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William Hill - Investment and regulation weighs on results

Nicholas Hyett, Equity Analyst | 26 February 2020 | A A A
William Hill - Investment and regulation weighs on results

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William Hill plc Ordinary 10 pence

Sell: 133.30 | Buy: 134.95 | Change -5.55 (-3.99%)
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William Hill reported full year net revenues of £1.6bn, down 2% year-on-year. That reflects lower revenues from high street stores following the introduction of the £2 staking limit, partially offset by growth in online and the US. Underlying operating profits fell 37% to £147m as increased investment saw operating costs increase in both online and the US.

The full year dividend fell 33% to 8p, as previously announced.

The shares fell 2.5% in early trading.

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Our view

2019 was dominated by the government's move to cut the maximum stake on in-shop gaming machines to £2 a pop. William Hill closed 713 shops in the UK as a result, impacting revenues and profits, with associated redundancy and other costs pushing the group into a loss at the reported level.

However, the impact has actually been less bad than the group had feared. Retail profits came in ahead of expectations, with customers migrating to the stores that remain open and gaming machine revenue holding up reasonably well. The pain will drag into next year too, since changes were made mid-way through the year, but the group should now have a reasonably solid base from which to rebuild the division.

Unfortunately for William Hill this isn't the end of the road for new regulation, and attention is moving beyond the high street to online operations. Increased customer due diligence and higher gaming duties weighed on results this time round. A ban on gambling with credit cards is expected to knock £5-10m off profit next year too. If the trend continues it could prove an unhelpful headwind for increasingly vital online revenues.

But that doesn't mean it's game over.

The app's had a facelift, and the acquisition of Swedish digital specialist Mr Green should add further online expertise while diversifying the business across Europe. It's already adding a shot in the arm to sales, although the continent comes with its own regulatory challenges and debt has increased substantially following the deal.

The US presents another exciting avenue for overseas growth.

William Hill already had a presence in the US, running books in over 100 casinos in Nevada, which historically had a near monopoly on sports betting. Now the Supreme Court has cleared the way for gambling across the country and William Hill has been quick out of the stalls. The US has the potential to become the world's most valuable betting market and the group's already accepting bets in nine states plus Washington DC. There's the potential to add several more.

Early growth has been very promising, but cracking the US market will be no walkover. Rivals are scrambling to secure a share of the market, and dynamic competitors GVC and Paddy Power Betfair should not be taken lightly. Memories of William Hill's less than successful foray into the Australian market still linger...

The shares trade at 13.6 times expected earnings, above their longer-term average of 12, and offer a prospective yield of 4.6%. The group is targeting an 8p per share underpin to the dividend through the transition, but if conditions worsen that commitment could well come under scrutiny.

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Full Year Results

William Hill's Retail business saw overall revenues fall 20% to £717m. That reflects a 2% fall in sportsbook bets to £2.2bn, as the group shut 713 shops in Q3. Like-for-like wagering in remaining stores rose 6%. A slight improvement in gross win margins (the percentage of total stakes the group keeps) meant overall sportsbook revenues were flat year-on-year at £400m. However, gaming revenue in stores fell 36% to £317m following the introduction of the £2 staking limit.

Operating costs didn't fall enough to offset the revenue decline, meaning underlying operating profit fell 45% to £83.2m. However this is slightly better than William Hill had originally expected.

Total Online revenues rose 16% to £738.3m. However, that was boosted by the Mr Green acquisition, on an underlying basis revenues fell 3%. The division saw overall sportsbook betting fall 4%, with gross win margins flat year-on-year, offset by increased international gaming revenues from the Mr Green deal.

The US Existing division saw wagering rise 14% while gross win margins fell slightly. That resulted in a 2% rise in net revenue at constant currency, which reached £83.6m. However, underlying operating profit fell 17% to £27.1m as the group invested in staff and property in its Nevada base.

Revenues in US Expansion rose 224% to £42.8m as total wagering rose dramatically and gross win margins also improved slightly. The group's overall market share now stands at 20%. The division reported an operating loss of £26.1m.

The acquisition of Mr Green and increased investment in the US business saw net debt rise 73.9% to £535.7m. Net debt to cash profits (EBITDA) rose to 2.4 times.

William Hill expects to deliver growth in Online and the US next year, with Retail expected to stabilise.

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