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Bingo-to-casino brands business is a losing trade, in our opinion

Bingo-led gaming firm Jackpotjoy (JPJ) could be worth more than 40% higher than its current 630p share price if it traded in line with the rest of the UK gambling sector.

That’s according to Edison Investment which has published a research note on the £485m company following its switch from the Toronto to London stock market on 25 January.

One of the reasons behind the listing move and rebranding from its previous identity of Intertain was to trade on stock market where gambling firms had better recognition among the investment community. In essence, it wants to trade on a market where gambling stocks command a higher equity valuation.

Management should be focused on improving their business, not finding ways to push up the share price. The pursuit of ‘better recognition’ (aka higher valuation) is a classic red flag in investing.

Jackpotjoy’s UK-listed shares now trade on 6.9 times Edison’s forecast 90.8p earnings per share for 2017. Gaming analyst Jane Anscombe believes the stock will re-rate towards the sector average of 12.1 times earnings for 2017.

Canaccord Genuity has a 950p price target, also saying the company is undervalued. We think it is valued below the peer group for good reason.

Jackpotjoy operates in competitive markets against muscular rivals and also bears technology and platform risks. It has a considerable amount of debt and needs to pay a substantial amount of acquisition earn-out payments. Dividends look unlikely for at least the next few years.

Edison forecasts the company will end 2017 with £374m net debt. That equates to 77% of its current market value which could put off many investors.

‘We believe there is a larger base of gaming investors in the UK which should benefit Jackpotjoy in the longer term. However, we also believe that UK investors are more sensitive to leverage than Canadian peers,’ comments Canaccord.

‘Historically, leverage has been quite low (or non-existent) within the UK listed online gaming operators. By contrast Jackpotjoy carries an estimated 3.3x 2017E net debt to adjusted EBITDA, which we believe is an overhang on the stock in the near term.’

When known as Intertain, the shares were depressed by negative market sentiment linked to a scathing report of the business by a former hedge fund manager, a prolonged strategic review and adverse currency movements.

We don’t like the high level of borrowings and the way in which the company is chasing a higher valuation. There are plenty of better stocks in the leisure sector if you want exposure to gambling, such as GVC (GVC). Avoid Jackpotjoy.

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