888 dives, but are the shares now too cheap?

There's no reprieve here for 888 which remains in freefall after peaking in May, but Graeme Evans has found a backer who thinks selling is seriously overdone. 

The losing streak goes on at 888 Holdings, despite the best efforts of the casino, poker and bingo giant to move on from its recent regulatory pain.

Shares fell another 8% in the wake of today's half-year results, leaving the stock a third lower than where it was in May and in danger of dipping below the 200p barrier for the first time since 2016.

The slump has continued even though 888 and rivals including GVC Holdings are rubbing their hands at the "seismic change" taking place in the US market.

Following a ruling by the Supreme Court in May to legalise sports betting, 888 has been working with its sportsbook provider Kambi to seize on opportunities in what should become the world's largest regulated betting market.

However, 888 told investors today that tapping into this market will require meaningful investment and have an impact on profitability in the short term.

The warning offset tentative signs of recovery in the UK, where 888 has been working to improve consumer protection practices since last year's record £7.8 million fine from the UK Gambling Commission.

These initiatives and the ongoing regulatory scrutiny drove an 18% slump in half-year revenues in the UK. Since then, however, the UK has returned to positive revenue trends.

Source: interactive investor (*)      Past performance is not a guide to future performance

Other regulated markets fared much better in the half year, with the 30% improvement coming after marketing spend was diverted from the UK towards higher growth areas such as Spain and Italy.

The group, which generates around a third of its business in the UK, lifted overall revenues by 1% to US$273 million and earnings per share by 2% to 10.5 cents. 

Analysts at Canaccord Genuity welcomed the update, particularly the signs that the UK market has stabilised in the current quarter.

They added:

"Overall, we see this as a reassuring message, with a stable UK providing a strong underpinning to full-year 2019 forecasts."

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Despite the regulatory pressures and need to retain cash for future investment opportunities, 888 increased the interim dividend by 5% to 4.2 cents a share. The stock trades with a projected 2019 yield of 3.8%.

Canaccord kept its forecasts broadly unchanged today, although the broker did cut the price target on its 'buy' recommendation from 318p to 306p in order to reflect a below-forecast cash balance at the half year.

Having materially de-rated since May, the shares now trade on a 2019 enterprise value to earnings multiple of 8.6x, which is a 12% discount to the rest of the sector. The price earnings multiple is 13.2x.

Canaccord analyst Simon Davies said: "It has taken its regulatory pain, we are encouraged by signs of life in its UK operations, and we see strategic value in 888’s owned technology platform in a consolidating market."

*Horizontal lines on charts represent previous technical support and resistance.  Black diagonal line represents former uptrend.