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Ladbrokes Coral - On course for the full year

Nicholas Hyett | 31 August 2017 | A A A
Ladbrokes Coral - On course for the full year

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Ladbrokes Coral Group Plc Ordinary 28.333p

Sell: 125.10 | Buy: 125.30 | Change -0.90 (-0.71%)
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First half revenues of £1.2bn were up 1% across the combined Ladbrokes and Coral businesses, as a strong digital performance offset weaker UK retail. Group operating profits rose 7% to £158.3m, with digital again leading the way.

An interim dividend of 2p was announced alongside results (2016: 1p). The shares rose 2.2% in early trading.

Our View

Following the merger with Coral, the group is the clear market leader on the UK high street. The international businesses are small but dovetail nicely, and with estimates for cost savings upgraded to £150m per annum, the potential impact on profitability is looking all the more significant.

The combined group's online offering is gaining ground on William Hill, and recent strength across both brands is reassuring. The merger also gives LCL the option of splitting its hand, with two brands each aiming at a different type of punter.

That said, the first half of 2017 has thrown up some unwelcome hurdles. A series of unhelpful football results in Italy, and a row with the Racing Partnership over UK broadcast rights, hit retail performance.

There are long-term risks as well. Net debt is over £1bn and only falling slowly, the large UK estate will need to be managed down over time, and planned expansion into new overseas territories could be expensive. However, gambling was never a risk-free enterprise and properly executed the deal and associated expansion presents a huge opportunity.

Our one major concern is around increased regulation, particularly of gambling machines in shops. Fixed Odd Betting Terminals (FOBTs) accounted for 33% of revenues in the first half, but the machines - often described as the crack cocaine of gambling - are unpopular with many, including politicians and the media. With the government's triennial review of stakes and prizes due to report soon, more regulation could be on the way.

That headwind probably goes a long way to explain why the group is currently trading on a 28% discount to its long-term price/earnings ratio. However, it also means the shares currently offer a yield of 3.6%.

Half Year Results

Integration of the two businesses is said to be on track, with the head office team consolidated and UK digital brands consolidated on to one platform. Synergies are now expected to be £150m per annum by 2019 - more than double the original estimate.

As suggested in the group's pre-close trading update, performance UK Retail has poor, with amounts staked down 3%, gross win margins down 0.3 percentage points and operating profits down 10% to £102.7m. The poor performance reflects the impact of last year's European Championship and reduced racing content during negotiations with the Racing Partnership.

By comparison Digital saw revenues jump 14% to £374.5m, with improvements across both sportsbook and gaming, reflecting strong performance in the UK and Italy and market leading growth in Australia. Operating profits rose 67% to £52.7m.

The smaller European Retail business saw staking grow 5%, but operating profits fell 24% to £11.1m as gross win margins deteriorated following poor football results in Italy.

Net debt fell slightly in the half, to £1,065.5m (Dec 2016: £1,089.5m) and now stands at 2.79 times annual EBITDA (earnings before interest, tax, depreciation and amortisation). The group continues to target net debt of 1.5-2x EBITDA by the end of 2018.

The final dividend is expected to remain unchanged at 2p, taking the full year payment to 4p. The group remains on track to meet full year expectations.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

All yield figures are variable and not guaranteed. The information in this article is not intended to be advice or a recommendation to buy, sell or hold any investment mentioned, nor is it a research recommendation. No view is given as to the present or future value or price of any investment, and investors should form their own view in relation to any proposed investment.

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