Shares digital

The scandals to hit online gambling make for grim reading: 19 December, 2007 Microsoft; Google and Yahoo agree to pay a total of $31.5 million to settle claims that they accepted online advertising promoting illegal gambling, although not accepting any wrongdoing as part of the civil settlement. 20 March, 2008; reports emerge of a crackdown in Thailand with the Department of Special Investigations in Bangkok seeking to stop the rise in Thai teenagers gambling on national football games. 21 March, 2008; the US government urges Britain to amend new gambling laws as part of a drive against money laundering. 28 March, 2008; 13 people are arrested in the New York State of Albany, accused of running an illegal $50 million sports betting ring following an 18-month investigation into computer-generated bets. The ringleaders, both in their 60s, face up to 25 years in prison if convicted.

Gambling is not merely a form of entertainment, it is a cutthroat, highly competitive industry riddled with questionable legislation, particularly among online operations. Having spent decades trying to shake off its association with the criminal underworld the sector has now turned into a political battlefield. State monopolies are trying to protect their local economies by shutting out foreign operators with international trade bodies fighting these restrictions. Governments are under pressure to curb gambling addiction by raising taxes on gaming operators. The businesses themselves are under pressure from weaker economies prompting consumers to spend less. It is a state of affairs that is only going to get uglier.

Online battleground

The lock down in 2006 by the US over online gambling was a turning point for the industry. The news headlines were dominated by the arrests of David Carruthers, former chief executive of BetonSports, and Peter Dicks, Sportingbet chairman, in the US on grounds of running illegal online gambling services. The result was a flat ban on online operators accepting wagers in the US, severely reducing the valuations of affected businesses as they experienced a large hole in their revenues.

Operators subsequently increased their position in Asia and Europe, two regions with their own dubious laws, not least because most were written before the advent of internet services. While the rules over land-based gambling operations are relatively clear, the online environment remains open to interpretation. The London IPO of gaming operator AsianLogic in December 2007 illustrated the complexities of doing business above board. The Aim admission document contained 16 pages of risk warnings, led by the company’s legal advice on operating in countries such as Singapore, Malaysia, Japan and Indonesia. AsianLogic believes its advisers’ interpretation of the local laws allows for the business to operate legally, but the company warns that it can’t guarantee local authorities won’t take a different view. ‘Such events could have a material affect on the financial position of the group,’ says AsianLogic. Indeed they could.

The Asia and the Middle East gambling markets alone are forecast to be worth over $83 billion by 2012, currently dominated by casinos and lottery. Online services such as poker, casino and sports betting are the growth drivers. Globally, the online gambling market will be worth $24.3 billion by 2012, according to Global Betting and Gaming Consultants. A vast sum, but a mere 6.1% of the total market.

For traditional bookmakers including William Hill and Ladbrokes, online offers the most tangible growth opportunity rather than retail and telephone betting. The high street betting shop is in terminal decline, despite what the operators might want you to believe. ‘Gaming machines inside shops used to add incremental revenue growth. Now they are more substitutional,’ says Landsbanki analyst Mark Reed. ‘Someone who used to put £10 on a 2:1 bet on the 3.30 pm at Folkestone, for example, used to also pop a few more pounds in the gaming machines. They’re still doing both activities, but the overall spend is now £10, not £12.’ While there is still a place in the business mix for retail shops, it is easier for punters to have a quick flutter using their computers. Deutsche Bank analyst Simon Champion reckons telephone betting has lost out the most to the online channel.

Despite this, Irish bookie Paddy Power is planning new retail outlets in the UK, claiming there are many people without internet access who enjoy the atmosphere of shops as a place to bet. Further changes to the high street will happen from the £400 million sale of state-owned bookmaker Tote on the open market, a deal which will include ownership of more than 540 betting shops. ‘The sites were originally established around steel mills and coal mines, so in the current climate they are perhaps not the best locations. But they are a substantial estate, which rules William Hill and Ladbrokes out of buying the Tote on competition grounds,’ says James Hollins, analyst at stockbroker Daniel Stewart. The Racehorse Owners Association insists the Tote should stay within racing and not be sold to a bookmaker. Its campaign will not be enough to stop the likes of Paddy Power, betting exchange Betdaq, Irish bookie Boylesports and football pools operator Playtech competing for the sports betting business. Bingo and betting firm Gala Coral is seen as the front-runner for the Tote, helped by its private equity ownership.

