Interactive Investor

Big bets placed on William Hill recovery

2nd August 2017 12:28

Graeme Evans from interactive investor

High street bookie William Hill shares have been short of backers in recent months, not least due to fears over a looming regulatory crackdown on gaming machines.

These fixed odds betting terminals (FOBT) are such a major revenue stream that Hills has warned that the UK government's review of stakes and prizes raises the risk of a "material impairment of assets" in its retail arm.

Uncertainty is now expected to drag on until at least October, with the result of the review having been delayed by the general election in June.

So where does this leave investors? Hills shares have recently been languishing at their lowest point since before the London Olympics in 2012, with the company's failure to join recent consolidation in the industry adding to disappointment around lacklustre trading and regulatory uncertainty.

That was until interim results today piqued investor interest, with Hills gaining over 10% after chief executive Philip Bowcock put a more positive spin on the firm's performance and outlook than many had expected.

He said the bookmaker was once again growing at or above UK market rates, buoyed by a resumption in growth in the number of new customers. Group net revenue for the first half was 3% higher, even without the benefit of a major international football tournament this summer.

Online, which accounts for 35% of revenues, is also delivering a better performance, helped by a 12-month transformation plan and improvements in marketing.

Unfavourable football results meant group half-year pre-tax profit dropped 11% to £109 million and earnings per share fell 2% to 9.5p. However, strip out one-off items and adjusted operating profit - a better indicator of underlying performance - was down just 1% at £129.5 million.

The interim dividend was raised by 4% to 4.26p, reflecting strong cash flow and confidence in meeting strategic priorities.

That gives a prospective yield of around 4.4% and, even after a double-digits share price rally on these numbers, Hills shares trade on a reasonable price/earnings (PE) ratio of 11.7.

Broker UBS believes the shares are worth 300p, but whether today's optimism translates into a sustained share price improvement is likely to rest on the outcome of this autumn's government review. Until this is resolved, there's a significant bar to further industry consolidation.

William Hill said today it generated net revenues of £7.9 million from gaming machines in the half year, a rise of 3% due to a better gross win per machine.

It pointed out there was no evidence to suggest that changes to stake levels helped to tackle gambling-related harm.

However, campaigners want maximum stakes in the industry to be cut from the current £100 to as low as £2, potentially leading to widespread shop closures and job losses.

The outcome of the review by the Department for Culture Media and Sport has been further complicated by the growing influence of the DUP, which has struck a deal to support Theresa May in Parliament. Many of its MPs have made clear their opposition to FOBTs.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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