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William Hill - counting the cost of FOBT restrictions

George Salmon | 3 August 2018 | A A A
William Hill - counting the cost of FOBT restrictions

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William Hill's half year results are severely impacted by a £882.8m impairment from the government's decision to cap fixed-odds betting terminal stakes at £2.That's pushed the group to a pre-tax loss of £819.6m.

On an underlying basis, profits fell 12% to £113.6m as a result of horse racing cancellations earlier in the year, and increased investment in the US.

The shares fell 8.9% on the news.

The dividend is held flat at 4.26p per share.

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Our view

There's plenty of balls in play for William Hill at the moment.

On the positive side, the online division looks to be performing much better.

Extra developers have given the app a facelift, and a revamped marketing campaign, plus products like #YourOdds, have breathed new life into the brand. Profits are hitting a gallop.

The online changes are part of the wider goal to recruit more 'recreational' punters, who 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.

Success across the pond would be a big prize. The fact the group has existing relationships with casinos, which will, at least initially, be the focal point for the unshackled industry, is a positive. Investment is stepping up, and growth is accelerating, although from a very low base.

While we understand you need to speculate to accumulate, it's worth bearing in mind that there's plenty of others scrambling to secure a share of the market. Dynamic rivals GVC and Paddy Power Betfair have both signed significant deals in the US.

Investors should also bear in mind that the last time William Hill rolled the dice on international expansion it didn't go well. The Australian business has now been sold, but the proceeds of £170m were only around a third of what the group spent to acquire it in the first place.

Prior to first half results, the shares traded on 11.6 times expected earnings, and offered a prospective yield of 4.5%.

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Trading details

Net revenue rose 3% to £802.6m, boosted by a as growth in the group's online division outweighed declines in the high street Retail business.

The online business delivered growth despite wagering falling 5%, to £2.4bn, as win margins increased to 8.3% for 6.9% in H1 last year. Net revenue was £320.9m. Underlying operating profits rose 5% to £59.9m, following the introduction of the horseracing levy and higher marketing costs around the World Cup.

After reaching an agreement with the regulator around a failure to protect customers and prevent money laundering, William Hill continues to close customer accounts, which could impact performance in the second half.

Within Retail, amounts wagered fell 11% to £1.1bn. While win margins improved to 18.4%, that wasn't enough to stop net revenue falling 3% to £444m. Profit fell 7%, despite costs falling 2.7%.

8 shops were closed in the half, and as a result of the weak outlook for the UK, the store estate is being reviewed.

The existing US division delivered profits of £17.6m, more than double that in the equivalent period last year. After regulatory changes, the group is pursing expansion in new areas, which incurred losses of £17.2m.

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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.

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