Although bookmakers’ growth plans place them in direct competition with online gambling operators including PartyGaming and 888, they are taking business away from other companies such as bingo halls and, to some extent, pubs, with fixed-odds betting terminals (FOBTs) – or slot machines to those not familiar with the lingo. Server-based machines are able to automatically download new games every few weeks, keeping the punters interested in betting. In comparison, many of the pubs and bingo halls don’t have the latest technology so they need to physically replace machines to get new games. The UK government is not happy with the rise in gambling addictions and has commissioned a study to see if the problem is linked to FOBTs. Raising the taxes on the machines could have a significant impact on the bookmakers’ profits, apart from Paddy Power which only has a small fleet (on its UK estate) due to FOBTs being outlawed in Ireland. It may also thrown a spanner in the works for anyone interested in the Tote, as such machines accounted for 56% of its revenue in 2007.

Rules of the game

Clarity on gambling legislation across Europe hasn’t gone to plan. The Dutch Parliament decided earlier this month that Holland could do without online gambling, despite its lenient approach to marijuana and prostitution. Holland Casino, the state-run service, had signed up FTSE-listed Cryptologic to build its online gaming platform, but the Ireland-based software group has been left out in the cold on the decision. AsianLogic used to generate 10% of its revenue from Italy but pulled out of the country before floating last year after its lawyers couldn’t get comfortable on the country’s position towards online gambling. ‘The UK, Australia and Hong Kong are probably the few places with a clear legal position,’ says AsianLogic executive vice-chairman Tom Hall. ‘Hong Kong particularly, as it is strictly anti-gambling. It has a monopoly operator licenced to run bets on horse-racing and football. 100% of profits are ploughed back into the community.’

Sports betting is legal in Italy, but gaming – poker, casino and bingo – is not yet regulated. Sports betting group Leisure & Gaming proclaimed at the start 2007 that the Italian government had prepared the necessary regulation for gaming and that opening up the market would transform its business. ‘By the end of the year, Italy still hadn’t given permission for online gaming, so we’ve shut up about how our fortunes will be changed until the laws go through,’ said chief executive Henry Birch. He hopes investors will now value the company on its existing operations, not forward growth potential.

Many countries such as France have state monopolies over gambling. The European Union is slowly letting it be known that its cross-market trade treaty doesn’t support such behaviour in trying to protect local industries. It wants to stop the monopolies. Like most things in government, not a great deal has happened. A catalyst for change may emerge from French President Nicolas Sarkozy who is rumoured to be on the verge of liberalising online gambling in the country. Given that France will assume the presidency of the EU in July, Sarkozy needs to be seen to support the free trade treaty. Just don’t assume that it will be a free market, as Italy as illustrated. This country may have opened up its market to foreign operators, with Ladbrokes and Coral already present, but taxes on gambling are high, licences must be bid for and existing suppliers are seen to be given preferential treatment.

Institutional investors are sceptical about online gambling because of grey laws. Even hedge funds, with their appetite for high risks, are getting worried about investing in online gamers, should the companies be destroyed by huge fines. A catalyst for change will be the decision by the US Department of Justice on whether to punish online gambling operators who took bets from US before 2006’s lock down. Once a line is drawn under the issue PartyGaming will be instantly acquired for example. Technology giants Microsoft and Google will start to buy into the sector, as gambling is a natural extension to their online services, says AsianLogic’s Tom Hall.

Don’t expect an imminent resolution on US action, as the EU has made a counter-attack. It has launched an investigation into possible discrimination by the US towards the online gambling industry, which could lead to a formal complaint with the World Trade Organisation. Corporate transactions may be suffering as credit markets dry up, but lawyers need not worry about whether they can afford that third villa in Monaco, as here’s an industry ripe for legal assistance.

