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The online gaming market is ill at ease with itself at present. This is largely because of the atmosphere created by PartyGaming, the FTSE 100 behemoth that generated a tremendous amount of pre-and post-float excitement on the back of its historic profitability and top line growth rates, and thrilling predictions of future expansion.

However, a mere four months after the IPO – from which its shrewd founders pocketed a few billion or so – the optimism has disappeared. A brutal profit warning poured cold water not only on PartyGaming’s growth, but also on the consensus in the market that this sector will seriously outperform all others over the months and years ahead. (The warning also added muscle to the notion that you should never back an IPO, regardless of how large it is, if most of the new money is going directly to the founders rather than the company!)

As PartyGaming was promptly shedding vast chunks of its market value, analysts and commentators were appraising other niggling issues in the sector, most notably the simple fact that the activities of many of the big (off-shore) global players may be illegal in the US, the country that is supplying most of the punters.

And, even if this issue is finally put to rest (few analysts actually believe US legislators will make any moves against the off-shore gaming ventures) there is the simple fact that competition is becoming fiercer and barriers to entry falling fast. The latest entrant to the scene in London was one-time shell Interactive Gaming, an AIM tiddler which purchased London-based fixed-odds bookmaker Premier Bet for £1 million.

Of course, against all these risks sits the simple possibility that, over the longer term, the entire online gaming sector will deliver strong – if not electrifying – growth. Indeed, Global Betting & Gaming Consultants estimate the internet betting market will burgeon from US$9.3 billion in 2004 to US$18.6 billion by 2008, with online poker a major growth driver. And, if the competition in the market does hot up, consolidation could provide solid rewards for all players. If you want to succeed you just have to ensure you don’t overpay for any company you back.

Executive appeal at erstwhile shell

One venture that looks attractive is Leisure & Gaming, which came to AIM with a £400,000 placing a year ago. Chief executive at float (and still a director proffering advice) was Benjamin Shaw, who set up Victor Chandler’s online gaming operations. The incumbent CEO now is Alistair Assheton, founder and managing director of the first acquisition, Curacao-based sports betting and gaming operator VIP.

Leisure & Gaming now operates the vip.com domain name and has already invested significant sums into VIPsports.com, VIPhorses.com, VIPcasinos.com and VIPpoker.com. The key to the business will be to drive up customer numbers without breaking the bank. This seems to be happening.

For 2004, the VIP business scored adjusted pre-tax profits of £3.2 million on sales of £183 million. This year, analysts suggest £4 million off £213.7 million, placing the shares on a forward multiple of 12.5, falling to 10.5 the following year. Leisure & Gaming has an astute and industry savvy management team. In addition, it could become a target for a bigger player that believes it could absorb its business and extract considerable cost savings. The £43.5 million market cap does not look excessive.

Interim encouragement from AIM duo

Recent half-time numbers from ukbetting were extremely encouraging, with the top line surging 30 per cent higher to £55.5 million, and ukbetting turning in a first ever pre-goodwill pre-tax profit of £500,000. Fronted by Eric Semel – son of Yahoo’s Terry – and Peter Dubens, ukbetting is enjoying strong growth in its gambling operations and, twinned with tight cost controls, synergies between its content and gambling sites are falling through to the bottom line.

Shares in the business are not cheap – the stock is swapping hands for 28 times forecast ‘05 earnings versus a sector average between 15 and 20 – but Seymour Pierce’s Paul Leyland is bullish, arguing trends are moving in the right direction. He suggests the company has bid potential for cash-rich predators wanting to broaden product range and access quality traffic.

US- and Asian-facing venture BETonSPORTS also recently cheered with interims that demonstrated ‘a rapid turnaround from the dark days’ following last year’s IPO, according to Evolution Securities’ Robin Chhabra. Led by chief executive David Carruthers, BETonSPORTS floated last summer, raking in some $44 million, then ran into a double whammy of adverse American football results and unexpected advertising restrictions that hit the US sports betting industry. Understandably, the full year figures felt the effects.

But BETonSPORTS has bounced back, changing from a US sportsbook-orientated business to an ‘international’ play. Those first-half figures to 7 August revealed improved earnings thanks to strong recovery in the gross win percentage, as well as benefits of a new marketing strategy coming through.

Carruthers is upbeat about long-term growth prospects: ‘I see no slowdown at all and I am sure there will be further consolidation in the market, and remember we have $44.8 million cash on our balance sheet.’ Much of Carruthers’ enthusiasm about the year ahead is based on his expectations for BETonSPORTS’ Asian acquisition, Easybets. According to his reading of the market, this gives his group a ‘humongous’ market on the eve of the World Cup.

The full year still hinges on the November peak of the North American sports season, but investors might expect a leap in profits from $14 million to $19.9 million, or £11 million, giving earnings of 19.2 cents (10.6p), and a forward multiple of 15.2. Undemanding.

Sportingbet – fully valued but well managed
AIM giant Sportingbet has been a stellar and award-winning performer with fantastic growth rates. Nevertheless, at £1.1 billion, the group looks fully valued. It is forecast to report pre-tax profits of £57.5 million (13.6p) for the year to July 2005, and £80.2 million (17.3p) next year. Interestingly, its recent decision to walk away from a merger with Empire Online looks an astute move as Empire is heavily reliant upon PartyGaming (its business is driving traffic to other online gaming sites and PartyGaming is its biggest client) and sports a valuation of £600 million yet made just £14 million at the interim period. Of course, the attraction with Empire is that PartyGaming could take control itself.