Small Cap Value Report (Tue 5 Nov 2019) - Gambling/888, BOTB, FDP, UPGS, FLTA, CTP

5th Nov '19 by Graham Neary

40 comments 8326 reads

Good morning folks,

Quite a few RNS's that may be of interest, but I'm going to start with a quick look at the gambling sector. This follows the publication of an interim report by the All-Party Parliamentary Group on Gambling Related Harm, which whacked a number of share prices yesterday.

Then the RNS's that I might look at are (provisional list):

Best Of The Best (LON:BOTB)
First Derivatives (LON:FDP)
UP Global Sourcing Holdings (LON:UPGS)
Filta Group (LON:FLTA)
Castleton Technology (LON:CTP)

Gambling Stocks

888 (in which I have a long position): down 15% in two days
Flutter Entertainment (LON:FLTR) (owner of Paddy Power): down 4% in two days
GVC Holdings (LON:GVC) (owner of Ladbrokes): down 10% in two days
William Hill (LON:WMH): down 17% in two days
Rank (LON:RNK): down 10% in two days

Gambling Related Hard APPG: Latest News

All-Party Parliamentary Groups are "informal groups of Members of both Houses with a common interest in particular issues".

They can't pass legislation, but they can make proposals, and their proposals tend to have a good chance of success (since they have cross-party support).

The work carried out on behalf of this particular group has been funded by (and I appreciate the transparency, with these names given on page 1 of the report):

Derek Webb, who has made a fortune inventing games for land-based casinos
Bacta, the trade body for operators of land-based games machines
Hippodrome Casino
Gauselmann Group, which owns the High Street gaming chain Cashino

I can't think of any reasons why these groups would want curbs on online gambling, can you? Similarly, it was a coincidence that Sheldon Adelson was Donald Trump's largest donor!

Conspiracy theories aside, let's review some of the key findings:

around 20% of online gamblers are net winners. This is not much worse than spread bet/CFD companies. For example, 25% of retail investors at IG Group (LON:IGG) [disclosure: long]…

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rmillaree

5th Nov '19

I don't understand this. The "edge" with any gambling product is negative which should mean that around 0% of gamblers are net winners (except over short time periods.)

It's actually not that hard to beat the bookies - if one shops around to find best value and is selective on ones markets and one takes advantage of the reasonably generous special offers available until you are blacklisted (all so easy to be blacklisted) its a pretty easy thing to end up with a positive edge or no real material edge for the bookie. Then add in the arbitrage bettors who can't lose providing they make sufficient volume of bets and that's a reasonable pool of bods before you get to the lucky so and so's in life (all Leicester City fans brave enough to bet on their team to win the league :))

cic

"....20% of online gamblers are net winners." What does this mean? The word "net"implies that this is over a number of gambles, so how many. If the probability of being a net winner on 2 gambles is 20% the probability being a winner on a single punt is around 44 %. At the same odds the probabilty of being a net winner after 10 gambles starts to be pretty small, and after 100 gambles infinitesimal. Without information on the time period, or average number of gambles the figure is completely meaningless. I don't believe it!

Gromley

It does all depend on what we mean by 'gamblers', if we are talking about pure games of chance, like roulette or slots then I would agree over a long enough period of time everyone loses.

However any game that has a degree of 'skill' it is possible to get an edge, whether or not it can be sufficient to overcome in the embedded house cut is another matter.

In my student days I work for a turf accountant and through reading up and observations, moving on to extensive analysis of results databases; i came up with a few reliable systematic approaches that worked reliably. I might go back at some stage and see if they still work.

Despite the quite healthy edge, the relative rarity of the opportunities caused me to drop this in the end. To make meaningful money I would have had to stake substantial sums (and therefore to have a very much more substantial 'bank'). Firstly this made the ROCE no too impressive, but would also create an elevated risk of my 'edge' being arbitraged away.

