Monday, December 26, 2011

Diary: Is David Einhorn getting this right?

Just having a look at PTEC (Playtech), capitalised at £699m. Brickington Trading Ltd. (Tedi Sagy) owns £291m (42%), whilst David Einhorn owns 8.9m shares worth £20.6m personally, with his hedge fund (Geenlight Capital) owning an identical amount. So the total holding is 6.2%.

But there are some things that worry me. Directors shareholdings are practically non-existent, totalling £56,300, for starters.

The company was floated in 2006, during which time revenues have increased at a rate of 35.6% pa. Operating profits have increased at a rate of 25.6% pa. Number of shares in issue has grown at a rate of about 4.5% pa - pre-placing. So far, so good (if perhaps a little too good). It has net cash of £56m, trades at a yield of 6.7%, and a PER of 6.6. The latter figure is a little suspicious considering it's such a rapidly-growing company. ROE is 28.9%, but it's a figure that's been declining every year since flotation.

The company recently had a placing, taking the number of shares in issue from 242.7m to 289.2m. That is to help its acquisition strategy. They seem to be undisciplined. Issuing shares when the price is cheap doesn't seem like a great strategy, especially in light of steadily declining returns on equity, and lack of insider holdings. Playtech does actually provide legitimate software, so we've got that at least.

Could be a "magical formula" company. I must say, though, that there's a fair element of doubt in my mind about what's going on here. I hope David Einhorn knows what he's doing.


Wexboy said...


Actually, I think you might be double counting - I've never seen a personal David Einhorn holding, and I think the David Einhorn PTEC filing simply reflects Einhorn's controlling stake in Greenlight. You'll see this problem with a multitude of filings in the US, makes 13Ds and 13Gs almost indecipeherable in some cases. So I think there is only a 3.1% Greenlight holding in PTEC now.

I agree with your PTEC dubiety. I love the growth, and I much prefer investing in the back office, not the front office, of online casinos due to the regulatory uncertainty/risks involved. I also understand that the business is incredibly sticky, so it is v difficult for PTEC to lose any business.

However, like too many other companies I know, a great business is too often ruined by bad management... Surely there's a Buffett quote on this?! I'd love to invest but I don't trust Tedi, or management, or their hell-bent acquisition strategy. It's a shame, I may miss out, but I'd prefer to wait for a change in the controlling shareholding and management and/or a declaration that they are refocusing on consolidation and organic growth.

Also: I would usually be v happy with an Einhorn endorsement, but I was aghast when he was prepared to pay $200 mio for a small/non-controlling stake in the NY Mets, an awesomely pathetic team who lived on nostalgia for over 2 decades now. (Maybe they should team up with Chevrolet - their ad strategy's now reduced to suggesting Americans buy a Chevvy simply because their Dad did..?!.) This is the only really bad financial decision (narrowly avoided) I've seen him make - I wonder if his fondness for poker influenced his PTEC investment? I'd also estimate that PTEC is probably less than 0.5% of Greenlight's AUM, so Einhorn's usual/amazing level of due diligence may be missing from this stake so far.



Mark Carter said...


Good post, and it reminds me of a point I forgot to make. It isn't clear whether Einhorn considers this a serious investment, or is a "fun" holding due to his love of poker.

For some bizarre reason, Investegate wont allow me to perform a search, so it'll take some digging before I work out exactly what Einhorn's interest in the company is.

Like you say, PTEC has a very sticky business, and from that persepctive it's really good.

But then we get to the whole Tedi thing, where PTEC has been buying businesses off of him. Then there's the resignation of Deutsche Bank as their brokers. We're told that they "grew apart" from the company. Huh? What's that supposed to mean?

And like I say, PTEC is on a market cap of nearly £670m, so it should be on plenty of people's radar. Mr. Market might sometimes behave a little odd, but I'd expect a growing company such as PTEC to have a PER rather higher than 6.6. Maybe it's the profit dip in 2010, or maybe it's the rights issue that's put people's backs up. Mind you, PTEC has been steadily declining throughout the year, so it's like there are a lot of known issues with PTEC. It's true that it's been a bumpy ride for the indices this year, but PTEC has been sliding all the way down.

I dunno. There's just something fishy about this company. It seems almost unbelievable that Einhorn could walk into a trap, yet even the best investors make mistakes, and like you pointed out, PTEC might not have been subjected to his usual level of scrutiny.

Very interesting to see how this plays out.

Anonymous said...

Any further comments on this company folks? :)

Mark Carter said...

"Any further comments on this company folks?"

Well, I made a completely bad call on this. As it turns out, David Einhorn knew EXACTLY what he was doing, as PTEC has trounced the indices since the blog article was originally published. It is now part of the FTSE 250, rather than the AIM, which gives it more credibility.

It beats me as to what will happen next.