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William Hill - Maximum machine stake cut to two pounds

Nicholas Hyett | 17 May 2018 | A A A
William Hill - Maximum machine stake cut to two pounds

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The government has announced that it intends to cut the maximum stake on fixed odd betting terminals or FOBTs from £100 to £2.

Although it's early to be sure about the impact of such a major shakeup, William Hill expects total gaming net revenue to fall by 35-45% following the introduction of a £2 cap. That would result in around 900 William Hill shops becoming loss making, around 38% of the total estate, and a proportion could close soon after a limit is implemented.

Full year underlying operating profit is expected to be £70-100m lower following the cap. William Hill does not expect to change its current dividend policy, which sees it paying out 50% of underlying earnings.

William Hill shares were up 3.7% on the day of the announcement.

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Our View

William Hill's biggest problem in recent years has been a spluttering online division. That's not the case anymore.

Extra developers have given the app a facelift, and a revamped marketing campaign, plus products like #YourOdds, have breathed new life into the brand. Online staking is up strongly and a firm hand on costs means profits are hitting a gallop.

The online changes are part of the wider goal to recruit more 'recreational' clients. These punters typically put money on at poor odds in return for a bit of a thrill.

Unfortunately, Fixed Odds Betting Terminals, not usually the recreational punter's choice, still contribute around 29% of group revenues. The cap on the maximum stake for these machines is set to be slashed and that will see profits evaporate overnight. It's not yet clear when the cap will be introduced, but it's a case of when not if.

When it comes to regulation, the US makes for an interesting bright spot. At present sports betting is legal in only a handful of states, but the Supreme Court has cleared the way for gambling across the country.

William Hill has been gearing itself up to compete in the US, investing in those states were sports betting is permitted. Growth is accelerating, although from a very low base, and success on the other side of the pond would be a big prize.

It's worth bearing in mind though that the last time William Hill rolled the dice on international expansion it lost. The Australian business has now been sold, but had been a source of repeated downgrades in recent years. Having cost the group something in the region of £500m, the group will be glad to see the back of it, even at a sale price of a little over £170m.

For the time being, the shares trade on 12.5 times expected earnings, and offer a prospective yield of 4.3%.

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First quarter trading update (8 May 2018)

William Hill saw underlying revenue rise 3% in the first quarter, as a strong performance on Online and in the US more than offset a weaker UK high street. Gross win margins improved across all divisions, thanks to an unprecedented run of bookmaker friendly results.

The shares rose 0.8% in early trading.

Online saw revenues rise 12%, despite an 8% fall in amounts wagered in the Sportsbook. That reflects a gross win margin of 8.8%, up 1.3 percentage points, following favourable results in football and horseracing.

Online gaming revenue rose 8%, supported by an increase in active customers and improved cross-selling. Online customer numbers rose 10%.

The UK high street also benefitted from the run of supportive sports results, with gross win margin in Retail rising 0.8 percentage points to 18.8%. However, net revenue in the division was down 4%, with the number of shops down 1% as well. Wagering was impacted by the cancellation of 15% of UK and Irish horseracing fixtures due to weather conditions.

In shop Self-Service Betting Terminals (SSBTs) now account for 14% of total Retail Sports bets.

In the US, amounts wagered were up 31% in dollar terms, with net revenue up 62% as gross win margins improved. Basketball, Ice Hockey and in play tennis betting drove the increased wagering. Mobile now accounts for 64% of total wagering in the region.

The group continues to wait on the outcome of the UK Triennial Review of fixed odd betting terminals and the Supreme Court's decision on US sports betting legislation.

The disposal of the Australian business completed on the 23 April, raising A$313.7m.

William Hill expect full year results in line with market expectations, assuming normalised gross win margins in the remainder of the year.

Find out more about William Hill shares including how to invest

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.

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.