Playtech update

PTEC (Playtech) is a weird old company. At a market cap of £904m, it gets very little attention out of ADVFN posters. PER of just under 9, ROE of 20%, net cash £56m. A clutch of reports were issued by the company today:

• Acqusition of Geneity Ltd
• Signs German JV with Gauselmann
• Seals South African JV with Peermont
• issues KPIs

In the KPIs, total revenues up 89%. Everything is going up ... except the share price, which is down 4.6% on the news above. All very curious.

Just a reminder that I bailed out on PTEC earlier this year due to what I perceived to be the overwhelming smell of haddock.

298.5p

PTEC: Playtech

Sold my PTEC shares today for about 286p, having realised quite a substantial loss on them. Despite being on a PER of 8, and the prospect of the US opening up, I sold because:

• dubious corporate governance. The board seem to be the puppets of major shareholder Teddy Sagi. The company has bought businesses off of him.
• raising capital when the share price is cheap.
• Slight puzzlement as to why it doesn't want to move out from AIM to the main market
• On 04-Nov-2011, non-exec director Barry Gibson resigned "to pursue other interests". "I am stepping down from the Board as the increasing demands of my other commitments have meant that I am unable to devote the appropriate time to my duties as a Board member."
• Concerns over their broker resignation, Deutsche Bank. "There was speculation the split could be linked to a potential transaction that was either opposed by Deutsche or presented the bank with a conflict.". I asked about the possible implications of broker resignations on TMF, and received the rather chilling response: "I have never seen a good outcome when a Broker resigns". I received pretty much the same response in a private email.
  

Distinct whiff of fish on this one, so I'm out. It also fits a pattern of acquisitions and equity raising that I find suspicious. The share has 19% one-month relative strength, and 13% three-month relative strength, so there's obviously some momentum behind this share. So I certainly wouldn't rule it out going higher.

I used the proceeds to top up on AFF (Afferro Mining) and SHG (Shanta Gold). I'll explain the bull case on SHG in another post.

Diary: PTEC

In an earlier post, I mentioned about PTEC being up today. The source of the excitement has been explained:

U.S. Department of Justice legal opinion expected to open the door to Internet poker

Continuing:

Bronson estimated online poker in the U.S. to be a $6 billion industry annually. As poker becomes legal in more states, revenue would double, to $12 billion , he said.

Diary: PTEC

I see PTEC is up 15% in early morning trading today. There's no news that I can see, nobody is talking about it, volume doesn't look much to write about, so it's a puzzle as to what's going on.

I own some shares in PTEC, am I am torn over it. On the one hand, it looks cheap, and seems to have good prospects, but on the other, as I posted recently, I have concerns over corporate governorship. My gut is telling me to pull out. Let's see if it's right.

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.

Diary: growth versus value, ptec, jd., tcg, tt.

PTEC - Playtech

PTEC is down nearly 4% to 212p on news that it is to place shares at 215p, representing approx. 19% of the company's issued share capital immediately prior to the placing. The company has identified a number of bolt-on acquisitions and strategic joint ventures which require funding.

This will be an interesting one for me to watch.

The move seems ill-timed in view of the fact that the company is currently on a low rating; implying that the cost of the capital raised is high. Silly rabbits. It is expected that admission will become effective and that dealings will commence on 21-Dec-2011.

JD. - JD Sports

JD. down 4.9% on latest IMS updating progress since 17 Sep. "Continuing downward pressure on all elements of discretionary spending" about says it all.

TCG/TT. - Thomas Cook / Tui Travel

TCG is up 24% in early trading, having slid a monster 75% yesterday.

This chilling article from the Telegraph yesterday:

[It] has been forced to delay full-year results due tomorrow because its auditors cannot sign it off as a "going concern".

Holy Moly.  As a commenter noted:

The damage is done already by the media if nothing else.... The fact that the financial difficulties of this once great company are all over the media will make customers think very hard before booking holidays and flights with them which in the short term is the worst that can happen.

What's not getting a lot of media attention at the moment is TT. (Tui Travel). It had better hope it can steal customers from TCG is all I can say, because it's not looking too pretty either. It has only had been floated since Sep 2007, during which time it has never reported a net profit. z-score is a pitiful 1.03, it has net debts of £1.2bn, and an interest cover of 1.58. I suggest that, like TCG, it is far too vulnerable to setbacks, and should be avoided. TT. is currently up 10.5% in early morning trading.

Growth versus value

I saw an interesting post on Seeking Alpha, dated 02-Feb-2011:

• When both the CBOE Put/Call Ratio and VIX are high (compared to 6 month average), small cap growth will out-perform value a mean annualized 18.35%.
• When the CBOE Put/Call Ratio is low and the VIX is high, value stocks will outperform by up to 26%.

Currently, the VIX is high,and so is the CPC . Another interesting indicator is the Yield Curve. CXO Advisory looked at Ken Fisher's investigations into the yield curve. They conclude:

limited analyses do not support the hypothesis that growth (value) stocks systematically outperform when the T-note/T-bill yield spread shrinks (grows).

However, a reader submits that Fisher was not talking about th US yield curve, but about the world yield curve.

