MOTLEY FOOL CAUTIOUSLY OPTIMISTIC ON ONLINE GAMING STOCKS

2 November 2007

Are online operators now coming up trumps?


The respected UK publication Motley Fool takes a cautiously optimistic view of online gambling stocks in an article by David Stevenson this week, who examines the post-UIGEA business environment one year on and asks: "Are the online operators now coming up trumps?"

In a well argued piece, Stevenson recaps the consequences to UK public companies of the unpopular American law, which triggered an exit from the lucrative US market of the big listed gaming companies with severe losses incurred all round.

In order to survive, the online operators had to re-invent themselves, writes Stevenson. Yet this week 888 Holdings was the latest web-based gaming company to unveil a winning hand with a 37 percent rise in third-quarter revenues, helped by new promotions and poor summer weather as more people stayed indoors.

The internet gambling firm is now focusing on revenue sharing deals in Latin America, Eastern Europe and Asia. It's also stockpiled cash to make acquisitions in the European Union following a recent Italian sportsbook launch. And 888's online bingo operation, the only previous acquisition, has doubled profits within a year.

According to the company, trading in October was even stronger following the UK launch of a new TV advertising campaign.

Stevenson also points to last week's equally upbeat update from the world's biggest online gaming player PartyGaming, whose third-quarter revenue grew 24 percent. Despite poker revenues dropping 3 percent, the real winners were casino income with a 158 percent surge and sports betting, up 91 percent.

The company expressed confidence over the group's prospects both "for the full-year and beyond".

The Motley Fool piece also considers Sportingbet, which it characterises as worst hit of the big three in share price terms over the last two years. Last week the group revealed a two-thirds increase in gross European profits in the year to July, with its share of the gross win, the amount the company takes from the punter, rising by 48 percent and customer numbers increasing by 14 percent.

Reporting period timing differences meant that in Sportingbet's case, the one-off hit caused by the enforced US sale fell within the accounting year. Thus the headline numbers showed a pre-tax loss of GBP 312 million as turnover plummeted 35 percent to GBP 1.3 billion.

Trading across the Sportingbet group was significantly ahead of the previous year and was in line with management expectations, according to the company, which again is expanding into new European markets like Turkey and Italy.

That said, Stevenson has some cautionary comments: The first is that these companies need to find new markets....and not all fresh ventures will succeed. The European Commission has been putting pressure on EU member states to encourage more players and to allow a free market in gambling. The last thing the gaming industry wants to see is another US style clamp down. But there aren't too many guarantees on the regulation front.

Secondly, it's a tough online gaming world out there. Getting new players is increasingly hard. At some stage, growth will top out and any economic slowdown will hit online gaming just like everything else. What's more, the balance sheets have been shot to bits by the US legislators.

"But after huge relative under-performance against the FTA All Share index, ranging between 44 percent for 888 to 73 percent for Partygaming and 86 percent for Sportingbet, a recovery may be on the cards," writes Stevenson. "Greater confidence about future prospects is reflected in PER multiples of between 10 and 14 times prospective earnings. And some 'industry consolidation', i.e. a bit of takeover activity, wouldn't do sector share prices any harm either.

"For those who like a bit of risk, it could be worth a wager."

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