Sportech (SPO) supplies betting systems to over 400 clients in 38 countries, including the world’s most widely deployed Tote solution. It has an exclusive licence to operate betting in Connecticut (CT) and is well placed to benefit from eventual legalisation of sports betting in the state. It also has a fast-growing charitable raffle business. The business has been interrupted by COVID-19, but has proved resilient, especially through online channels. There are opportunities to improve margins by transitioning from a mechanical model to a digital one. We would expect these benefits to come through over the next few years.
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- Strategy: SPO continues to reduce the capital deployed and maintenance costs in its US racing business, as it moves increasingly digital. It is building on, and benefiting from, the growth in international commingling and looks to expand its lottery side. A sports betting licence in CT would prove a valuable extra.
- COVID-19: With venues shut and most racing cancelled for a few months, business was inevitably affected, but cash outflows were kept to a minimum, and business is bouncing back. The success of online has demonstrated to many of its more conservative clients where the future lies, and it is a higher-margin one.
- Valuation: Our forecasts assume no CT sports licence is awarded and no further major COVID-19 disruption occurs. We value the business on a comparable multiple basis, and derive a central value of ca.33p per share. The start of sports betting in CT raises that to between 45p and 55p.
- Risks: The prime risk is that anti-COVID-19 measures are augmented and further disrupt the global racing and sports businesses. The industry has proved resilient and resourceful so far. Gambling is always liable to attract government interest, which can affect profitability of betting customers and their suppliers.
- Investment summary: SPO is a business that has underperformed in the past but, in moving away from its industrial model to a more digital one, it should generate significantly higher profits in the future. It sits on nearly £10m of net cash, and has the potential to exploit a new market for sports betting in CT when the State agrees how to implement its new freedoms. There are also further opportunities in lotteries and the growth in international pool betting.