it is unlikely that this trend will continue indefinitely. 

Going forward, I reckon a conservative growth figure of around 3%, in line with inflation, is more suitable. Even at the slower rate of growth, I think the stock can double your money. Earnings growth of 3% coupled with a dividend yield of 7%, gives a potential total shareholder return of 10% per annum. At this rate of return, it would take just 7.2 years to double your money. 

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However, after watching the share price fall more than 40% over the past three months, I reckon now could be the time to get involved. 

Cash cow

The first thing that you notice when you look at Jackpot’s balance sheet is the company’s debt. At the end of 2017, the firm had an adjusted net debt balance of £387m, and an adjusted leverage ratio of 3.6 times. But this balance is falling rapidly. The group’s results for the nine months ended 30 September, which were published today, show the adjusted net leverage ratio falling to around three times. Meanwhile, adjusted net income increased 36% year-on-year, partly thanks to a 36% decrease in interest expenses. 

Jackpot’s hidden weapon is its free cash flow. For the year to the end of September, the group generated operating cash flows of £33m, most of which was used to pay down debt. 

In my view, this robust cash generation indicates that Jackpot is set to become one of the market’s top income stocks when debt is reduced to an acceptable level. Management is targeting a leverage ratio of below 2.5x earnings before interest, tax, depreciation, and amortisation, at which point “the Board can consider options to return cash to shareholders.“

As group free cash flow was £31m for the year to the end of September, I think cash returns could exceed £30m per annum, which gives a yield of more than 26% on the current market value. 

That said, Jackpot’s outlook isn’t wholly speed-bump free. In today’s release, management acknowledges that headwinds, including the expiration of a non-compete arrangement and additional gambling regulations, will hurt revenue growth over the next 12 months. So, I’m not willing to bet the house just yet. Nevertheless, with a potential dividend yield of more than 20% on the horizon, it looks to me as if there’s a wide margin of safety in the figures for investors buying today. 

Slow and steady 

With so much debt on the balance sheet, some investors might not be comfortable owning Jackpot. If you fall into this bracket, I think you should check out Secure Trust Bank (LSE: STB). 

Secure Trust has grown rapidly over the past five years, expanding revenues from £57m to £131m for 2017. Analysts expect the business to report further growth in 2018, with revenues set to rise to £154m, and then £181m in 2019. Off the back of this revenue growth, analysts think the company will earn 187p per share in 2019.

Historically, Secure Trust has distributed the majority of its earnings to investors via dividends. Analysts expect this to change over the next few years, however, as earnings growth accelerates. Payout cover is predicted to rise from 1.4 times in 2017, to 2.1 by 2019. 

I think these numbers could be conservative, considering Secure Trust’s history of distributing close to 100% of earnings. And analysts’ yield projection of 6.1% for 2019 understates Secure Trust’s true potential as an income play. Even if I’m wrong, a yield of more than 6% is nothing to be sniffed at. What’s more, today the stock is trading at a forward P/E of just 9.5. What’s not to like? 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The reason for investor caution is clear. The company is drowning in debt. At the end of 2017, JackpotJoy had an adjusted net debt balance of £387m and an adjusted leverage ratio of 3.6 times.

However, while the debt mountain is concerning, JackpotJoy is a cash cow and it’s rapidly paying off creditors. The company generated a free cash flow from operations of £97.8m last year, giving a free cash flow yield of 15.5%. 

Management is committed to cleaning up the balance sheet over the next few years and it has the resources to do so. A recent trading update declared that revenues during the first two months of 2018 have increased by 12%. That puts the company on track to generate a similar debt-reduction performance again in 2018, as well as meeting other obligations.

And once debt is brought down to a more sustainable level, I believe JackpotJoy will start returning excess cash to investors, so this could also be a future dividend champion.

Less than cash 

Another out-of-favour recovery play I like is Game Digital (LSE: GMD).

Like many of its high street peers, Game is suffering from its high fixed cost base (rental leases), rising costs overall, as well as shifting consumer shopping habits. These pressures resulted in the group announcing a 56% decline in profit before tax from its core retail operations for the 26 weeks ended 27 January. 

