In what should be regarded as a major positive move former Premier of NSW "Nifty" Neville Wran has been appointed chairman of EBT. His intellect and door opening potential are both a real plus for this company which definitely seems on the verge of profitable trading.
Critical mass achieved
We suspect the last of the loss figures has been reported by Ebet in the December half year. In classing the stock as a spec buy at 17 cents in SCG 282 we reported that the December quarter saw EBITDA positive trading estimated at around $450,000 and that the company had definitely hit critical mass.
For the half turnover increased 60.3% to $4.91m with a loss of $1.584m being reported. Of that total $1.26m came from amortisation of non-current assets and a further $107,000 in depreciation. Operating cashflow was actually a positive $552,00 while EBITA was negative $151,000 compared with an EBITA loss of $1.885m in the pcp.
Cashflow in the March quarter which incorporates the quiet January period will probably have been negative but trading for the June half should be cashflow positive and profitable ahead of expansion in the USA.
From here there is the potential for a rapid growth in turnover and profitability both in Australia and overseas.
Strong interest in cashless gaming
Cashless gaming has started strongly in Australia and regional distributors are now being sought. That will give more rapid access to the market as most distributors will probably be companies which service poker machines. Significantly management is also looking for overseas distributors but is first customising products to meet US standards and machine protocols. That approval process should finish by mid-year with revenues starting from US cashless gaming next year.
The cashless gaming product enables credits to be rapidly transferred from one machine to another and minimises down time for electronic gaming machines. With most jurisdictions now limiting the number of machines, the clubs or hotels are looking to ensure the maximum possible playing time. Ebet estimates clubs can save $1500 per machine per annum in operating costs by having the cashless gaming system. The benefit for EBT is not just the up-front sales consideration but an ongoing maintenance fee of more than $400 per machine per annum.
US potential is significant
More growth is likely to come from the USA gaming area through joint venture partner Penn National Gaming. Under the 10 year license agreement EBT will derive between 2% and 3% of internet turnover generated under the deal.
Turnover in the US has compounded at almost 15% per month in the last six months. This is likely to substantially increase in the short term following the announcement by Penn that a content license and marketing agreement has been signed with a leading global internet company. This is thought to be with the largest internet player in Yahoo which will give punters a similar online betting service to that offered through Penn's Playboy connection. There is one major difference however with the major internet players having the band width to enable broadcast of the races over the internet to the customer as long as the customer has the band width to play it. The latest deal should be operational by late June giving a flying start to FY2003.
In Australia internet betting is around 5% of total turnover. Currently total betting in the USA is only thought to be around $15bn but the expectation is that the internet percentage will quickly equal Australia. With Penn signing up obvious turnover sites we are very optimistic of rapid turnover and profit growth.
With the recent strong turnover growth in the USA which probably has taken monthly figures to around $3m, but still growing rapidly, we are expecting at least $50m total turnover and revenue to EBT of at least US$1.5m next year. The majority of that will flow to pre-tax profit with costs being covered essentially by some of the smaller deals.
Strong earnings next year
We have been expecting a profit above $4m or 3 cents per share next financial year and around 10 cents for 2003/04. The company has announced an EPS target next year of at least 2 cents and up to 3 cents per share at the time of the appointment of Neville Wran but we would regard these figures as being conservative. Given the growth in the USA our estimates appear eminently achievable which makes the company a strong buy.
The distribution of Ebet shares to its shareholders by Eglobal and a share purchase plan for up to $3000 of shares at 18 cents by Ebet shareholders has eased the share price back from the mid 20 cent level. This we believe is providing one final opportunity to get set at reasonable prices. EBT has hit critical mass and looks to have a strong growth profile. If our earnings estimates are achieved there is no reason why a stock such as this with its growth profile would not sell on a PE of 15 or even 20 times earnings which should give strong outperformance over the next two years.
ITQ Price at posting:
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