Fund Managers’ Favourites: Investing in Gambling

Video Transcript:

Alanna Petroff: If you are one of those people that likes online gambling, you are not alone. And many investors are benefiting off of this online gaming and gambling trend. Joining me now to talk about investing in this sector is Gervais Williams from MAM Funds. He is a managing director there and he runs two funds specifically for Acuim Funds, and we're going to talk about investing in gaming.

So Gervais, why are you investing in gaming? What’s appealing about this sector?

Gervais Williams: The thing which is exciting about this sector is we're getting a lot of new gamblers coming to the sector for the first time. The sector is growing is very fast. We are getting media increases with different mobile platforms coming on stream and of course the sector is very profitable. It's generating strong cash flow. A lot these businesses have net cash balances already. So, they're paying a lot of this cash out in dividends for the first time.

Petroff: Okay. So the dividend strategy is really what appeals to you as well?

Williams: Yes. I mean dividends and growing dividends I think really drags up share prices irrespective of where the market levels are and that's a very attractive feature for a fund manager.

Petroff: So let's talk about your top three picks in this sector right now. We have 32Red, 888 Holdings and NetPlay TV. So let's talk about 32Red, which is a rather small company, and why you like this company.

Williams: What I like about it is, it's got very good service levels. It's very well-known in terms of the casino area, and it obviously sponsors Swansea, so they get a good profile despite being only a 32 million market-cap company. But going forward of course the opportunity is for their customers to bring in new customers, and we've seen very strong growth in their revenues, their customer numbers, and that's leading to cash generation. The company already has cash balances on the balance sheet, so for that reason it's moved on to the dividend list and is now growing its dividend rapidly.

Petroff: Okay. Good to hear. Now 888 Holdings, what do we like there?

Williams: It's a much bigger company. This is a company which is about 325 million market-cap, much larger. A business which is doing substantial turnover, mainly in the UK where its brand is best-known, but it's just moved into Spain and it’s taken a big market share in Spain, where it's just deregulated, which is very exciting.

And the US, although it's illegal in the US to do any gambling online, they are beginning to deregulate. Nevada is the very first place where we expect that to happen and we expect 888 to be one of the first entrants to that market.

So again, cash on the balance sheet, moving on to the dividend list for the first time, and strong growth in dividend expected.

Petroff: Okay. Moving on to the next one: NetPlay TV. What do you like about NetPlay?

Williams: It's a different type of company. This is involved perhaps also in online gaming through its website, but it's getting access to new customers through online digital TV. So if you look at the terrestrial TV companies, for example, ITV after midnight puts a little roulette wheel on their screen and you're able to gamble on that if you want to. That's four nights a week. That brings them a lot of new customers, gives them a lot of new business, but also gives them growth going forward.

Petroff: More traffic to the site, then?

Williams: More traffic to the site.

Petroff: Okay.

Williams: So, people don’t just use the midnight to 4am type service, but they actually use it during the day as well, but they go to the website for that. So again we're seeing excellent growth, very strong figures, positive trading update and more cash generation.

Petroff: Okay. Now, in terms of sector risk, looking at online gaming, what are some of the big risks here?

Williams: I mean going forward, I think the government is talking about changing some of the tax, the way it taxes the sector, so that might affect different companies in different ways. From that point of view that's something to worry about in the next couple of years. It's not immediately [a risk], but in the next couple of years’ time. And they may not even do it, but we don't know at this stage. And so that's a negative.

Also there will be winners and losers: some companies will gain market share, others will be overtaken by new entrants. So from that point of view you’ve always got to be aware that there is a risk companies might lose out.

Petroff: But for the companies that we've just discussed now, your top three picks, are you looking at investing for the long-term in these kinds of companies? What’s your strategy?

Williams: My main strategy is to get involved in companies which are producing good and growing income, and the exciting thing about these companies is they're moving onto the dividend list in a big way. They are able to pay decent dividends from the start and I think that's going to drag up their share price significantly. Now, of course I’d like to stay them for many years. If their share prices run so hard that the dividend yield starts to drop and starts to become small then, of course, I might trim some holdings on that basis. Or if I get it wrong and trading turns down, then of course I might change my views on them, in that case. But generally I’d like to be with these companies for many years.

Petroff: Okay. Thank you very much coming in today and speaking with me.

Williams: Thank you.

Petroff: That was Gervais Williams from MAM Funds. I'm Alanna Petroff. Thanks for watching Morningstar.