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Ladbrokes Coral Group - Q3 results true to form

George Salmon | 13 November 2017 | A A A
Ladbrokes Coral Group - Q3 results true to form

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Ladbrokes Coral Group Plc Ordinary 28.333p

Sell: 172.00 | Buy: 172.00 | Change 5.00 (2.99%)
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The 2% increase in Q3 net revenue was driven by strong growth in the European and Digital divisions, with the UK Retail business posting a small decline.

The shares fell 1.4% on the news.

Our View

Ladbrokes Coral has made reasonable progress, but the upcoming review into the gambling industry still dominates sentiment.

Following the merger with Coral, the group is the clear market leader on the UK high street, and has the option of splitting its hand to pitch the two brands at a different type of punter. The international businesses are small at present 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.

That said, there are long-term risks. 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 Fixed Odd Betting Terminals (FOBTs) in shops. Gambling machines 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. A review into their use is ongoing, and with over 3,500 shops up and down the country, Ladbrokes has more riding on the outcome than rivals.

A reduction to the current £100 maximum stake seems inevitable, despite industry protestations that jobs are at risk. If the review sets stakes at a maximum of £50 a pop, the group would breathe a big sigh of relief, but slashing it to just £2 would lead to a rather sharp intake of breath. Hundreds of millions in revenues could disappear overnight.

A £2 cap still hasn't been ruled out, and the possibility of such radical change goes a long way to explain why the group is currently trading on a 19% discount to its long-term price/earnings ratio. It also means the shares currently offer a prospective yield for next year of 4.5%.

Third quarter results (on a constant currency basis)

An agreement with The Racing Partnership saw all horse racing content return to the UK estate. This helped staking rise on the previous quarter, but couldn't prevent a 5% decline year-on-year. With a 0.4 percentage point improvement in win margins, driven by the Ladbrokes brand, this translated into a 1% like-for-like (LFL) fall in UK Retail net revenue.

In Europe, net revenue was 12% ahead of the prior year, driven by an improvement in staking and win margins.

Online staking rose 14%, despite the absence of a major football tournament in the summer, and Sportsbook gross win margins increased from 8.9% to 9.6%. This helped group net revenue rise 16%, with strong growth at Coral, and in Australia and Italy, offsetting a weaker performance at Ladbrokes.com. Gaming net revenue rose 6%.

The group remains on course to meet its expectations for the full year.

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.

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.