Thanks to a positive £2.6m contribution from its growing Esports business for the period, overall profit only declined 26%. But more importantly, Game generated £32.2m in cash from operations during the period, up 25.3% year-on-year. 

Game ended the period with £85m in cash and equivalents with almost no debt, compared to a market capitalisation of £63.6m at the time of writing. Put simply, the company as a whole is now worth less than the value of cash on its balance sheet, making it a traditional value play.

Including intangible assets, the shares are trading at a price-to-book value of 0.5.

Misleading figures 

My final ‘absurdly cheap’ pick is motor retail and aftersales company Lookers (LSE: LOOK). 

Shares in this car dealer have lost more than 27% of their value over the past 12 months because of concerns about the state of the car market in the UK. Indeed, after years of above-average growth, fuelled by easy credit, new car sales slumped 15.7% in March, extending the run of falling sales to 12 months. As a result, fearing bad news ahead, investors have fled car stocks.

I believe this presents an excellent opportunity for value investors. You see, while headline numbers show car sales in the UK are collapsing, according to official figures from the Department of Transport the average age of vehicles on Britain’s roads is now more than eight years, its highest level since the turn of the century. Nearly 20% of cars are at least 13 years’ old. Sooner or later, drivers will have to replace these vehicles. 

And when sales growth does pick up, shares in Lookers could see a substantial re-rating. The stock is currently trading at a forward P/E of 6.7, which, in my opinion, is factoring in the worst case scenario and leaves no room for positive surprises.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

As I’ll explain, traditional high street businesses with strong online operations can still have a lot to offer investors.

41%+ and counting

Shares of the world’s largest online bingo operator Jackpotjoy (LSE: JPJ) have risen by 41% since its flotation in February 2017. This solid performance has put the £600m firm well ahead of many other shares in which you could invest your money.

However, the stock’s momentum seems to have petered out and the shares have been largely flat since October last year. Even today’s full-year results haven’t moved the needle. The share price was almost unchanged at the time of writing, despite the company reporting a 14% rise in gaming revenue last year.

Investors don’t want to play

One reason for investors’ lack of enthusiasm could be that Jackpotjoy’s adjusted net profit fell by 9% to £76.1m last year. Adjusted earnings per share fell 10% to 102p, leaving the stock on a P/E of about 8.

A second concern is that high levels of debt seem to be preventing the group from paying a dividend. Although adjusted net debt fell by 5% to £387.3m last year, that’s still equivalent to 3.57 times adjusted earnings before interest, tax, depreciation and amortisation (EBITDA).

A net debt-to-EBITDA ratio of more than 2.5 times is normally considered high. Jackpotjoy’s ratio of 3.57 times is uncomfortable in my view, especially as growth doesn’t seem particularly strong.

I’m out

The group’s adjusted earnings are expected to rise by 13% to 115.5p per share this year, leaving the stock on a forecast P/E of just 7.1.

But with a mountain of debt and no dividend, I believe there are better options elsewhere.

A sure winner?

FTSE 250 firm Rank Group (LSE: RNK) is the operator of Grosvenor Casinos and Mecca Bingo. It also operates a number of online brands.

The group’s mix of online and physical venues means that its internet operations have very strong brand recognition, which is helping to drive strong growth.

UK digital revenue rose by 16% during H1, while digital operating profit rose by 56% to £11.4m. That’s almost level with the £12.7m operating profit provided by Mecca venues during the same period.

Despite this, overall revenue growth is slow. Both Grosvenor and Mecca venues saw a fall in visits during the six months to 31 December, limiting growth.

A stock I’d buy now

Rank’s profitability improved significantly during H1. Adjusted pre-tax profit rose by 17% to £40.2m while adjusted earnings climbed 16% to 8p. These gains were matched by cash generation from continuing operations, which rose 19% to £61.9m.

The group ended calendar 2017 with a net cash position of £4m and free cash flow of £65.2m, or 16.7p per share. This covers the forecast dividend of 8p per share twice, making this payout very safe indeed.

