The UK broker Panmure Gordon sees the online gaming sector as an opportunity for investors and has highlighted five companies that it rates as a ‘buy’. The broker notes that e-gaming shares have underperformed the market over the last year and with strong balances and growing earnings the current share prices make them attractive.

"We think most companies traded strongly over Q3 and valuations appear undemanding,” said the broker note. “However, with earnings difficult to forecast with high conviction as countries move to a regulated and taxed framework, the market is applying a significant discount to our estimate of fair value. We continue to favour a basket approach to the sector as all companies are employing slightly different strategies to achieve the common aim of maximising revenues from regulated markets.”

Panmure also suggests that consolidation “remains problematic” due to the divergent views between vendors and buyers on price, perception of brand value and interpretations of legacy legal risk. It also noted that with the increase in regulation 2012 is likely to be “a seminal year”.

Investors are advised to take an overweight position in the sector. The following companies, which all offer substantial upside potential, have ‘buy’ recommendations: 888 Holdings (LON:888), Betfair (LON:BET), NetPlay TV (LON:NPT), Sportech (LON:SPO) and Sportingbet (LON:SBT). “The broker suggest the sector expects to realise a price-to-earnings rating of 9.1 times and an enterprise value/EBITDA rating of 5.3 times, with around 13-per cent compound growth in EBITDA estimated for the next three years.

888 Holdings represents an “opportunity for significant near-term gains” if the company is able to confirm is has enough cash to meet its deferred payment of Wink Bingo. The share price is “inexpensive” due to its trading on a 2011 EV/EBITDA ratio of 4.1 times, and the broker has set a price target of 53 pence for the shares from the current price of around 32p.

Betfair’s core products “continue to perform well” and “Yet the stock is inexpensive”, said Panmure, suggesting price target of 1,065 pence, which would see an increase of 48%.

The broker sees shares in NetPlay increasing to 12p from the current price of 9.7p as the company “has refocused on its core Supercasino product and has produced a strong financial performance so far in 2011”.

Sportech “has been transformed but is still not well understood”, added Panmure suggesting a target price of 67p compared to the current price of 40p.

Surprisingly the broker also see a big upside to Sportingbet even though Ladbrokes have only recently pulled out of acquisition talks. Panmure has set a price target of 70p which represents good value at the current price of 39.8p per share..

Panmure has downgraded bwin.party and Playtech from ‘buy’ to ‘hold’ as a result of the near-term uncertainty around German regulation in respect of bwin.party and concerns about future joint ventures and capital structure, at Playtech.