Morgan Stanley’s latest take on the online gambling biz

May 14, 2010

What’s Changed
Bwin: Price target from €46 to €49
888: Initiate with Overweight, PT 140p
Unibet: Initiate with U/weight, PT Skr140
Paddy Power: Downgrade to U/weight , PT €24
PartyGaming: Price target from 400p to 390p

Industry Update: Online gambling remains an under-penetrated industry with high growth potential. Strong cash generation and significant scale benefits mean ongoing M&A is likely, and is likely to add shareholder value. The USA remains the single largest market, and in 2-3 years we see some form of legalised online gambling market in the USA as likely.

888: initiate with Overweight. The key attractions of 888 are: 1) Its strong B2B business, which is worth up to 50p per share, we think. 2) Its proprietary technology, giving it a competitive advantage in a crowded market, and scarcity value in an industry ripe for consolidation. 3) Its low valuation; at 10x P/E it is the cheapest stock in our coverage universe. 4) US worth up to 180p.

Unibet: initiate with Underweight. We see a number of concerns that are not well reflected in the market: 1) Strong dependence on France where profits are likely to fall in 2011 due to the full year impact of higher taxes. 2) High EBITDA margins could be competed away. 3) High valuation at 16x 2011e P/E is at the top end of the group.

PartyGaming: Overweight. Low valuation, high exposure to US potential opening, ongoing consolidation potential, growing B2B exposure.
Bwin: Overweight: European market leading brand. Strong sports and poker technology. Growing B2B business, ongoing consolidation potential.
Paddy Power: Underweight. Strong positions in Ireland, the UK and Australia, and some potential from its B2B business. Tax risks and lack of proprietary technology mean its 2010e P/E of 18x is too rich.

SOURCE: Morgan Stanley Research (May 14, 2010)