Betting On Europe

Uncertainty represents opportunity. Sportingbet Australia is growing strongly, the Spanish business has just been licensed and we are confident that management can hold Europe at break-even during a period of regulatory and economic change. With over €130m of Turkey disposal proceeds still to come, our sum-of-the parts ranges from 42-55p and the FY13 EV/EBITDA is only 4.2x. Not for the faint-hearted, the shares have significant upside potential on a medium-term view.

Q3 Reflects Changed Business Mix
Q3 comparatives (revenue down 21%, EBITDA down 33%) reflect the sale of the Turkish website business, acquisition of Centrebet, and new gambling taxes in Europe. However, the Australian business continues to perform very strongly with like-for-like revenue up 46% and cost synergies coming through well. Our FY12 EPS estimate is unchanged (the mix is a little different). The jump in estimated FY13 profit mainly reflects the benefit of European cost savings, although we have reduced our FY13 EPS from 5.6p to 5.0p (broadly in line with consensus) to reflect management’s intention to reinvest European profits in newly regulated markets. If in-play betting is allowed in Australia (hopefully from end 2012) there will be a positive boost to results.

Surprises -- And Opportunities
Spain finally issued gambling licences on 1 June and miuapuesta.es is trading in time for Euro 2012 (after an injunction had forced the temporary closure of the old website). Sportingbet now derives about 65% of its revenues from regulated markets, although it still faces economic uncertainty in Spain and Greece (together about 22% of revenues). The Spanish events of the last few months were more damaging in that they highlighted the unpredictability of European markets until licensing regimes are fully implemented. However, Sportingbet also has growth opportunities elsewhere: in fast growing emerging markets and potentially also with partners in the US, which is slowly moving towards allowing some online gaming.

Valuation: Sum Of The Parts 42p-55p
On our estimates the FY13 EV/EBITDA is only 4.2x, a significant discount to the sector average. Our sum of the parts is at least 42p (40% above the current share price), even if the high-quality European sports platform is valued at nil. Even our 55p SOTP is based on fairly cautious assumptions, suggesting significant medium-term upside potential. Hoped-for newsflow later in the year regarding Australian products or US partnerships would be very positive triggers.

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