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Ladbrokes - Favourable results ensures profits rise

George Salmon | 4 August 2016 | A A A
Ladbrokes - Favourable results ensures profits rise

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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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Ladbrokes have this morning released first half results ahead of management expectations, benefiting from good staking and favourable sporting results, especially the unpredictable Premier League and European Championships football. The share price rose by over 4% this morning.

Headline revenue is up 13.1% to £661.8m, with operating profit for the half of £52.3m, up from £38.9m last year.

Revenues in the UK Retail division increased 6.4% to £436.6m, with a gross win margin of 17.4% (H115: 16.0%). The UK high Street remains the group's largest division, accounting for 65% of revenue. BetStations (formerly SSBTs) now account for 10% of over-the-counter stakes.

Ladbrokes' online offering continues to grow, with total digital revenues increasing by 40.9% to £158.1m, with the addition of an extra 79,000 customers in the half. Staking in Ladbrokes Sportsbook increased by 30.4% (excluding high rollers) with the growth attributed to increases in mobile, in-play and football betting. Ladbrokes Australia saw stakes rise by 53.7% and revenue by 41.5%.

Although Ladbrokes CEO Jim Mullen acknowledged that a series of bookie-friendly results in the period has helped boost profits in the first half, he was keen to stress that he expects result patterns and margins to normalise in the future. He was particularly encouraged to see staking remaining high despite the results running against the punters in the period.

In light of the performance in the first half, Ladbrokes have raised their expectations slightly for the full year. Bloomberg consensus is for revenues of £1.26bn, with operating profit of £101.8m.

On the Coral merger, Ladbrokes are now engaging with potential buyers and remain hopeful that a competitive process can be successfully completed by the end of Q3. Completion would then be in Q4, at which time significant restructuring would commence.

The interim dividend is held at 1p per share.

Our view:

Aside from paying out over £3m to bold punters who backed Leicester at stratospheric odds, the sporting trend has generally been in the bookies favour this half. Portugal winning the European Championships, with a goal from a Swansea reserve team player against the well-fancied home nation France was a fitting end to an unpredictable season.

Ladbrokes have moved to target the recreational customer, and with a series of results even those in the blue parts of the East Midlands thought they would never see, the bread and butter of the Premier League has served Ladbrokes well this time.

Focusing marketing on the recreational customer has also helped to buck the decline in over the counter revenues, with the UK seeing a 1.3% growth in staking. The casual gambler, whether betting online or in shops, is less likely to win, and less likely to mind when they don't.

Aside from current trading, the main news item for Ladbrokes remains the merger with Coral. This is likely to go ahead once the Competition and Markets Authority's requirement for the sale of 350-400 shops has been satisfied.

The enlarged group will be the clear market leader on the UK's high street, while the international businesses should dovetail nicely. With cost synergies of £65m per annum mooted by the two parties, the impact on the bottom line is significant.

The trend in bookmaking, like many other industries has been for a shift to online. This division has been improving of late within Ladbrokes, however the combined group would still be under-weight online. The merger gives the combined group the option of splitting their hand. Having two brands, each aiming at a different type of punter, could be the chosen approach.

Therefore the Coral merger, if it goes through, could create a huge opportunity for the group, provided they can execute it properly. The enlarged group would be quite highly leveraged and still under-represented online, with an even larger Retail estate to be managed down over time. But let's face it, gambling was never a risk-free enterprise.

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.