The approach, and as ever also the mistakes, however did teach me quite a lot that I also find useful in the stock market.

Gostevie

I have a theory, which I admit I haven't tested rigorously, that when betting on a sporting event that can only have a binary outcome (win/lose only, not win/lose/draw) one just might over time get a small edge by always betting against the English/British competitor. My reasoning is that some people will back the home competitor out of sentiment, lowering his/her/their odds below their 'natural 'level, with a corresponding increase in the opposition's odds. That said, any edge that this proffers is probably so small as to make it not worth the effort.

shipoffrogs

Yes, very apparent with England and rugby.

My theory is that one should never bet on Scotland to win at anything (for obvious reasons).

I think the problem with any theory is that there are bods with money who pore over the stats - so if there was an edge for betting against English teams and that was backed up by historical results one would expect the smart big money to be going for that exact option up to the point the margin did not exist due to the odds adjustment to take account of those bets.

qvg

Golfnut, me too

muzmanoz

This part of today's report caught my eye

"During Q1 FY 20, we successfully launched our offer in Germany on a major online platform there and now have the template for a pan-European roll-out which we plan to execute during the rest of FY 20 utilising third-party logistics. This is an exciting new development for the business and we will be investing in additional headcount to facilitate this."

Metatron

With respect whatever 'the 'edge' sports betting companies have there have always punters who have been able to beat them - the problem has always been getting the bets on.
If you doubt sports betting punters can be winners I suggest do some research on the Racing Post or At The Races top tipsters who have a large following - the reason why is that year after year their tips deliver if every tip is backed at the odds tipped at an overall significant profit.The catch is that bookmakers mark down the odds usually very quickly after the tips are made public.
Possibly the best market for making profits is just coming up consistuency betting in general elections .Punters who live in constituencies/regions far away from odds compilers living in London have the edge.
Note in the 2017 and 1997 elections spread betting punters who laid Tory seats made a fortune.Currently Tory seats are pitched at 310-315 - could lightning strike thrice?

andrewdb

Absolutely.
Politics.
got 23-1 odds for lab making the next majority govt, now I know lab are not likely to win, but they are better odds than 23-1 - and you can close out early on betfair exchange.
same for brexit and trump - made a bit on those and then lost most of my gains on the 2017 election by following groupthink.

On how _anyone_ makes money gambling, yes, in the long term the probability of ruin -> 1
but most people do not gamble forever.
We ought to note that the return of the market index can be negative over decades - (adjusted for inflation) prices were lower in 1849 than in 1720; were lower in 1949 than in 1871; and were lower in 1989 than in 1968 (h/t chris dillow for that sentence)

Luthrin

SCS (LON:SCS)

Parlour Product Holdings (PPH), an affiliate of US buyout specialist Sun Capital Partners, announced after market close that it intends to sell at least 5.38m shares in SCS Group through a placing. This represents approximately 13.4% of the company's current issued share capital (one third of PPH's holding). PPH bought SCS out of administration in 2008 and held it privately until it was floated again in 2015.

SCS Group subsequently announced its intention to potentially participate in the placing using its current buyback authority. The company says it will limit its participation to 4.99% of its share capital. Any shares purchased will be cancelled.

Tortoise investor

Hi Graham,

I think you might be giving all-party groups (APPGs) too much credibility when you say "They can't pass legislation, but they can make proposals, and their proposals tend to have a good chance of success (since they have cross-party support)."

APPGs are pretty far down the pecking order in the hierarchy of influence in Westminster. They vary in quality and influence, but tend to just have a couple of active MPs who convince other MPs to add their names to the official register of the group just to make the numbers to set the group up. In addition, they tend to be fronts for other causes and organisations who run the secretariat and fund the group (e.g. see here)

I think your statement might be better applied to Select Committees perhaps - but even then I am not sure their proposals have a good chance of success.

(For background I work in political lobbying and public relations).

