Playtech splashes out on affiliate

10th Mar 2011 17:31

Decent results from online gaming software developer Playtech were overshadowed by the decision to pay at least €104m to buy out affiliate business PT Turnkey Services (PTTS) from Worldwide Online Enterprises, a company controlled by Platech's biggest shareholder."Integrating these affiliate businesses into the group will enable us to provide current and future customers with a full service market leading offering," said Playtech chief executive Mor Weizer. "This makes our proposition particularly attractive to those businesses looking to operate in newly regulated markets and wanting a fully functioning and highly competitive offering from day one," Weizer added.Broker Peel Hunt played devil's advocate and said: "The alternative view is that the deal will dilute the pure technology/software story and, furthermore, the market is often suspicious of connected party transactions. Our view is that, judged on its acquisition track record to date, management deserves to be given the benefit of the doubt.""However, management will need to satisfy the market that there is compelling strategic logic behind the deal if the stock is not to be de-rated," the broker added.The initial consideration may be topped up depending on the performance of PTTS in a three year period after it has been integrated into Playtech, with the additional consideration capped at €140m.The acquisition is expected to be earnings enhancing for the group in 2011 and thereafter, with the group guiding to a 13% earnings boost by 2012.The assets being acquired had revenues of €90.2m and earnings before interest, tax, depreciation and amortisation of €18.9m in 2010. The group's full year results for 2010 saw revenues rise to €142.3m from €114.8m in 2009, while profit before tax ebbed to €67.0m from €70.34m.Adjusted earnings before interest, tax, depreciation and amortisation jumped 10% to €103.1m from €93.7m, broadly in line with market consensus.Cash balances at the end of the year stood at €68.5m, up from €58.7m at the end of 2009.The current year has started well, the company said, with like for like growth in daily average revenues for the first nine weeks of 2011 up by more than 8% year on year, excluding the effect of the closure of the French offshore market and acquisitions. The company had planned to move from AIM to a full listing on the London Stock Exchange this year but, after discussions with the UK Listing Authority, the agency responsible for assessing eligibility for a premium listing, the move to the full market will be delayed until 2012. The delay relates to the requirement that a company must have an audited track record covering at least 75% of its business for the past three years; owing to the fact that the company's online joint venture with William Hill was not formed until late 2008, Playtech currently fails to meet this requirement. A final dividend of €0.09 has been proposed, making the full year dividend €0.19, up 4% on 2009.Broker Daniel Stewart remains a fan of the stock and reiterated its "buy" recommendation. "We remain buyers of the stock as the acquisition further strengthens Playtech's position in the market," the broker said.Panmure Gordon is also a buyer, and has a 520p target price. "The valuation appears fairly compelling, with the stock trading on a 2011E price/earnings ratio of 10.6x and an Enterprise Value/earnings before interest, tax, depreciation and amortisation of 8.3x, supported by a 4.9% yield," Panmure Gordon said. "However, we think that the shares are unlikely to materially outperform until the appointment of a new, permanent, finance director and the move from AIM to the main list of the London Stock Exchange," the broker added.