Broker tips: Playtech, SIG
Analysts at Berenberg revisited Playtech's numbers on Friday, making substantial amendments to account for the firm's recent acquisition of Snaitech, concluded at the end of June and the group's latest profit warning issued on 2 July, flagging the increased competition in the Asian market.
On the positive side, Snaitech, Italy's leading betting and gaming machines operator, will be consolidated in Playtech's accounts from June, contributing an estimated €70m to the firm's EBITDA this year and an additional €150m on a full-year basis in 2019.
Berenberg felt Playtech's €846m acquisition of over 70% of Snaitech, would afford the group "much greater exposure to B2C business in regulated markets", as well as the potential for synergies, even if the broker thought that regulatory evolution in Italy was "not devoid of risk".
As well, stronger competition seen in Asia had led Playtech to issue a "sizeable" profit warning, with management lopping €70m off their forecasts for the company's EBITDA from Asian markets in the current year.
Berenberg included the warning in its estimates and also assumed no recovery in the Asian business beyond 2018.
"Following all of the above-mentioned changes, our price target on Playtech comes down significantly," the broker said as it slashed its price target on Playtech from 950p to just 600p.
"We acknowledge that with the share price plummeting, Playtech now looks very inexpensive on most metrics," the analysts said.
"However, we must point out that the company has issued two profit warnings on the same problems (first one in November 2017), and that it is quite difficult for an external observer to come to terms with the suddenness and magnitude of the last warning."
As a result, Berenberg opted to "remain cautious on the stock" and maintained its 'hold' rating.
Analysts at Canaccord Genuity said on Friday that the investment case for SIG continued to hinge on the success of its turnaround strategy to improve profitability and returns even while reducing leverage.
The Canadian broker felt that SIG's management was "doing a good job" of reducing leverage, expecting the firm's indebtedness ratio fall below 1x in 2019 thanks to recent disposals.
While SIG did not target an actual year by which to reach its operating margin of 5% and return on capital employed target of 15%, Canaccord now forecast the targets would be reached by 2021 at the earliest, rather than in 2020, as trading conditions remained "challenging" in the UK and the group's historical mismanagement would take time to rectify against a mixed market backdrop.
With leverage looking increasingly under control, assuming that markets do not deteriorate significantly and that management starts to deliver "meaningful self-help" from the second half the year, Canaccord said SIG's shares looked "well-positioned" for a re-rating to reflect "increased confidence in the success of the turnaround".
However, even as Canaccord recognised the lack of recovery priced into SIG's shares, the broker stood by its 'hold' rating on the firm until more evidence of margin improvement coming through from self-help was seen.
"The shares have performed very poorly year to date, down by c.20%. We continue to believe the shares could potentially exceed 200p over the medium-term if management delivers margins close to its targeted 5% but the market will likely need to see evidence of this before giving the benefit of the doubt," said Canaccord's analysts.
In addition to reiterating its 'hold' rating, Canaccord dropped its target price on SIG to 155p from its previous 165p mark.