Blissgull

rmillaree,

Absolutely. Beating "the odds" at the bookies is easy. The problem for successful gamblers is account restrictions.

It amazes me that people think they can profit in the financial markets by looking at a few charts, when they are up against huge money, institutions employing some of the world's best mathematicians and most sophisticated software and supercomputers, but think you cannot beat the bookies.

Every day bookmakers have to set odds on events they know nothing about, often involving animals they have never heard of and which may have never raced before. t

Simply taking bookmakers promotions can be lucrative until they restrict you. The best promotion of course is the pair of underpants which Paddy Power post to their punters after a few bets.

Andrew niven

i think the business model for this company is fragile to say the least and i also have serious concerns regarding management. I think this is a very high risk share and not for the faint hearted

mojomogoz

Luthrin

I wonder how the placing of Parlour/Sun Capital shares will go. Altogether Sun holds just short of 50% (I think). In the past SCS (LON:SCS) has bought a few percent off of Sun and placed in some employee incentive/retirement sort of thing (from memory).

I think SCS is an amazingly run business and presents good value....however, I sold out on the recent results. They were fine but illustrated that top line growth could be at risk. IMO the value and cash plus cashflow cover this quite well in a rational valuation sense. But I don't think the market is rational to it. The way it could have got some rationality applied was by being more active in managing the excess cash of the company. They should have instituted an active share buy back once the wheels came of the great thing they did with House of Fraser. Really unlucky that didn't work out due to bigger HoF probs but they then had a look at sofa.com (?) but backed away and let Mike Ashley have....phew as its a small capital hungry business that would require time, mgt focus and cash to make it work and it would be at risk of not working well given its outside of their C2DE demographic.

So the last results was the final straw for me as I felt they were leaving themselves hostage to fortune (market conditions, top line, sentiment, etc whatever) when they could be driving the future more and make eps go up handsomely for several years with buybacks irrespective of environment.

Sun obviously are a bit edgy. They did everything right really with SCS but they have not got the exit they want. Now it appears they are pushing the issue. I suspect there has been some tension and that SCS want to keep their cash to wait for opportunities to acquire. They 5% buyback from SCS is back foot defensive. I suspect that the share price could go down on this or become very weak on any weak trading update (I'm not forecasting that but I think their last results hinted at it)

jwebster

6th Nov '19

Zytronic (LON:ZYT)

Manufacturer of large format touch screens and associated control electronics.

Dividend yield of 11.5% ! Clearly a value trap. Or a beaten down small cap ? Worth a look.

Market cap is small at 32m but they have net cash of 12.1m which is positive. Last year ZYT generated 4.8m in operating cash and spent 3.7m on dividends so the dividend cover was good, especially given the net cash in the bank as a buffer.

Moving on to the bad news reported at the half year.

Firstly, revenue from gaming dropped from 4.2m to 3.1m. Secondly, product lines with higher margin falling away ".... the number of larger panels dropped by 35%... " leading to a reduction in gross margin from 39.6% to 34.7%. Outlook negative “…there are several projects that should improve performance as they come to fruition, at this stage the Board is taking a cautious and conservative view on an increase in activity levels from the Gaming sector in the second half.”

Looking at the revenue by segment for the half year versus 2018 half year.

Gaming 3.1 <- 4.2
Financial etc 5.1 <- 4.6
Other 1.3 <- 1.8
Total 9.5 <- 10.6

Could have done with some commentary on the ‘Other’ category as well. They also burned through 2.6m in cash with a fairly heavy 1.7m change in working capital. Of this, inventories grew by 0.9m, possibly due to the lower sales.

While revenue above reduced 1.1m cost of sales only reduced by 0.23m and admin only 0.05m thus PBT reduced 0.8m from 2.2m to 1.4m

So, if costs remain inflexible, a further reduction in revenue of 1.9m or so puts them nearly at a loss.

