PartyGaming’s share price took a hit this week after analysts at US investment bank Lehman Brothers issued a note saying its shares were overbought and put a price target of 116p on them.
PartyGaming’s shares were trading at 132p at the time of the release.
Analysts Philippe Ronceau and Craig Fraser highlighted a number of issues that led them to reviewing PartyGaming’s valuation, among them rising bonus payouts and a one-off rise in customer numbers.
While short-term news flow had been positive, this could start changing “as the increasingly negative impact of bonuses becomes more apparent on 4Q performance indicators to be announced on 26 January 2006”.
With “10% of active players contributing c.70% of revenues”, an increasing amount of PartyGaming’s top-line growth is being absorbed by rising player bonuses that are handed out as part of its efforts to encourage customer retention.
The reportcontinued: “[PartyGaming] Management commented that bonuses were going up and that the 14% gross growth mentioned for Oct/Nov would turn into 10%-12% net growth. This would imply that poker bonuses represent anything from 14% to 29% of gross revenues. In 1H05, reported bonuses accounted for 9% of gross revenues, therefore we believe they are absorbing an increasing proportion of gross revenues.”
The daily average number of poker players playing on the Party platform had risen to 183,000 during Oct/Nov from 131,000, a 5% increase on Q3, which the reports states “is a strong performance, in our view, as we were expecting no growth in yield in 4Q, based on previous forecasts.”
It goes on to explain that the “timing of the increase in the yield per player coincides with the improvements made to the IT platform, which were offered to PartyGaming players only”.
Ronceau and Fraser conclude that what might have contributed directly to the increase in yield per player are the players signing off from PartyGaming’s skins to join the Party platform proper. “We estimate: 1) Empire was accounting for 70%+ of PartyGaming’s income from skins; 2) the yield per player was 20% higher at Empire than PartyPoker. In our view, such an impact would have to be seen as a one-off, independent from any historical seasonality,” it added.
source : egr magazine
