Full-Year Adjusted Margins Up Threefold for Sportingbet

15 October 2008

Despite logging a £4.3 million loss for the year, Sportingbet, the online sports betting and gaming operator, saw its shares rally 7.1 percent today after revealing growth in net gaming revenue and adjusted operating profits.

Net gaming revenue -- which contains the London company's sports betting, casino and poker streams -- came in at £147 million, up 23 percent against the prior year. Operating profits before exceptional items, share option charges and amortization of intangibles, meanwhile, rose 363 percent to £22.7 million.

The company's adjusted operating margin, therefore, came in at 15.4 percent against 4.1 percent last year.

"For the margin across the year, I wouldn't say it is abnormally high," Andrew McIver, the company's chief executive, said today in a conference with analysts. "We still have those very dominant South European countries where they like these lovely big accumulators, so that the Spains, the Turkeys, the Greeces, are growing at 130 percent, is all very helpful to the margin."

The company's flagship betting business generated £90.3 million in net gaming revenue from £1.3 billion wagered. Europe and Australia, the company's principal territories of operation, yielded revenue of £71.1 million and £19.1 million -- up 43 percent and 54 percent, respectively.

Casino rose 25 percent against last year, generating £36.8 million across the company's territories, though the vast majority (£35.28 million) was derived from Europe. Poker, however, fell 28 percent to £20 million.

"The problem we have in poker, in common with a lot of the industry, is we have one arm up our back because PokerStars and Full Tilt continue to take bets from Americans," Mr. McIver said. "They have the big liquidity, that's where people want to go."

A headline issue on its third-quarter results in June was Turkey, a jurisdiction the company has served remotely for eight years. Between the third and fourth quarters, Sportingbet has reduced its exposure to Turkey from 13.7 percent to 8 percent of net gaming revenue.

Two of its junior staff members were arrested in Turkey in May while on holiday; the first was released in late July and the second just yesterday. While the first employee has returned to the United Kingdom, the second remains in Turkey. Both have yet to be formally charged though they await trial set provisionally for Jan. 26, 2009.

"We will continue to do whatever we can to get him out of the country in terms of more legal representation," Mr. McIver said with regard to the second employee still in Turkey, "because although the judge has said he must not leave the country, apparently that is legally challengeable."

The company has lessened its presence in the country by cutting off its advertising, Mr. McIver said.

The company's net gaming revenue across all territories in 2008 was split thus: Other (17.5 percent); Turkey (17.2 percent); Spain (17.1 percent); Greece (14.2 percent); Australia (12.4 percent); United Kingdom (8.6 percent); Italy (5.1 percent); Bulgaria (4.3 percent); Hungary (3.4 percent).

With regard to Sportingbet's Spanish-language operations, having brought its Spanish marketing partner in-house in July and launched an offering in Brazil in 2007, the company is mulling whether to expand its "Mi Apuesta" brand from Spain to South America.

Sportingbet is confident it will obtain a license and launch in South Africa by Christmas 2008. Meanwhile, the anticipated launch of live-video streaming for in:play -- the company's in-running betting service which accounts for 45 percent of its business -- is scheduled for Oct. 29.

In the first two months of the 2009 fiscal year, net gaming revenue is up 30 percent. The company ended 2008 with net cash -- minus long-term debt and customer liabilities -- of £28.9 million.

What the Analysts Say

Strong market growth dynamics with operational improvements underpin our Sportingbet forecasts and despite wider macro economic fears we think the group is well placed to deliver further earning growth in FY 2009. The business has trading momentum, cash on the balance sheet, strong structural growth trends and we think the current valuation of 5.6x 2009 earnings is compelling. In our view, as the group delivers earnings growth over the coming quarters and reduces exposure to Turkey, the current 50% peer group valuation discount will begin to narrow.

Richard Carter, Wyn Ellis and Douglas Jack | Numis Securities

Sportingbet has an enviable sportsbook operation with dominant market positions in the countries in which it operates. This makes it an attractive acquisition for other online gaming/sportsbook operators once the US legal situation is resolved. Today's prelims and update on current trading underpin our forecasts and we believe the current FY09 PE multiple of 4.9x is simply too low for a company showing strong revenue and operating profit growth.

Ivor Jones | Evolution Securities

These results are a great birthday present for investors. The industry seems to grow in waves and Sportingbet are right on this one. Sports betting is the latest product group to gain some momentum and with their Eastern European focus they are benefiting from economies that are yet to slow as much and where important factors such as broadband penetration and payment solutions are improving.

Simon J. Holliday | H2 Gambling Capital

Chris Krafcik is the editor of IGamingNews. He lives in St. Louis, Mo.