I do wonder why this company manages to exist given touch screens are dominated by big players in China, Japan and Korea. I suppose around 20m in annual revenues is so small ZYT can play a niche. They do say they have a patent on the multi-touch tech but my concern is the big players spend billions on R&D and lead the market. I think these small firms actually copy existing tech outside of patents and customise it for specific customer demands.

One to watch for the second half results, their revenue is too uncertain for me at this point.

MiserableJacktPotato

I’m no expert in how the figures break down, but over and above the reasons given for sports betting by others - a significant amount of the money gambled is on skill based games such as the various forms of poker and in my experience the it’s same user names that usually have large pots that they’ve won.

gus 1065

9th Sep '21

Rather than clog up today‘s SCVR, this seemed a more pertinent place to post a link to 888 Holdings (LON:888) proposed acquisition of William Hills’ non US businesses. It’s a big acquisition, more than doubling the size of 888’s current franchise so characterised as a reverse takeover.

https://www.investegate.co.uk/...

Initially being funded by underwritten debt, a future share issue of about £500m is proposed “in due course”. 888 Holdings (LON:888) are paying 9.2x EBITDA (pre synergies expected to take this down to 6.8x) off the back of their own current PE of about 19x so earnings enhancing. At face value looks a good fit - the prey becomes a predator as 888 was one of my expected bid candidates - but even at this larger size it just makes it potentially even more attractive to the private equity boys in due course. I would expect the competition authorities to call this one in for review.

Gus.

abtan

888 Holdings (LON:888) (I hold)

Thanks Gus,

As a holder I am stunned that they were able to raise £2b of debt given their current £1.5b Market Cap.

I've never been a fan of debt in general, so a part of me remains wary of the size of the deal. Even a 5% interest rate will add £100m in costs per year...which is pretty much what the current business makes right now.

I'm not bothered about the dividend and would rather they just slashed it in order to prioritise deleveraging; I'm surprised by their commitment today to continue with the current dividend policy.

I also wonder if the Board is going to be able to cope with all the avenues of growth it's pursuing right now. 3 big challenges come to mind:

Expansion in the US with Sports Illustrated, which launched this week;
the "re-launch" in Germany, as though it's a new market;
Today's acquisition (which includes a significant offline business.)

That's a lot to focus on.

---

The above concerns aside, 888 Holdings (LON:888) did need to do something drastic if it was to have any chance of joining the big players and accelerating its growth plans.

There have been so many consolidations in recent years in this sector too, and without any firms showing an interest in buying 888 Holdings (LON:888) itself as far as I know, so I note the irony that the acquisition includes Mr Green, which I previously held and was bought by WHI back in 2019.

I don't see a reason to sell my position right now, but I'm keen to see the final terms of the deal, particularly the cost of the whopping big loans being taken out. Looking 5 years out, if that debt can indeed be paid down as planned, this could look like a very good deal.

Hi abtan.

Yes it’s a big chunk to bite off. I’m quite sanguine about the debt. Given the nature of the bank group (short term investment banks rather than providers of long term capital) they will want this refinanced as soon as possible - probably through a combination of new equity (about 20-25% of current share count should get the £500m), longer term syndicated bank debt and possibly some corporate bonds. With a combined pro rata EBITDA of about £340m there’s plenty of headroom to service/pay down the debt in a reasonable timeframe provided they keep the business performing.

I suspect the big shareholders are already onside for the new equity to be issued and that the use of acquisition finance debt is to give certainty of funding for a deal that may be picked apart/delayed due to a review by the competition authorities without issuing new shares at the onset. My main concern, other than execution risk of digesting such a big spread of new businesses, is the background threat of some form of regulatory clampdown on the business in one or more of their jurisdictions could wallop the projections. Not without material risk but as you say five years from now it could well look like a great deal when seen in the rear view mirror.

Small Cap Value Report (Tue 5 Nov 2019) - Gambling/888, BOTB, FDP, UPGS, FLTA, CTP

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Graham Neary

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