888 teases shareholders with the prospect of big buybacks
One of the holdings in my portfolio which I’m currently feeling most optimistic about is 888 (latest share price 162p, market cap £595 million or $777 million).
Like too many of my holdings (IGG, BATS, etc.), it has been on the rough end of regulatory change in recent years. This has led to justifiable concerns about the quality and sustainability of earnings.
From my point of view, these concerns are likely to be fully priced in around the current share price, and I topped up my 888 position last month.
What has provoked this optimism, you might ask? Well, I just think that a forecast EV/EBIT multiple of less than 11x is rather cheap for a leading, internationally diversified online casino. Multiple territories would have to deteriorate quite a bit further to make this seem overpriced, in my opinion. Haven’t regulators done enough already?
Parts of the business have struggled, it is true, but the overall picture seems to have plenty of potential. In UK sport, for example, 888 is making a big push: continuing its sponsorship of Birmingham City, paying for lots of TV advertising space and making deliberately unpopular YouTube videos (this one got nearly 200,000 views so far). There is also the tantalising prospect of success in a deregulated US market.
Anyway, let’s cut to the chase.
888 has been paying out huge dividends to shareholders while also making bolt-on acquisitions, yet it still had $76 million in cash as of December 2018. That’s about 10% of the current market cap, leaving an enterprise value of $700 million (though we should also take into account an £18 million bingo acquisition in February). EBITDA is forecast to be almost $90 million this year, while EBIT is forecast at $66 million.
That sort of performance could result in a lot of spare cash lying around, depending on how the year progresses in terms of capex and acquisitions.
So at the strange time of 11:15 AM today, 888 released this RNS: resolution to purchase own shares.
…the board of directors of the Company has decided to propose a resolution seeking general authorisation to make market purchases of up to 36,759,113 of the Company’s ordinary shares of £0.005 each (representing approximately 10% of the Company’s current issued share capital)…
If approved, the directors have no present intention to exercise this authority.
I’d have no problem at all with a tender offer to take out a big slug of the existing equity at the current share price, but this is the next best thing.
The company doesn’t need the cash pile to be any bigger than it currently is, so it would be great to see any spare cash getting ploughed into buybacks at this level. I’m glad that the directors are giving themselves the option.
In related news, AJ Bell’s Investment Director has been speculating in the Daily Mail over the weekend that bookmaker shares could attract bid attention at these depressed levels. With respect to 888, he says “it may not be cheap enough for a predator yet, but is getting there”. Perhaps it’s already there!
At the time of publication, the author has a long position in 888.