Playtech: Contrarian play or Value Trap?

Thursday, Dec 13 2018 by
Playtech Contrarian play or Value Trap

Warren Buffett once said that he likes ‘buying quality merchandise when it is marked down.’ Many of his investments have been in profitable, cash generative companies with strong brands, but were often trading at cheap bargain prices when he brought them. Stockopedia’s framework for classifying shares would categorise these investments as ‘Contrarian’. They have high Quality and ValueRanks, but typically have weak price momentum.

Until very recently, Playtech, one of the UK’s largest online gaming providers, fell into the ‘Contrarian’ category of stocks. The firm has now been reclassified as a ‘Value Trap’. These stocks tend to have weak price momentum and they may cheap for a reason - for example, they may have a deteriorating financial situation.

As Playtech has only just been reclassified, it is still uncertain what the correct classification for this company is. Its share price has fallen by around 46% over the last year. It has cheap valuation metrics (eg. a low PE ratio) and historically the company was both profitable and cash generative. What remains unclear is whether the firm will be profitable as we go forward. If Playtech remains cheap, but its financial situation deteriorates, then there’s a risk that Playtech could indeed be a Value Trap.

In order to explore whether Playtech is a contrarian play, or a value trap, we need to understand why its share price is falling in the first instance…

Why is Playtech’s share price falling?

Playtech’s share price is falling as more online gaming providers have entered the market and its profits are suffering as a result. The company has issued two profit warnings over the past year. On 2nd November 2017 a trading statement explained that ‘Playtech has seen a recent slowdown in certain parts of Asia due to recent changing market conditions.’ On 2nd July 2018, another trading statement noted that:

‘average daily revenue in Asia continues to be impacted by an increasingly competitive backdrop. Towards the end of the first half, this market has seen a particularly aggressive pricing environment from new entrants to the market and this has impacted revenue.’

Would contrarian investors like Warren Buffett see Playtech as an investment opportunity? To answer this question fully, it may help to take a look at one of the investments that Buffett made back in the 1970s…

Buffett often brought stocks which had been marked down as a result of…

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Playtech plc supplies online gaming software. The Company and its subsidiaries develop software platforms for the online and land-based gambling industry. Its gaming applications include online casino, poker and other pay to play games, bingo, mobile, live gaming, land-based terminal and fixed-odds games. Its segments include Gaming and Financial. Its Gaming segment includes Casino, Services, Sport, Bingo, Poker and Land-based. The Financial segment includes contracts for difference (CFD). Its business gambling software offering includes casino, live casino, bingo, poker and sports betting. The Company supplies software and services through online, retail and mobile operators, land-based casino groups and government sponsored entities. Its product suite enables players to access online, broadcast, mobile and server-based gaming terminals through a single account. Its subsidiaries include Playtech Software Limited, OU Playtech (Estonia) and Techplay Marketing Limited. more »

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4 Comments on this Article show/hide all

fredericktug 11th Oct '18 1 of 4

Brilliant article, thank you Alex. I am a holder and was thinking of selling, I still am. What has caused me to hold off for now is some material stake building in the company. Of course this could be more fools chasing after mistaken value, but one of them (at 5% I think) is ODEY, and another is Jason Ader (Springowl) - who has invested $100m I believe. It is also reported that the two are in contact. So it looks and feels to me like there could at least be value seeking activism coming on board, maybe more. I'm still sceptical but I thought I'd give it some time and collect the dividend, which I am hoping is relatively safe!

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ridavies 11th Oct '18 2 of 4

Very good article Alex which I found insightful and gave me considerable cause for thought. I have been a holder and follower of Playtech (LON:PTEC) for some years now. At times, I have actually been the only shareholder at the AGM! I think that the company has fallen into the trap of paying insufficient attention to the cash cow element of the business, Asia. That is where they have been hit in the soft underbelly, and that falls straight through to the bottom line.  That trap has been openly considered by the company in a number of their financial reports; they have been aware of it, but arguably did not take the threat seriously enough. At one time it was acknowledged that it was a risk - to be reliant to such an extent in profit terms on one distributor there. then they tried to excuse it away by saying that the distributor had a significant number of sub-distributors and therefore this meant the 'weakness' was less than it may have seemed, and less than it has turned out. The chickens have indeed come home to roost.  

They have made considerable efforts to diversify. In 2015, they bought a financial instruments company, probably with the intention of building up this side of the business. They took the current FD at the time off the main BOD and put him in charge of that (promoting the hitherto Investor Director to FD). Their plans for further expansion were due to come to fruition by the end of that year, calendar 2015. However, despite saying that both deals would be completed by September, they weren’t completed at all. One was an opportunistic move for Plus500 (LON:PLUS) which had run into regulatory issues in the UK and was available at a bargain price of around £4 a share; the other was an Irish company. BODs/CEOs generally take the credit for ‘successes’ and therefore they must take the flak for these ‘failures’. 