Although Rank will need to manage a gradual shift from venues to online, progress so far seems encouraging. With the shares trading on a 2018 forecast P/E of 13 and offering a cash-backed 3.7% yield, I believe this stock deserves a buy rating.

The post Why this FTSE 250 dividend stock could be one of the best stocks to buy now appeared first on The Motley Fool UK.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The online bingo behemoth declared that gaming revenues grew 14% in the nine months to September, to £222m, with sales rising by the same percentage in the third quarter to £75.4m.

Meanwhile, adjusted EBITDA rose 11% during January-September, to £85.9m, although momentum here has slowed in recent months due to larger marketing spend. Earnings jumped 4% in quarter three, to £26.7m.

Commenting on the results, Jackpotjoy said: “The strong trading momentum seen over the first six months of the year continued into Q3 and into the early stages of Q4.” It added that management “remains confident in meeting the upper end of market expectations for 2017.”

Fancy a flutter?

Jackpotjoy is the country’s largest bingo operator and it continues to add players at a terrific rate. In the last quarter the number of active customers jumped 13% to 251,186, which helped real money gaming revenue per month increase 16% to £22.6m.

The London firm’s tentacles stretch far and wide (it commands a market share of around 25% in the UK and 24% in Spain), and it has a brilliant retention rate thanks to the strength of its product portfolio with a particular focus on creating a ‘community feel’ for its gamers. And these factors continue to send turnover to the stars.

Now, whil it is expected to print a 4% earnings reverse in 2017, it is predicted to snap back next year with an 11% bottom line improvement.

The gambling giant has seen its share price detonate in recent times, gaining 50% in value during the past six months. Despite this, however, it can still be picked up for a song, the firm changing hands on a bargain forward P/E ratio of 8.5 times.

Although Jackpotjoy does carry some regulatory risk, of course, I consider this too cheap to pass on right now given the firm’s exceptional long-term profits outlook.

Pins powerhouse

Hollywood Bowl (LSE: BOWL) is another leisure stock in great shape to deliver exceptional profits growth in the years ahead.

Its site refurbishment programme continues to impress, as does performance at its new sites, and as a consequence the ten-pin titan saw revenues shoot 8.9% higher in the year to September, or 3.5% on a like-for-like basis. And with the nation’s bowling appetite continuing to hot up, Hollywood Bowl has seen takings picking up the pace too more recently (the top line swelled 10% during April-September).

Hollywood Bowl is expected to have endured a 17% earnings decline in the last year on account of its large capex bill. But the business is predicted to get firing again from this year onwards, and a 12% earnings rise is estimated for fiscal 2018.

Despite its bubbly long-term earnings outlook, it still deals at a very tasty discount, a prospective P/E multiple of 14.8 times falls below the widely accepted value terrain of 15 times or below.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Hollywood Bowl. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Similarly, a new structure either through reorganisation or merger can create uncertainty. However, this increased risk can mean a company’s shares offer a wider margin of safety. As such, for long-term investors there can be investment opportunities at times of change within a company. With that in mind, these two stocks could be worth buying today.

Management change

Announcing news of a change in its management structure on Monday was Jackpotjoy (LSE: JPJ). The world’s largest online bingo-led gaming operator released a statement to say that its CEO Andy McIver will step down from his position.

The reasons given for the change is that the company is seeking to strengthen its operational focus and that it has appointed several highly experienced divisional managing directors. As such, current Chairman Neil Goulden will become Executive Chairman. Additional operational expertise will be provided by Group Managing Director Simon Wykes.

Looking ahead, Jackpotjoy is expected to post a rise in its bottom line of 10% in the next financial year. It trades on a price-to-earnings growth (PEG) ratio of just 0.7 and with a great deal of sector consolidation taking place at the present time, a bid approach would not be a major surprise. With such a large margin of safety and a strong position within its key markets, the company appears to offer investment potential for the long run

Merger potential

Having undergone a merger just under a year ago, Ladbrokes Coral (LSE: LCL) is apparently mulling a merger with sector peer GVC. Whether this goes ahead or not, the original Ladbrokes and Coral merger caused significant costs last year and many investors seem unsure as to whether the rationale for the combination is strong enough to support significant future profit growth. Evidence of this can be seen in its 6% share price fall during the last year.

