Why are Pointsbet shares crashing 45% today?

Is this decline actually a good thing? Let's find out.

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a man attending a sporting match looks down at his phone with his hand over his eyes in dismay as though his sporting bet has failed.

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Pointsbet Holdings Ltd (ASX: PBH) shares are having a very tough session on Tuesday.

In morning trade, the sports betting company's shares crashed as much as 45% to 45.5 cents.

The company's shares have recovered a touch since then but remain down 37% to 52 cents at the time of writing.

Why are Pointsbet shares crashing?

Well, the good news is that today's weakness has not been caused by any bad trading updates or broker downgrades.

In fact, today's crash could be described as a positive for shareholders.

That's because Pointsbet shares are falling today after trading ex-capital return. This means that the rights to a rather substantial capital return are now locked in and new investors will not receive it if they buy shares.

As a result, the company's share price has dropped to reflect this. After all, you wouldn't want to pay for something you won't receive.

Capital return

Last week, following the completion of the sale of its US operations, the company revealed plans to return $127 million or $0.39 per share to its shareholders. Based on yesterday's close price of 83 cents, this represents a 47% yield.

This is the second return the company has made, with a total of $442.37 million being distributed to shareholders across both capital returns.

Eligible shareholders won't have to wait long for this latest return. It is due to be paid to eligible shareholders next month on 16 May.

Should you buy the dip?

Analysts at Bell Potter are very positive on Pointsbet shares and see a lot of value in them. In response to its update last week, the broker retained its buy rating with a trimmed price target of $1.02.

Its analysts have updated their sum of the parts valuation of the sports betting company to account for the capital return. They said:

We continue to value PointsBet on a sum-of-the-parts and have updated the valuation for the now known second capital return (39c vs our previous forecast of 41.5c) and the recent increase in the number of shares on issue. We continue to value the Australian and Canadian businesses at $150m and $25m respectively but have reduced the assumed corporate cash level from $35m to $30m for conservatism and some leakage. The net result is a 6% decrease in our PT to $1.02 which is still >15% premium to the share price so we maintain our BUY recommendation.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended PointsBet. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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