Small fish to fry

There are 14 companies in the gambling sector with market valuations under £50 million. Considering the sector has a reputation for fast growth and large cap heavyweight stocks, are these minnows clinging on to dear life? Lottery service groups are the real small fry. Half-year results for New Media Lottery Services, reported in January, show €1.2 million administration expenses against sales of just under €400,000. The company appears to surviving off loans from the directors – never a good sign. Another company waiting for its big break is the Weather Lottery, whose most recent financial results show losses widening, which it blamed on Aim charges. It has reduced the number of games available to save costs. With a £4 million valuation, Top Ten Holdings issued a profit warning earlier this month as the smoking ban reduces bingo attendance. Betbrokers’ intermediary betting services have been slow to take off. Bookmaker Neville Porter continues a run of bad luck. With a market cap of less than £250,000, it makes no business sense to remain quoted on Aim. Best of the Best is a nice little business and a welcome relief to its micro-cap peers. Its sportscar competitions in airports and online are doing well, but growth will rely on overseas expansion. A provider of mobile phone-based gaming technology, Probability has a growing army of fans in the City but we’re not convinced it will be the big takeover story alluded to by the management.

Key indicators

The economics:

• Changing consumer spending trends, with mixed opinion on whether gambling is resilient in an economic downturn

• Tighter legislation may reduce gambling and free up consumer spending for retail items, boosting the economy

• On the flip side, gambling is already a key contributor to the economy through taxation

• New casinos and gambling facilities create new jobs

• The smoking ban and tighter rules on gaming machines could cost jobs, if leisure facilities continue to see a reduction in trade

Key metrics used by analysts

• Number of active customers

• Average spend per head

• Average stake per product type

• Churn: new customer sign ups relative to active customers

TOP ANALYSTS

Simon Champion – Deutsche Bank

The favourite

With ten years’ coverage of hotels, gaming and tourism and training as an accountant, Deutsche Bank’s Simon Champion has found the right ingredients to grab the top spot as the highest-ranked leisure analyst in the UK.

The five star-rated analyst is the best in his field at predicting earnings, according to data specialist Starmine. Whereas many investment banks focus on the traditional bookmakers, Champion believes there is benefit in covering stocks across the wider gaming sector, to obtain a more rounded view.

For example, many analysts are cautious over following PartyGaming, saying there are too many questions over the murky legislation surrounding online gaming. Simon says this is a mistake. ‘If you look at Ladbrokes and Paddy Power, for example, you will see that online gaming has been the biggest growth driver recently – this applies to all of the traditional bookmakers really, apart from William Hill. If you’re going to have a proper view on these companies, you need to also have a view on online gaming businesses.’

Other stocks deemed useful in understanding the bigger picture, according to Champion, include Opap, which has the national rights to sports betting in Greece, and Playtech, which provides systems and games for online gaming operators. ‘With Playtech, you’re not placing a prediction on an individual player, but rather on the growth of the industry,’ he says, currently rating Playtech as a ‘Buy’ alongside Ladbrokes, Paddy Power and 888.

Champion admits his personal interest in gaming is limited, but benefits from ‘on-the-ground’ knowledge passed on by several friends who are semi-professional gaming players.

Ian Rennardson – Merrill Lynch

Pipped at the post

‘Be realistic,’ says Ian Rennardson on why his earnings forecasts tend to be accurate. ‘It is easy as an analyst to have a view on a stock and then do modelling to support your view. You need to be completely objective, working as a team with colleagues to judge what the company can achieve.’ The Merrill Lynch analyst is ranked second best by Starmine in terms of getting earnings forecasts correct. Rennardson puts his success down to ‘having a bit of history’, namely having worked in multiple sectors. After gaining a degree in applied physics, his career took him through Yamaichi International and Credit Lyonnais Laing before joining Merrill Lynch in 1997. Three years leading the European electronic manufacturing services research team was followed by a move into travel and leisure, where he now covers such stocks as Rank, Ladbrokes and William Hill. ‘Our view of the UK betting and gaming sector has been more pessimistic than most. The benefits of deregulation have not been as good as many in the industry expected, which could explain why we’ve got our earnings forecasts right,’ says Rennardson. He believes 2008 will be a difficult year for the industry, saying the government’s actions tend to be negative towards the UK gaming industry: ‘Shelving plans for the mega casino; not removing double taxation on bingo; looking at clamping down on betting terminals.’ What could be exciting, says Rennardson, is the potential medium-term opening up of Europe, if the EU can clamp down on country monopolies and open up trade to outsiders.

