Snaitech Sale And 308% Caliplay Stake Will Drive B2B Shift

Key Takeaways

• The sale of Snaitech to Flutter provides capital for special dividends and strategic B2B investments, enhancing shareholder returns.
  
• Expanding into U.S. and Brazilian markets and focusing on AI-driven operational efficiency will boost earnings and profitability in the B2B segment.
  
• Adverse operational conditions, litigation fees, and investment-related losses may hinder short-term profitability and financial performance, necessitating strategic adjustments.

Catalysts

A technology company, provides gambling software, services, content, and platform technologies worldwide.

• The upcoming sale of the Snaitech business to Flutter, expected to close in Q2 2025, is set to provide Playtech with significant capital for potential special dividend payouts and enable a shift towards becoming a more focused B2B operation. This should improve its balance sheet and enable strategic investments, impacting shareholder returns and cash flow positively.
  
• Playtech's strategic agreement with Caliplay, including a 30.8% equity stake and anticipated revenue growth in Mexico and other regions, is expected to boost Playtech's earnings and revenue streams over the medium term.
  
• Expansion into the highly prospective U.S. and Brazilian markets is projected to drive substantial future growth, despite short-term headwinds. Investments in these markets, particularly in live gaming studios, should eventually contribute positively to earnings and cash flow as market demand increases.
  
• Initiatives to enhance operational efficiency, such as leveraging AI for process optimization and focusing on cost efficiencies, should help reduce expenses and expand net margins, driving higher profitability in the B2B segment.
  
• Targeting regulated and high-growth markets for expansion, with investments in popular segments like live casino, enhances Playtech's revenue potential while improving operating margins by streamlining offerings and capitalizing on high-demand products.

Playtech Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Playtech's revenue will decrease by 0.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -16.1% today to 10.9% in 3 years time.
• Analysts expect earnings to reach €93.4 million (and earnings per share of €0.31) by about April 2028, up from €-136.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 45.6x on those 2028 earnings, up from -19.0x today. This future PE is greater than the current PE for the GB Hospitality industry at 17.8x.
• Analysts expect the number of shares outstanding to grow by 0.75% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.66%, as per the Simply Wall St company report.

Playtech Future Earnings Per Share Growth

Risks

• The new terms of the Caliplay contract and adverse FX movements have impacted margins and additional B2B services fees, which may reduce short-term profitability and affect overall earnings.
  
• The business faces ongoing litigation fees that could continue to impose financial burdens, potentially impacting net margins and free cash flow if not resolved favorably.
  
• Investments in the U.S. and Brazil, which are currently leading to operational losses, pose short-term headwinds for EBITDA and cash flow, and they are highly dependent on future market success for returns.
  
• Underperforming businesses, including HappyBet, generated significant negative EBITDA and free cash flow, which could weigh on overall financial performance until resolved through restructuring or closure.
  
• Regulatory changes and stringent requirements in emerging markets like Brazil may temporarily impact revenue growth and cash flow, as these can introduce compliance costs and delay market penetration.

Valuation

• The analysts have a consensus price target of £9.066 for Playtech based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £11.03, and the most bearish reporting a price target of just £6.24.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €854.9 million, earnings will come to €93.4 million, and it would be trading on a PE ratio of 45.6x, assuming you use a discount rate of 7.7%.
• Given the current share price of £7.02, the analyst price target of £9.07 is 22.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.