Amateur statistician hour now ... as I recently computed quartile PEs for a broad range of companies, excluding market caps. The data is fairly recent, an cover caps over about £200m. Here's the results:

Q1  7.9

Q2 11.1

Q3 15.9

So, we see that the median PE of the market is about 11.1 - an historically low figure. At the lower quartile market (the "value" shares), PEs are about 7.9 - which doesn't seem much of a discount to the market. Also, at the upper quartile (the "growth" shares), it's 15.9. This is slightly above the long-term median of shares, suggesting that you can buy growth shares today at prices which match historical averages (for the "average" shares, not the growth shares).

So, value shares are trading at only a small discount to the market, whilst growth shares are trading at only a small premium. This suggests that your bias should be towards growth shares, not value shares. You are only paying a small premium for growth, so that's where you should put your money.

In low growth environments, growth shares are likely to hold up better. If this whole Euro thing hits the fan, then I see value shares as being crucified further. Or, you're a macro-economist whether you know it or not.

I'll have some things to say about Jeremy Grantham, P/B values, and where that likely puts us in the cycle as regards the desirability of growth relative to value in a future article. Gotta crunch some numbers first, though.

Diary: CPP, PTEC, RM.

Just a round-up of various company news today.

CPP - CPP Group - Support Services - 130.5p/£223.7m
Up 10.4% today on latest IMS for p/e 30-Jun-2011:

We have continued the revenue growth shown in our half year results announcement, with Group revenue growing by 6% for the period. ... Costs and lost revenues associated with the ongoing FSA investigation have had a negative impact on margins, as has ongoing investment in the future growth of our business, the impact of which is partially offset by higher UK Identity Protection and Turkish Card renewals. Northern Europe revenue increased by 5% ... despite the ongoing suspension of new sales of our insured Identity Protection product through our UK voice channels. Operating profit for the region continues to be adversely impacted by associated costs and lost sales. ... Southern Europe continues to be impacted by well publicised challenging economic and regulatory conditions, and revenues have decreased by 6% ... North America has continued to exceed our expectations, and sustain the strong growth achieved in the first half of 2011. Revenues have increased by 26% ... India and China continue to drive revenue growth in Asia Pacific of 21%. With bankable populations of 748 million and 1,062 million respectively, we believe there is significant growth potential in these markets. ... Our financial position has improved ... On 28 March 2011 CPP announced that it was in discussions with the FSA in relation to certain issues surrounding the sale of the Group's Card Protection and Identity Protection products ... discussions are ongoing ... We anticipate continued positive Group revenue growth for the final quarter, albeit that revenues and margins for Northern Europe continue to be negatively impacted by the ongoing suspension of UK Identity Protection sales through CPP channels.

Strongly undervalued at a PER of 6.6. I really need to increase my exposure on this one. It's only a minute holding for me, but if I was going to choose 6 shares for a concentrated portfolio, I'd have this in it. Strong fundamentals, and totally hated.

PTEC: Playtech - Online gaming - 247p/£599m
Up 3.1% following successful resolution of staff disruptions in a number of William Hill Online operational locations, including Tel Aviv and Bulgaria. Cheap on fundamentals, in a growth market, but plenty of uncertainties regarding the possible conseuqnces of future regulatory environment.

RM.: RM - Software and Computer Services - 51p/£48m
Up an eye-popping 17.9% on the announcement of the resignation of CEO Terry Sweeney. I guess it's a case of "don't forget to close the door on your way out". Martyn Ratcliffe appointed Executive Chairman (1 June). Robs Sirs was going to leave after 21 years of service, but now isn't.

Diary: Peter Lynch, csinvesting, HIK

Peter Lynch
Here's an article in Yahoo Finance, which was originally published on Stockopedia, which advertises their screener. They put together the following criteria to emulate Lynch growth:

• Annual EPS Growth Rate >= 15% but <= 30%.
• PEG < 1.0
• Institutional ownership <50%
• Total Debt / Total Equity < 25%
• .Market cap less than $2 billion
• Operating Margin 5-Year Average >= 50% * Current Operating Margin. This is an attempt to screen for consistency of earnings, although this is difficult to do so effectively. One should ideally study the pattern of earnings, especially how they reacted during a recession
• Price-Earnings: The price-earnings ratio is less than the industry's median price-earnings ratio and less than the five-year average price-earnings ratio. Finding a good company is only half the battle in making a successful investment. Buying at a reasonable price is the other half
• No Financials

Lynch warns against:

• Hot stocks in hot industries
• Companies (particularly small firms) with big plans that have not yet been proven
• Profitable companies engaged in diversifying acquisitions. Lynch terms these "diworseifications."
• Companies in which one customer accounts for 25% to 50% of their sales

 One micro-warning signal, particularly important for cyclicals (manufacturers & retailers) is if inventories that are building up. If they are growing faster than sales, that is seen as a red flag. On the other hand, if a company is depressed, the first evidence of a turnaround is when inventories start to be depleted.

There is also a link to a discussion of growth investing on Stockopedia.