However, with the company forecast to post a rise in its bottom line of 77% in the current year and a further increase of 34% next year, it seems to have high growth potential. As well as this, it trades on a PEG ratio of only 0.3 at the present time. This suggests that it has a wide margin of safety that could improve its risk/reward ratio for the long run.

Ladbrokes Coral also appears to have income appeal. It is forecast to yield 5.1% from a dividend that is covered 2.4 times by profit. As such, with a mix of dividend, growth and value appeal it could be a top performer for the long run.

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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. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

However, the company has one thing holding it back: debt

Growing out of debt

Jackpotjoy is highly leveraged. At the end of the first half, the company reported an adjusted net leverage ratio, including earn-out liabilities, of 3.6 times. Gross debt including earn-outs was £415m, compared to total shareholder equity of £237m and tangible assets of only £64m.

Such a high level of gearing may put most investors off the company, but management is working hard to change the group’s financial situation. 

During the second quarter the company generated 30p per share of operating cash flow and for the first half, operating cash flow was a total of £46m. Jackpotjoy has virtually no capital spending requirements, so all of this cash flow was devoted to debt pay-down. 

Gross debt has fallen by £100m since the end of 2016 and going forward it looks as if this pace of debt reduction is sustainable with a free cash flow around £50m per half (based on current figures, excluding any growth). With this being the case, the company should be debt-free within four years, and this will almost certainly result in a re-rating of the shares. 

The shares currently trade at a forward P/E of 7.9, a depressed valuation that reflects market sentiment towards the company’s elevated debt levels. Debt reduction should drive the valuation up to the sector average, which implies an upside of more than 100% of current levels as the gaming sector currently trades at a median P/E of 15.

Cash cow

As the company reduces debt, Jackpotjoy looks set to break out and so does the Phoenix Group (LSE: PHNX).

Phoenix is a consolidator of closed life assurance funds particularly, closed life and pension funds, which it acquires and then manages. Earnings from this business are unpredictable, and the company has reported a loss in two out of the past six years. 

Nonetheless, City analysts expect the firm to return to profit this year and have pencilled in a pre-tax profit of £189m for this year, followed by a profit of £209m for 2018. The company returns most of its income to shareholders with a dividend payout of 50.2p per share pencilled in for this year, equal to a yield of 6.5% at current prices. If the company can sustain its profitability, then the shares looks set to break out as investors re-rate the business as an income play. The company has always returned the majority of its earnings to investors, but unstable profits have recently overshadowed its income potential.

What’s more, between 2017 and 2018, management is looking to generate between £1bn and £1.2bn, and by 2020 cash generation of £2.8bn is targeted. For some comparison, the company’s current market capitalisation is £3.1bn.

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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors. 

The company, which describes itself as “the largest online bingo-led operator in the world,” posted strong growth in revenue (13%) and adjusted EBITDA (15%) for the six months to 30 June. And there was an impressive acceleration of growth in Q2, with revenue increasing by 17% and adjusted EBITDA by 28%.

Despite the strong performance and the shares trading at a new high of 680p, a company-commissioned research report published this morning suggested “the stock trades at a significant discount to peers” and advised “we would expect a re-rating as the market regains confidence in the business.”

Lack of confidence

On the face of it, a forecast P/E of 7.1, falling to 6.1 next year, is dirt-cheap. So, what’s behind the market’s lack of confidence?

It may be lingering doubts about Jackpotjoy’s antecedents as Intertain when it came under attack in a report by short-sellers Spruce Point. An independent committee appointed by Intertain dismissed most of Spruce Point’s allegations but the upshot was a major boardroom overhaul and a decision to change the company’s name to Jackpotjoy and move its listing to London.

Chief financial officer Keith Laslop survived the purge, having also previously emerged little scathed as a director and chief operating officer of the somewhat notorious Gerova Financial. He had rubbed shoulders (as a defendant in a civil lawsuit but not in a subsequent criminal trial) with Gerova fraudsters Jason Galanis and Gary Hirst.

