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Ladbrokes - Taxes up, dividend down, Coral merger

Steve Clayton | 11 August 2015 | A A A
Ladbrokes - Taxes up, dividend down, Coral merger

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Ladbrokes Coral Group Plc Ordinary 28.333p

Sell: 172.00 | Buy: 172.00 | Change 5.00 (2.99%)
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In common with other UK bookmaking operators, like William Hill, Ladbrokes have reported a sharp fall in profits, caused largely by the recent changes to the taxation of online and machine based gambling. Revenues rose by 1.3%, but the impact of the Point of Consumption Tax (PoCT) and higher Machine Gaming Duty led to a 44% fall in profits and earnings per share. As previously announced, the dividend is sharply reduced to 1.0p at the interim stage, with an intention to pay 3.0p for the full year, a reduction of almost two thirds.

Ladbrokes recently announced a merger with Gala Coral and a new trading strategy, making these results somewhat academic. The shares rose marginally on the results.

Our view:
Ladbrokes hope to merge with Gala Coral, to create by far the largest retail bookmaker in the UK, and to significantly boost their online scale at the same time. Cost cutting should improve financial returns, hopefully allowing Ladbroke to generate acceptable returns, after a prolonged period when the business has been mis-firing.

The risk is that they end up with a larger version of the Ladbrokes of old. The market was unenthused when the merger was announced, mainly because the targets were seen as unchallenging and the combined group will have large debts at the offing. Ladbrokes faces big structural issues; retail staking over the counter, is going out of fashion. The majority of income, both staking and gross win, already comes from the machines, where duty rates can be hiked overnight. Both OTC and machines revenues are vulnerable to a further drift of business from the retail shops to online gambling sites.

The established bookies have not been able to gain the same market shares online that they commanded on the High Street. Indeed, in the merger announcement and strategy review, Ladbroke commented that only 11% of their retail customers also gamble online with them. This failure to convert punters, and also to attract online-only gamblers in large numbers, is both the bookmakers' biggest challenge and their opportunity.

If Ladbroke can enhance the profitability of their own and Coral's estates, through efficiency gains, and if no further increases in duties and taxation are applied, then there could be potential. But this will need to be accompanied by a sustained improvement in digital performance to prove durable. In the meantime, the dividend yield of under 3% (variable and not guaranteed) is uninspiring.

Highlights:
  • Group net revenues rose 1.3%, or by 4.2% stripping out the impact of the World Cup in 2014.
  • Retail revenues rose by 1.2%, with better staking trends. OTC wagering declined by 5.2%, Machine wagering rose 0.3%. Once the impact of win margins fed through, OTC net revenue declined 7.5% and machine net revenue rose 8.2%.
  • Digital net revenue increased by 6.9%, reflecting growth in Australia. The core Ladbrokes.com business saw declining revenues, reflecting punter-friendly sporting results. Staking actually rose by 20%. Gaming revenues rose 16% as the Playtech platform continued to improve performance. In Australia, staking rose 55%, with active customers up 82%.
  • In Other businesses, Belgium delivered a broadly flat performance, Spain continued to make small losses and the Irish business was successfully restructured after entering into the Examinership process (broadly equivalent to Administration in the UK). Telephone betting saw a sharp fall as punters moved online, whilst High Rollers’ contribution was down by three quarters, but is notoriously volatile, given the nature of the business.

Merger with Gala Coral:
The new company will have around 4,000 betting shops and will inevitably have to make closures or disposals in some parts of the country in order to get permission to merge from the competition authorities. Significant cost savings are promised. Ladbroke intends that the combined group will be focused upon increasing its digital market share and serving the recreational gambler, rather than the higher-staking, semi-professional gamblers, who bet large, but expect sharper odds. The group aims for retail earnings per store to reverse their decline and be higher in 2017 than they were in 2014, and to grow digital customers by 35% over the period.

Gala Coral is being acquired from private equity ownership and has significant debts. Group cash flow will initially be focused on reducing leverage, requiring a reduction in the dividend until such time as debt levels are more comfortable and dividend cover is 2x or better.

Outlook:
Ladbroke say simply that trading thus far in H2 has been in line with their expectations.

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This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.


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