Morgan Stanley downgrades Playtech after profit warning

Morgan Stanley downgraded its stance on Playtech to 'equalweight' from 'overweight' on Tuesday and slashed the price target to 650p from 1,100p after the gambling software company's profit warning a day earlier on the back of weakness in Asia.

Playtech said on Monday that the current run rate in Asia is "materially" below the average in the second half of last year and what was expected for the second half of 2018 at the start of the year. If it remains unchanged for the rest of the year, including no material improvement in Malaysia, the group expects revenue from Asia to be around €70m lower than original expectations.

As a result of the warning, MS cut its earnings per share forecasts by 10% for this year and 31% next year and said its confidence in earnings visibility has reduced.

"While we had flagged Asian risk in the past, we had always assumed this was likely (as in Malaysia) to be a governmental/regulatory issue, and saw the risks as balanced between a long-term trend towards regulation of grey markets and shorter-term political risk.

"Unexpectedly in China, the issue appears to be competitive, where competitors (new and existing) are forcing take rates down in an 'aggressive pricing environment'."

MS said that while Playtech may be able to mitigate this by offering more structured agreements - better pricing in return for guarantees over position or volumes - it suggests that the company's product in Asia may be less compelling than previously assumed, with lower barriers to entry or unsustainably high margins.

The bank added that the sudden nature of the profit warning raises questions over whether Playtech could face further shocks to the remaining €150m of Chinese revenue.

Morgan Stanley's bear case assumes that the remaining China revenue unwinds and negative regulation in Italy makes a meaningful impact on Snaitech profitability. Its bull case, meanwhile, assumes stability in China, a good performance in Italy, good core growth and an accretive bolt-on acquisition.

"Although the risk reward skews to the upside, we see our bear case as a reasonable scenario and think the share price is unlikely to reflect the stock's attractive qualities (cash flow, core business strength, balance sheet optionality) in the next year, just as it has not done for some time."

At 1250 BST, the shares were down 1.1% to 550.40p.