Then again, perhaps some investors are concerned by Jackpotjoy’s still-high level of debt, its lossmaking statutory profit numbers or simply the business dynamics of online bingo. At any rate, I see the company as sufficiently problematic to put it on my list of stocks to avoid.

Cunning plan

At a current price of 59p, shares of Tungsten (LSE: TUNG) are 85% down from their September 2014 high of 400p, despite the company’s revenue having increased threefold in the intervening period.

Tungsten was founded by City financier Edi Truell and raised £160m in 2013. It bought a long-time lossmaking and near insolvent US e-invoicing firm for £101m. The firm as it stood was worth next to nothing — Tungsten booked £98.7m as goodwill — but Truell had a cunning plan to use its large database of buyers and suppliers to create a lucrative invoice discounting business, offering early payment facilities to suppliers. To which end Tungsten also acquired a subsidiary of an Israeli bank for £30m.

In search of a profit

To cut a long story short, Truell subsequently departed, the company sold the bank in favour of third-party financing and the financing business still hasn’t taken off, with Tungsten reporting revenue of just £152,000 in its latest financial year.

New management has had some success in bumping up prices in the e-invoicing business and flogging customers add-ons such as spend analytics. A decreased EBITDA loss to £11.8m from £16.2m was hailed as progress but it was helped by the company capitalising software development costs (£3.6m) for the first time in its history.

Tungsten remains a company in search of a way to make a profit and an impairment of that £98.7m goodwill is surely overdue. It remains firmly on my list of stocks to avoid.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Despite this, there could still be a number of stocks with investment potential. Many shares have high growth rates which may not yet be fully reflected in their share prices. Here are two companies which could fall into that category.

Strong results

Reporting on Thursday was competition specialist Best of the Best (LSE: BOTB). The company announced a rise in revenue of 7%, with profit before tax increasing by 42.7%. This was aided by the success of the company’s strategy, with its revenue continuing to shift towards online and away from physical sales. In fact, around 80% of sales are now generated online, which reduces the company’s risk profile since new sites are not necessarily required.

The company announced a special dividend of 6.5p per share, with a 1.4p ordinary dividend also set to be paid. This puts the company on a yield of 2%, with dividends being covered 1.7 times by profit. Therefore, there could be scope for further growth in shareholder payouts in the long run.

However, it is with regard to the company’s earnings growth potential where there may be even more appeal for investors. Best of the Best is making investments in its online marketing, while it is seeing margin growth because of improving scale and competition frequency. This is allowing it to negotiate better prices on cars purchased, which is a trend that could continue in future. Therefore, while a relatively small company which has a high risk profile, it could prove to be a sound buy.

Low valuation

Also offering strong growth potential is online bingo operator Jackpotjoy (LSE: JPJ). While its bottom line is forecast to fall by 7% this year, it is due to reverse this decline with growth of 11% next year. This has the potential to gradually improve investor sentiment in the stock as the company’s financial performance improves.

Since Jackpotjoy trades on a price-to-earnings (P/E) ratio of just 6.3, it seems to offer excellent value for money. In fact, when combined with its forecast growth rate, its rating translates into a price-to-earnings growth (PEG) ratio of only 0.6. This suggests that share price growth could lie ahead after its 6% gain of the last month.

Clearly, the online gaming sector is becoming more competitive, and sector consolidation may therefore become more likely as incumbents seek to reduce costs. Due to Jackpotjoy’s relatively low valuation and upbeat growth prospects, it could be a realistic bid target. However, even if an offer does not come to fruition, it could still prove to be a strong investment for the long term.

The post 2 small-caps with stunning growth outlooks appeared first on The Motley Fool UK.

More reading

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• £15,000 invested in UK shares a decade ago is now worth…
• 3 FTSE shares with many years of consecutive dividend growth
• Prediction: Diageo shares could soar in the next 5 years if this happens…
• With a P/E of 5.9 is this a once-in-a-decade opportunity to buy dirt-cheap easyJet shares?

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.