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William Hill - signs of recovery as sports return

Nicholas Hyett, Equity Analyst | 21 October 2020 | A A A
William Hill - signs of recovery as sports return

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William Hill reported a 9% decline in third quarter revenues as a continuing decline in Retail revenues offset growth online and in the US. However, this reflects a significant improvement on the 32% revenue decline reported in the first half of the year - with both retail and online staking benefitting from the return of live sports.

The shares remained broadly unmoved following the announcement. The share price of 279.6p remains 2.8% ahead of the agreed cash offer from Caesar's of 272p per share.

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Our view

The cash offer from Caesar's means William's Hill's results are a bit of a formality - although the offer still needs formal approval from shareholders and regulators.

Having said that, the recovery in performance since live sports returned to TVs will help to reassure the would be acquirer. The US casino giants interest lies predominantly in William Hill's fledgling US business growth in the US remains impressive despite the MLB, NBA and NHL only resuming their seasons in late July. William Hill is also nailing down marketing deals and smaller acquisitions that will help drive growth nationwide.

However, we think it's worth noting that William Hill shares currently trade slightly above the Caesar's offer price. That could suggest the market thinks a better offer from a rival bidder will be forthcoming.

The current offer values William Hill at 25% premium prior to any announcements. But if it goes through Caesar's will look for "suitable partners or owners" for the group's non-US segments or 90% of last year's group revenues. An attractive offer for such a small part of the business is unusual.

However, Caesar's is deeply embedded in William Hill's US business and that is very much the jewel in the crown. The group already owns 20% of William Hill US, through their joint venture and the existing agreement says that if William Hill is acquired by someone else, Caesars has the right to cut off access to its casinos. We think that will make it difficult for anyone else to clinch a deal.

We suspect that's one reason the William Hill board thinks the current offer is good enough to recommend to shareholders.

Until any deal is signed the William Hill we knew before remains. The group's licking some wounds from the pandemic, but the balance sheet is in better health thanks to a £224m share placing and VAT refund.

Regulatory and competitive challenges remain but will likely be someone else's concern soon. That means the main decision facing investors is whether to sell and lock-in current gains or hold on in the hope that Ceasar's is gazumped.

William Hill key facts

  • Price/Earnings ratio: 41.7
  • 10 year average Price/Earnings ratio: 13.07
  • Prospective dividend yield (next 12 months): 0.6

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Third Quarter Trading Update

Online revenues rose 4% in the third quarter. The group delivered improvements to the gaming offer in Europe and the UK, as well as smaller developments in online sports betting and customer protection. New regulations being introduced in Germany are expected to negatively impact cash profits in the region by £10m.

Footfall in the UK Retail business move back towards pre-coronavirus levels. That reflects in part the smaller estate, as the group shut loss making shops - opening 1,414 in the period. Revenues in the quarter fell 2% year-on-year. Local-lockdowns continue to cause disruption, and William Hill estimates that the closure of any 100 of its shops for a month would negatively impact cash profits by £2m. AT present 10% of the retail estate is in areas with 'very high' alert levels.

In the US quarterly revenues rose 10% year-on-year. The group's sports offering is now live in 14 states, with strong wagering growth and 72% of bets being placed through mobile channels. The group has agreed a new exclusive partnership with ESPN, and integrated both the Cantor and Caesars' sports books.

The group expects to achieve a net debt to cash profit (EBITDA) ratio at the year end of 1-2 times. That follows the Vat refund on certain gaming machines.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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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