Mark Reed – Landsbanki

A strong finish

Having proved his worth as an accountant at PriceWaterhouse Coopers, Mark Reed has spent the past eight years specialising in the leisure sector, principally looking at hotels, tour operators, betting and gaming. ‘Being a successful analyst is more of an art than a science. It is a question of balancing what a company tells you with an understanding of the external environment, more often than not putting weight on the latter,’ says Reed. Having been a long-term seller of PartyGaming, Reed and his colleagues at Landsbanki dropped coverage of pure online gambling companies a year ago, tightening the focus on companies like Rank, racecourse operator Arena Leisure and traditional bookmakers. Among Reed’s current ‘Buy’ ratings are Ladbrokes and William Hill, despite saying that the regulatory threat on bookmakers is greater than the companies realise. Political figures are focusing on family values and mending a broken society, says Reed, but he still reckons the bookies stand a chance of trading well. ‘It is a difficult time for them at the moment. Retail takings are slowly grinding to a halt. Internet growth is moderating. Regulatory changes in different countries are forcing companies to pull out of certain regions, and competition is increasing.’ Mark may only be ranked sixth-best analyst at predicting earnings among leisure companies, but his intuitive approach to understanding the industry and accurate assessments of how companies will trade in different market conditions suggests that he could soon be heading further up the leader board.

STOCK FOCUS - BEST BUYS

PaddyPower - Irish charm

A bit of Irish charm goes a long way. The bookmaker has grabbed the top spot in its homeland territory and is now focused on overseas expansion. Over 50% of operating profit comes from online operations, which range from sportsbook to poker and financial spread betting. In Ireland, it is heavily dependent on horse-racing as land-base gaming machines are banned. The Cheltenham Festival held every March has historically been one of the big earners for the group, but it refuses to comment on how betting went until its AGM in May. It is rolling out new betting shops in the UK.

‘Paddy Power has a clever strategy,’ says Ian Rennardson at Merrill Lynch. ‘Willam Hill and Ladbrokes have around 2,000 shops each in the UK, out of 8,000 bookies. Paddies has opened up a fraction of sites but purposely selected those close to the most successful competing outlets. There is very little brand loyalty in betting, so Paddy Power just looks for where there is a strong, regular custom and opens up a shop there.’

The UK business could become loss-making in 2008 because of the extra costs of opening new shops. Current €/£ exchange rates could knock 2008 group profits by €4 million. These won’t be enough to dampen Paddy’s spirits as it drives further online gains. The company had a terrific 2007 and will be lucky to score so well again this year, so analysts have forecast margins to ease back to normalised rates. That said, Dresdner Kleinwort still believes that forecasts could be upgraded during 2008. It predicts a comfortable 11% rise in pre-tax profit for the year to €89.6 million. The shares, at €23.40, are trading on 15.5 times 2008 earnings. Well worth a punt.

PartyGaming - A brand apart

PartyGaming is one of the strongest brands in online gambling, has a diverse range of products and has recovered well from its US deportation. It bought Empire Online, Intercontinental and Gamebookers in 2006 to boost its casino and sports betting businesses.

The company faces a potentially large fine from the US Department of Justice, if it decides to punish online operators who took bets from the US prior to the ban. Chief executive Mitch Garber will leave in May 2009 after just three years in office, which creates some uncertainty over management until a replacement is found. Performance wise, PartyGaming increased ‘clean’ (namely before one-off restructuring costs) poker EBITDA in 2007 by 60% to $62.4 million on the back of European growth. Casino EBITDA was up 174% to $43.6 million, with sports betting generating $3.4 million against a $1.6 million loss in 2006.

The industry is facing higher marketing costs as companies try to fill the revenue hole left from being forced out of the US. PartyGaming’s promotions are clearly working. It is cash rich and well positioned for growth. ‘PartyGaming has a well-invested and robust platform that can support bolt-on deals, as well as an improving marketing function following the purchase of Empire’s assets and brands,’ says James Hollins at Daniel Stewart. The company’s

premium valuation has eased back with the shares, at 22p, trading on 12.9 times 2008 forecast earnings. Hollins reckons the stock should hit 33p by January 2009, implying 50% upside. Deutsche Bank is looking for 32p, after knocking a penny off its target to accommodate a potential slip in margins.