Although Playtech (LON:PTEC) claim that the financial side of their business continues to meet all criteria, it doesn’t really in come up to the mark versus companies like IG Group (LON:IGG) or even Plus500 (LON:PLUS). There have been other irritants which have cost time, money and probably most importantly focus like the Sun Bingo fiasco, but hopefully this will come to an end soon. The BOD seem to have an uncanny knack of upsetting shareholders; the latest of these is the award of a pay rise of £60k a year to the Chairman by the back-door; a seeming payment for failure!  

But there are quite a lot of reasons for optimism, when they can control the Asia situation where they haven’t really created a moat, a barrier to entry, which they have elsewhere. 

  1. They have made a major purchase in Italy where recently announced regulations are likely to strengthen the position. Snaitech is a major acquisition and Playtech (LON:PTEC) should be able to quite quickly whip it into better shape and use it as a building block for developments in Italy, a major regulated market. 
  2. Some of the funding for this has been the opportunistic success of increasing values of shareholdings in other companies, all of which have now been realised; the last to go at £15.50 a share was the shareholding in Plus500 (LON:PLUS), accumulated during the unsuccessful takeover of that company at the end of 2015, and since when Playtech (LON:PTEC) has been the largest single shareholder of Plus500 (LON:PLUS) with nearly 10%! Ironic, isn’t it, but it has been a valuable ‘investment’. In fact, whilst the Playtech (LON:PTEC) SP was falling from around £10 in early 2016 to its current sad level, Plus500 (LON:PLUS) SP was rising from around £4 to £15+! However, that is an aside. The rising value of shareholdings in other companies has helped to bolster the company’s finances and now they are gone helped to reduce debt / invest elsewhere – like Italy. 
  3. Most recently, they have been paying off the Italian acquisition’s high dividend debt by a new much lower coupon cash raising at 3.75%, and this should put Playtech (LON:PTEC) on a much sounder footing. 
  4. Playtech (LON:PTEC) is still one of the very top companies in its field. As at least one of two recent large investors have suggested, they should get out of financial services – 10% of their business - and focus on where they have historically proven they are superb practitioners – ‘over time we would like to see Playtech in the gaming business...and not have the distraction of other financial services holdings.’ If they do refocus, it should be better for the long term, though there is no immediate need to rush any pull out of financial services. All in good time, at a time of best advantage.
  5. Probably one of the more exciting developments covered in the H1 results was, and I quote: ‘In recent months Playtech and GVC have initiated discussions to extend its existing relationship. Negotiations are underway and both parties will update the market in due course. Playtech believes that given the competitive landscape and expected regulatory changes to the retail and online market in the UK, there is significant potential for both parties to find a way to work closely together. Both parties believe there is a mutually beneficial path forward which would allow GVC to realise attractive synergies whilst allowing it to access Playtech products and content, particularly outside of the UK in attractive markets where Playtech does not currently provide any products or content to GVC brands.’
  6. GVC are one of the go-getters in the betting world, and are not backward in developing a programme for any further changes in the US betting legal situation. Playtech are well placed to support them.
  7. Last but not least, they have added to the BOD, and I hope this in time will turn out to be a strengthening. I look forward to the proof! At least, I hope it will make the old group sit up and become less complacent, if the Asian situation hasn’t done that already.

...response continued below.

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ridavies 11th Oct '18 3 of 4

In reply to post #407314

... continued from above.

The former major shareholder, Mr Sagi, sold off several slots of shares at around £7.50. (He still holds some 6% by the way, so wot be pleased at the SP fall either), He has done the same in other companies. I put my medium term SP target at around £6.75 (€7.70), which happens to be close to the SP target shown on the Stocko page.

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aflash 12th Oct '18 4 of 4

Thank-you all,

Useful article and comments.
Although I reduced my position after reading here are a few new points.

The same table Alex uses to illustrate ROCE decreasing shows Cash flow increasing over 5 years.

There are two Piotroski screens: Price to Earnings and Price to Book. Presumably it fails both, the former for the reasons you mention and the latter because of Goodwill on acquisitions.

PTEC still qualifies for the Philip Fisher Growth screen which it joined in Feb 2018 before the profit warning 2 July. It may be dropped on revision. It now only has a Growth rate of 3 according to VectorVest. 

On 7 Sep PTEC announced the sale of its 10% stake in PLUS for 228$ mln. 

They made some money there! Shows good sense of timing to me. The Feb 2019 results will reflect this.

They have just made a bond offering at 3,75% and Moody's finds their outlook 'stable'. Not that either are that positive but the market gives them a chance.

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