BUY HOLD SELL – PointsBet (ASX: PBH)
PointsBet (ASX: PBH) provides a cloud-based wagering platform. It operates through three segments: Australia Trading, Technology and United States. Its product offering includes Fixed Odds Sports, Fixed Odds Racing and PointsBetting. PointsBetting is available on all sports across sporting leagues, allowing clients to increase their winnings from a bet based on the spread of the underlying contingency.
Founded in 2015, PBH has grown rapidly since launching PointsBetting in Australia in February 2017. By March 2018, PBH provided a full-service corporate bookmaker offering in Australia, adding Fixed Odds Racing (September 2017) and Fixed Odds Sports (March 2018) to complement its PointsBetting product.
Australia represents the highest per capita gambling expenditure in the world, with 64% of Australian adults estimated to participate in some form of gambling each year. As such the Wagering Industry in Australia is highly competitive and highly regulated. There is a significant market opportunity in the US, as a result of the Professional and Amateur Sport Protection Act (PASPA) being overturned by the US Supreme Court in May 2018. This has enabled individual states to introduce legislation to permit sports betting, including online wagering.
In July 2018, PBH entered the US market by signing the New Meadowlands Agreement, giving it a commercial licence to operate as an online corporate bookmaker in New Jersey. PBH commenced taking bets in New Jersey in December 2018 and launched its brand and marketing campaign in January 2019. PBH has since entered into other agreements giving it the option (provided the relevant legislation is passed) or allowing it to offer online and mobile sports wagering in New York, Iowa, Colorado, Illinois and Indiana. PBH is led by an experienced management team, with a demonstrated track record in the wagering industry.
In late April, PBH reported Q3 turnover of $268.7m vs $136.2m a year earlier. Active Clients grew to 106,046 vs 65,031 a year ago. The business also noted that Australian racing, which historically represents the majority of Australian revenue, has remained largely unimpacted by COVID-19. As at 31-Mar-20, PBH had $149.4m of corporate cash, the majority of which is held in USD. The company has no borrowings.
- Not a great fundamental picture. ROE is negative for the foreseeable future, currently -34%. The company is in its infancy, so we also cannot be too critical.
- Revenue growth is what is attracting eyeballs, forecast to grow 38% in FY2 and 68% in FY3.
- EPS growth is uninspiring, up 30% in FY2 but expected to fall back into negative territory in FY3 and FY4.
- Limited coverage but the two surveyed by Thomson Reuters who cover it have a buy or strong buy recommendation.
- It is trading at a 14.7% discount to the average broker target price.
- The stock trades with relatively high volatility, weekly ATR as a percentage of price is 19.8%. In short, it typically moves ~20% in either direction every week.
WHAT TYPE OF INVESTMENT IS PBH?
This is a growth play and, as noted from some of the data in the Stock Box above, it requires a bit of faith. That said, PBH fits the bill of a business that has a long runway of opportunity and should be able to grow regardless of the broader economic conditions – and there aren’t too many businesses that can lay claim to that quinella. Let’s be clear, the potential opportunity for PBH in the US is massive. In New Jersey, which pushed for the repeal of the law which banned sports betting in all but a few states, data showed that in the 17 months post sports betting commencing, nearly $5bn was wagered, with $293m going to the operates – a take rate north of 6%. That is a massive prize on offer, the type of which only comes along once in a lifetime. PBH needs to make sure it acquires customers however and, of course, it is not the only bees buzzing around the honeypot. PBH has a competitive product, a strong management team, a technological advantage and a robust marketing department which has cut its teeth in Australia – one of the most highly regulated and competitive gambling markets on the planet. Whilst the opportunity is huge, PBH still has to execute. So far, they are doing a good job.
Not many brokers following PBH at the moment, Ord Minnett has BUY recommendation. Observes the business is well-positioned to weather some headwinds from COVID-19, its partnership with channel seven and the continuation of horse racing through the lockdown period helping. PBH is also set to benefit from the return of the NBA and MBL in the US. Target price lifted to 18% to 590c. JP Morgan today initiated coverage with an UNDERWEIGHT recommendation. The price target is 500c.
SHORT TERM TECHNICAL VIEW
The stock is up an impressive 440% from its March low. Currently 18% off its June high of 792c and consolidating around the 600c level, with the bulls seemingly building up for the next leg higher. RSI still in the middle of the range, although has just ticked up.
After sorting by most recent filings, its obvious recent selling outweighs buying, with two multimillion-dollar sales back in May. There was a small lift in interest at the start of the month, although nothing very noteworthy. CEO Sam Swanell picking up a few hundred grand of his own company two weeks ago.
Not an encouraging trend. Shorting is at an all-time high at just over 3%. Hardly surprising considering its leverage to the economic reopening theme and sports being allowed to operate without restrictions. Would likely see short interest spike on news of new state and government restrictions, here and in the US.
Putting the ethical considerations aside, the question is really whether or not you believe in the US story. Because it is success in the US, tapping into what is likely to be many years of structural growth, which is going to determine the future share price – and whether the current share price is justified. To this point, the strategy and execution in the US appears to be sound. The recent pullback towards 610c, off a high around 790c in June, makes buying attractive at current levels. We would be happy adding PBH to a growth portfolio.
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