Ladbrokes - Online edge

Ladbrokes has grabbed the bull by its horns and now claims to be one of the world’s most profitable online gaming operators. It is exploring opportunities in Asia and is seeking to roll out several ‘local-language’ web services, having already launched one for Italians.

UK horse-racing costs have increased after caving in with a subscription to Turf TV, so all the major races are broadcast in its retail shops. Telephone takings have been good, driven by high rollers. High street operations are underperforming William Hill and it is also facing high debt costs, but its online success gives it an edge. E-gaming profit will be reduced this year as it makes investment for growth, but this will benefit the long-term potential gains.

Bid rumours keep reappearing and it is possible that private equity could buy the group, but this won’t happen until there is greater clarity on gambling regulations. Ladbrokes has benefited from new rules that permit television advertising in the UK for gambling. The first promotional campaign was credited as driving up football betting stakes by 25% since the start of the 2007/08 season. We downgraded Ladbrokes and William Hill in March following their results on grounds of regulation risks. Having since studied the industry to much greater depth, perhaps we were overcautious. Ladbrokes is our pick because of the online opportunities, so we upgrade to a ‘Buy’ as it is worth holding one of the big bookmakers in a portfolio of gambling stocks.

STOCK FOCUS - STEER CLEAR

Gaming VC Holdings - Felled by the EU

The business could be ruined if the EU doesn’t overturn a decision by Germany to ban online gambling. GamingVC operates German-language gambling services and has continued to operate in Germany despite the country outlawing online gambling in late 2007.

The company has taken the side of the EU, which doesn’t recognise the German legislation and wants to stop state monopolies. The EU took action against Germany and Sweden in January, saying their restrictions on internet-based gambling companies based in other EU member countries are not in line with its treaty for open international trade. The matter is liable to go to the European Court of Justice, which could drag on for months. House broker Arbuthnot said last September that if Gaming VC was forced to shut down operations in Germany, it would lose 74% of revenue.

The share price dropped nearly 85% to 88.5p between September 2005 and October 2006 as uncertainties grew over the legitimacy of its business. Gaming VC made the decision to diversify operations, which prompted a small revival in the stock, currently trading around 190p. The company holds a Maltese gambling licence and is permitted to offer sports betting in Italy. At the end of November, it had €14.8 million in cash. The dividend is forecast to yield 17.3% and the stock is trading on a price to earnings ratio of 3.7. On paper, these figures suggest the business is rich, cheap and generous.

If you accept the high risks, then there could be high rewards. Shares’ view is that the risks are too great to participate in the stock, regardless of any quick return. Until there is clarity on the German legislation, Gaming VC doesn’t have enough alternative business to fall back on, in our eyes.

Inspired gaming - Falling short

Don’t get carried away by the attractive client list including Ladbrokes and William Hill, as the group’s financial position could be in a for a nasty shock. The company has seen a decline in rentals and takings from gaming machines it supplies to pubs. This has prompted Inspired Gaming to conduct a strategic review of its pubs division (it also provides machines to amusement arcades, airports and bookmakers). The result will be published by June with the division either sold, spun out or closed. The best case scenario would be net cash inflow through a sale. The worst case is a closure which could result in large redundancy costs. House broker Evolution is confident that Inspired has the right credentials to offset any losses by winning additional business elsewhere. But the market obviously doesn’t agree. The share price has fallen 66% in the past six months, not helped by a failed takeover. Theoretically, Inspired should do well as server-based machines enable new games to be regularly supplied without having to replace the hardware. Bookmakers are reporting significant interest by customers in such facilities. Until the strategic review is concluded, we would advise staying clear of Inspired. Short of winning a major contract, there is little to suggest that the share price will do anything but keep falling in the short term.

