Growth in earnings of 29% this year and 9% during 2018 looks attractive, especially when the share in question pays a dividend that City analysts expect to yield a forward 3.5% in 2018 with the payout covered almost 2.3 times by anticipated earnings.
Yet the firm trades with a forward price-to-earnings (P/E) ratio of just 12.5 at today’s share price of 978p. In today’s bullish market, I think this valuation looks low and the firm warrants further investigation.
Strong trading
I’m talking about FTSE 250 company Playtech (LSE: PTEC), the online gaming and sports betting software supplier, which has grown both organically and through acquisition activity to become the world’s largest firm of its type.
The company’s products and services serve regulated online, retail and mobile operators, government-sponsored entities such as lotteries, and land-based casino groups. It’s hard to deny the popularity of such gambling activities around the world and I can see that the firm’s growth has been blown along by a strong tailwind since the company started during 1999.
With today’s AGM trading statement, chairman Alan Jackson confirmed that so far in 2017 trading has been strong. He puts this down to organic growth and “strategic acquisition,” such as the takeovers of BGT, Quickspin, ECM and Eyecom, which all occurred during 2016 or 2017.
A pipeline of acquisition opportunities
Growth-enhancing acquisitions can drive decent earnings, but it’s always worth keeping an eye on a firm’s debt levels as over-exuberance on the acquisition trail can lead to problems later if borrowings get out of control.
At the end of last year, borrowings stood at around 1.6 times the level of last year’s operating profit, which seems manageable. We’ll have to wait for the balance sheet in the interim report to see how this year’s deals have affected the level of borrowings.
Mr Jackson tells us that the firm’s merger and acquisitions (M&A) pipeline is strong and there are ongoing discussions with a number of businesses. I reckon we can look forward to more acquisitive growth over the coming years as Playtech becomes a consolidator in the market.
International expansion
Last year, around 40% of the firm’s revenue originated in the Philippines and 30% from the UK, with the rest coming from around the world. That suggests that the potential for further growth abroad could be large.
Since the beginning of 2012, revenue has shot up by around 325% and the share price by 325% too. On top of the capital gains, the rising share price has delivered to the firm’s investors, ordinary dividend payments have grown by around 125% over the period. That’s a cracking outcome on total returns from this growing business, which seems to be capturing an expanding market enabled by the proliferation of online devices.
Playtech’s growth story looks set to continue over the coming years, and the firm’s valuation today looks attractive. I think the company is well worth your own research and consideration right now.
