Investing in egaming? Look north 04/02/2010

David Myslinski, Redeye

IF YOU ARE an investor looking to buy stocks in the online betting companies, the Swedish market presents good opportunities. 

Last week my company, equity research business Redeye, published a sector report on the Swedish online betting sector, which includes a handful of listed companies of which Unibet, Betsson and Net Entertainment dominate, with market caps over SEK 2,5 billion (€225m), as well as smaller companies like Entraction, Redbet, Cherryforetagen and Betting Promotion. 

Last year the combined market cap of these companies grew 78% - significantly outperforming the Swedish stock market’s advance of 45%. Year-to-date, the sector has advanced some 15%, while the general market is flat. And despite the strong performance last year we believe there is plenty more for investors to look forward to in 2010. 

We estimate the sector gross revenue will increase by about 20% on an aggregate level. Given the scalability of the online business model - be it B2C or B2B - we estimate a growth in net profit of 34%. 

The valuation of the bigger companies such as Unibet and Betsson ranges between thirteen and seventeen times their estimated earnings per share 2010, which is in line with, or even slightly below, international peers. Considering the estimated growth in net profit, we believe there is still room for the shares to advance.  

The valuation of the smaller companies liked Entraction and Redbet ranges between seven and eleven times their estimated earnings per share 2010. This clear 'small cap' discount creates an investment opportunity in one of our top picks in the sector, software solutions supplier Entraction Holding: the low EV/EBITDA valuation of 4.6 makes it a potential acquisition target. 

With distinct economies of scale, the whole industry is in an intense consolidation phase, which is a potential trigger for all the listed companies. Last week shares of Cherryforetagen soared more than 100 % as the company announced the acquisition of online casino skin Coys. 

Also worth pointing out is the fact that the growth of the Swedish companies mainly comes from markets outside of the more mature Scandinavian markets. Considering the underlying growth factors, like increasing broadband penetration in south and central Europe and the consolidation in the industry, we are convinced that the sector will outperform the general stock market in 2010.

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Posted: 04/02/2010