Rank - Off the pace

A takeover is not going to happen soon, according to Landsbanki analyst Mark Reed. If this is the case, then the market will price down the shares to remove the bid premium which was the only factor propping up the stock. The resignation of finance director Peter Gill earlier this month doesn’t paint a good picture for the troubled Mecca bingo and Grosvenor Casinos operator. Having issued several profit warnings last year, driven by the negative effects of the smoking ban and changes to the type of gaming machines it was allowed, Rank recently said bingo trading had picked up in early 2008. Casino trading is still weak and its online arm, Blue Square, has recently suffered from an unlucky streak of sports bets in favour of the punters. Several shareholders are seen to be moving in on the company – Malaysian gambling group Genting and investment house Guoco hold large stakes, as do the Richardson property and haulage family. There is little attraction in owning shares in Rank. In December, the final dividend was cut and £30 million slashed from its expansion and refurbishment programme to help stay within its banking covenants. Land-based bingo operations look to be under pressure for months to come. Chief executive Ian Burke is under considerable pressure just to keep the business afloat, let alone push forward any development programmes. It will bid for a handful of the new casino licences promised by the government but this won’t save the company. Put your money elsewhere.

RISING STAR

Jumping the shark - Mor Weizer, chief executive of Playtech

With a valuation approaching £1 billion, pre-tax profit forecast to rise 50% in 2008 and a promotion to the main market on the cards, it is not hard to spot the rising star among UK-listed gambling stocks. Playtech may look like a technology business rather than a leisure outfit, but its operations are firmly embedded in the gambling industry, providing games and betting services for some of the world’s biggest operators.

Playtech provides investors with exposure to the thriving online gambling market but with fewer risks. It provides gambling operators with the technology to offer internet-based gaming or betting, currently having licence agreements with 56 companies including PartyGaming, The Tote and Betfred. Playtech earns royalties based on a percentage of the licensee’s revenue. As it doesn’t take bets directly, it is removed from any potential litigation problems that may arise from country-specific changes to how gambling is regulated. However, its revenue would suffer if a licensee was forced out of a country.

On the money

At 32 years old, Playtech’s chief executive Mor Weizer fits the demographic perfectly for individuals driving the market for online poker, casino and other games. Increasingly young adults with comfortable earnings are gambling their disposable income on interactive games, mixing up an excitement with the joy of fattening their wallets. Weizer may be young for CEO of a company set to qualify for the FTSE 250, but his strong performance since taking the reigns in May 2007 suggests he is more than capable of the job.

Playtech claims its iPoker network is the largest in the world, with around 75% of group revenue coming from its ten largest licensees. Asia has fast become a key region for Playtech, particularly since its licensees were forced out of the US in 2006. Last year was a turning point for the business, which finally saw its monthly revenue exceed that reached while it still provided systems to operators taking US bets. Playtech has invested $5 million in gaming operator AsianLogic including participation in its recent IPO. At the end of 2007, the investment had more than trebled in value. ‘AsianLogic were always going to be our gateway into Asia,’ says Weizer. ‘Asia has forty times more poker players than the US and Europe, which should give you some

indication as to how popular gaming is in the region.’

Playtech is in the process of rolling out its Asian P2P games via AsianLogic, where players use its platform to compete against each other, potentially having 50,000 concurrent players using its system. It promises to offer games directly for money, a remarkably different approach than most Asian P2P which have historically been played for fun, amassing points which are then redeemed for cash. Considering Asia’s established gambling culture, Playtech could be on to a winner if its systems can avoid the technical problems experienced by other operators whose platforms couldn’t cope with the demand.

AsianLogic already has a working partnership with Playtech, where it has a room of dealers that are broadcast live to Playtech’s licencees, effectively running a live casino broadcast into a player’s home via the internet. ‘The live dealer appeals to Asian people as it helps them feel confident about the game. For some, there is a fear of being manipulated by traditional online gambling as they don’t trust the technology,’ comments Weizer. ‘The live video stream is now taking off outside of Asia, into Europe and UK, especially popular with high rollers. The interaction creates a loyalty to the casino and we are in talks with land-based operators to offer such services.’

Staying mobile

In addition to online gaming operations, Playtech is hoping for success in the server-based gaming market via a subsidiary business called Videobet. ‘It is a way for land-based operators to reduce their capex. Instead of having to stick with the same game for 18 months, our software lets them change the products whenever necessary via a remote management set up,’ Mor explains. ‘We are in a window of opportunity. The competition is very limited with only a few companies doing server-based gaming.’ Investment bank Jeffries isn’t so sure, as analyst William Birch explains: ‘Playtech is wading into a shark pool, with server leaders Inspired Gaming, Global Draw and Cyberview having cut their teeth with the UK bookmakers and expanding globally. We believe it will be two to three years before Videobet makes a substantial contribution.’

