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Here’s why eBet Limited is still worth a punt even after its strong run

Investors have warmed to eBet Limited (ASX: EBT) with the stock jumping after the gaming systems company posted good top and bottom line growth in the first half and gave a reassuring outlook.

It’s great to be in the winner’s circle. The stock gained over 2% to $3.99 ahead of the close on Monday, this on the back of a 31% surge in pre-tax profit to $2.1 million as revenue lifted 6% to $22.4 million.

More pleasingly, gross margin expanded to 74% from 67% in the six months to end December 2014, when compared to the first half of 2013-14.

Worries about the negative impact from the falling Australian dollar, which puts upward price pressure on imported goods, have also been allayed. Management said that the unfavorable exchange rate has little impact on demand for its solutions as the vast majority of its products are sourced locally.

This may even give eBet a competitive edge against rivals that are more reliant on imports.

Another thing to like about eBet is the 3 percentage point increase in recurring revenue to 56% of total revenue and its strong cash generation.

Operational cash flow jumped by 54% to $3.7 million in the first half, and eBet’s ability to spin out cash is one of the key reasons why I think eBet should be added to most portfolios.

However, it isn’t all good news. Sales came in around 5% below my expectation and that has a bigger impact on my bottom line estimate because of its operating leverage.

This has forced me to lower my EBITDA estimate by 17% to $7.7 million and 19% for 2014-15 and 2015-16, respectively.

But even then, my discounted cash flow valuation of $4.55 is still comfortably ahead of the current share price. This doesn’t include potential acquisitions and I suspect the company will be making more deals this calendar year following the takeover of Flexi-NET and CDOL.

What’s more, the stock is trading on undemanding multiples despite its 36% surge in value over the past year. Based on my forecast, eBet is currently trading on a 2015-16 price earnings of 14.7 times, or around a 12% discount to the sector.

eBet provides networking and management systems to electronic gaming machine venue operators. The company also supplies stored value card systems and business intelligence software for the industry.

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Motley Fool contributor Brendon Lau owns shares in eBet. Follow me on twitter