Blog: csinvesting
I just discovered a value-investing blog, csinvesting, which has some interesting content. Check it out.

HIK: Hikma Pharmaceuticals - Pharma & Biotech - 636.3p/£1.2bn
I was on the lookout for a growth company, and came across this stock. HIK is a pharmaceuticals company, with three segements: branded, injectable, and generic. It's on a PER of 18.97, so scrapes through as a GARP. Gearing is 41%, and interest cover is 10.6. It has net debt of £196m. I was going to write that off as an "immediate fail", but I think things aren't so bad. Net profit for last year was 61m, add back exceptionals of 3m, and you get an adjusted net profit of 64m. So it could pay off its debt in 3 years (196/64). It's median PER since flotation in 2005 is 18.7 - so it's about in-line. Revenue growth has been about 30% pa over the last 5 years, whilst operating profits have grown at a rate of about 24% pa. 5-year EPS growth is about 20%. Directors own about 30m worth of shares, which is a reasonably chunky amount. Median ROE over the last 5 years was 12%, which is a bit disappointing. I'd hope for 15%. Median 5-year operating margins were 19.6%, which look uninspired against AZN (Astrazeneca), which has a margin of 31%, and GSK (Glaxosmithkline)  of 34%. Take a look at the interview with CEO Said Darwazah for a run-down on the results for 2010. Motley Fool also wrote an article about it in August 2011. I can see the attraction in it, and I wouldn't necessarily rule it out as a GARP share. It doesn't seem to get much of a following on the boards. Perhaps one to keep on a watch list. If I had a choice, I'd rather have my CTN shares (I'm taking price into consideration).

Growth opportunities
My shares in IQE have been rocketing lately. I bought at the end of September, and have seen them go up 20% in the space of a little over 2 weeks. If only they all did that! It just goes to show that you can get some good things happen to you in depressed markets if you spot some companies with good growth opportunities. Much more exciting than owning those boring go-nowhere companies! IQE currently trades on a PER of 18.8, so I wont be looking to add more at these prices. This one to look out for dips. IQE hasn't been much of a victory for me, you should understand, because it only makes up 0.7% of my portfolio. I was waiting for my CTN money to come through, and anticipating further drops in the market.

I think there are some cracking growth companies still worth buying in the current markets. One is PTEC (Playtech), that provides software to online gaming companies. It's on a PER of 7.6, has ROE of 29%, and oodles of cash. Another one is PIC (Pace), the set-top box maker. It's on a PER of 4.4, has a ROE of 29%, although admittedly the debt situation is not good. Prospects do seem good, though. I also think SBT (Sporting Bet) offers very good value at a PER of 6.5, high ROE, and plenty of cash. I think it's important not to over-concentrate in a sector - especially in online gaming, which is one with many uncertainties surrounding it. If you're willing to cough up a little more, and go where there isn't as much growth, but still above-average growth, then I think there's quite a lot of opportunities: SN. (Smith & Nephew), BATS (Brit American Tobacco), MRW (Morrisons), DNO (Domino Printing Sciences), and I'm sure many many others that you could come up with that I had never even heard about.

888 a logical buy for PTEC?

Time for some totally random speculation.

Interesting recent statements for PTEC:

 Playtech is increasingly consolidating its position as the supplier of choice for technology and services for the worldwide online gaming industry ... The Board has determined that due to exceptional joint venture and near term acquisition opportunities currently under discussion in certain key markets, it will defer a decision over the interim dividend until the final results for 2011, in order to retain maximum flexibility.

 There are 3 interesting major shareholders in 888: E Shaked Shares Trust, O Shaked Shares Trust, and Ben-Titzak Family Shares Trust; "The Israelis". Together, they hold a combined value of £57.9m, out of a market cap of £106m (55%).

888 has been a fiasco lately. Maybe a shakeup would be something that the Israelis would welcome, and PTEC might be able to do that with a purchase (at the right price).

There's some other interesting angles to consider. 888 has a market cap of £105m, and net cash of £37m. That would give it an EV of £68m. Well, PTEC has net cash of £56m, so a buy would look within reach. Also, 888 has an EV/EBITDA of 3.92, compared to PTEC of 7.33 (according to SharelockHolmes). So PTEC might view it as value-enhancing.

Compare that with, say, BPTY, which has a market cap of £1bn, net cash of £180m, and EV/EBITDA of 13.52. BPTY is too big (although in the world of finance, that doesn't necessarily stop anybody) and probably too expensive to be interest to PTEC relative to 888.

I'm not saying it's going to happen, of course, I'm just putting down a marker so I can claim bragging rights if it does.

I was seriously considering adding 888 to sticky situations, but decided against it. Their ROE doesn't seem especially high. The Earnings Yield looks good, but given the instability of the earnings, it's difficult to determine if the return will be exceptionally high, or only mediocre. I like the restructuring angle, but I have doubts about the competency of the board. To buy a company, and then basically write it off a year later as a mistake is a great cause for concern. Also, my sticky sits already has a gaming company in it.

It's an interesting setup, and I have a feeling that the odds are good. I am keen to keep an eye on this one to see how this one plays out. I'm not brave enough to commit, though.