Mobile gaming is also being explored, but Jeffries again doesn’t believe revenue will become material until at least 2010. ‘M-commerce has proved difficult to commercialise over the past five years, but new smartphones, regulation and agreements with mobile operators look to be gradually moving into an alignment where it could take off,’ comments Birch. UK-listed competitor, Cryptologic, has similar ideas and recently invested $6.1 million for a ‘significant’ stake in Mikoishi, a specialist in Asian mobile gaming.

Playtech is currently rated at 19.3 times 2008 earnings. Earnings per share are forecast to grow by 47% in the year. Competitor Boss Media was acquired last month for 25 times 2008 earnings (with 32% forecast EPS growth) by GEMed, a subsidiary of lottery giant GTECH and Swedish investment group Medstroms. Comparing the two ratios suggests that Playtech deserves a higher rating. As an investment, it has delivered nearly 40% gains in the past three months. This is quite an achievement against difficult markets. Weizer says the company is running internal preparations towards moving to the London main market. Although he refuses to put a date on a possible promotion, Playtech’s assumed qualification for the FTSE 250 means it should benefit from tracker funds investing in the stock, giving another reason behind further share price appreciation.

CHARTIST - by Simon Griffin

It is clear that the gambling sector has been under something of a cloud since May 2006, no doubt heavily influenced by the curtailment of an anticipated exponential growth horizon resulting from the effective closing of the US to an embryonic internet-based industry. The decline looks bad on the chart, approximately 60% or so to the January low, and as a result the sector has significantly underperformed the wider market. During the ten years to 2004 it pretty much remained within plus or minus 10% of the performance of the FTSE 100, however, prior to the aforementioned decline, it peaked in 2006, outperforming the wider market index by around 50%. Perhaps latterly we have simply seen a proportionate reaction to this preceding over optimism.

Technically the chart is now beginning to suggest that the decline in the sector is possibly bottoming. We have already seen an early indication in the form of positive momentum divergence between the troughs of price in November and January, and the corresponding but rising oversold troughs in the RSI study. We appear to have entered into a new phase with the market forming a higher low but not yet having had the strength to produce a higher high to supersede that seen in late February. To really get bullish, a break of the bear trend line would be needed, however, this would require a further 12% gain from current levels, though it would also then break above congestive resistance (previously support) that influenced in late 2006 and again last August and December. Any move below the March low would risk a drop to retest the January low some 10% below current levels.

William Hill (WMH)

BUY 382p TARGET 488p STOP LOSS 358p

A long established player in the betting market, Hill was initially unaffected by the sector sell off that developed in mid-2006, marking time in a tight sideways range until in early November it broke downward, testing clear historic support at 488p and forming a bear flag pattern in December. The pattern duly delivered with the expected matching drop in January. During this decline any upside corrections were capped by resistance from the 50-day average. Things now seem to be on the change as the spike low in mid-March did not produce lower momentum levels. Indeed bullish momentum divergence transpired and prices have moved above the 50-day average to test resistance from the bear trendline drawn off the close highs seen in October and December. The general pattern of price action is suggestive of a potential inverse head and shoulders, with a break above the bear trendline (a close above 402p would achieve this) signalling potential to re-test the resistance at 488p and possibly produce further gains.

Sportech (SPO)

BUY 78p TARGET 130p STOP LOSS 68p

One glance at the chart of Sportech, the owners of the venerable Littlewoods gaming brand, should shout ‘opportunity’ to any follower of charts. The shares have been ranging for the last seven years between 160p and 70p, with two excursions to 200p proving short lived. From a range trader’s standpoint the shares have been a great play buying at 80p and selling short above 155p, always with the sure knowledge of where the ‘game’ ended and a new trend would establish itself. Now the shares are close to the key 70p support level at a time when momentum can be seen to be signalling a positive stance as it rises against a backdrop of falling prices. The 50-day average has largely defined support and resistance over the last two years and a move above 80p would see its resistance broken along with the bear trendline that defines the last fall from 160p and would thereby add weight to the bullish argument and point to an initial target of a test of congestive resistance at 130p. The recent blips in volume also hint that there is significant interest coming in on the buy side. Close protective stops just below 70p would limit the downside nicely.