William Hill plc (WMH) Ordinary 10p
HL comment (17 March 2020)
In light of ongoing coronavirus disruption and in an effort to keep resources within the business, William Hill is suspending its dividend until further notice - including the proposed 2019 final year dividend of 5.3p per share.
This decision came as part of announcement that William Hill's expects the current disruption to sporting events and closure of US casinos to have a material impact to this year's revenue and earnings.
The shares rose following the announcement on Monday afternoon but finished Tuesday down 26.5%.
William Hill's faced some sizable threats in recent times. Maximum £2 bets on fixed odd betting terminals, heightened regulatory scrutiny and a recent ban on using credit cards online all hurt profits.
Despite all this the group's most recent full year results on 26 February, although not pretty, did suggest William Hill was weathering the storm.
However, the spread of the coronavirus has meant sports events are being delayed or cancelled worldwide. With sports betting a staple of the whole sector, revenues are set to slump.
Analyst EBITDA expectations before the outbreak were in the region of £260m for the year. Based on their current scenario William Hill reckons coronavirus could knock £100 - £110m off cash profits this year this year. However, the closure of retail branches is an additional £25 - £30m hit per month - and given the UK Government's current stay at home stance, shop closures seem likely.
As earnings over the next few months are unreliable to say the least, the focus will switch to how well prepared William Hill is to weather the storm. That means looking at the balance sheet.
At the end of 2019 William Hill's net debt was 2.4 times cash profits. As long as the group can keep this measure under 3.5 times they have access to a £425m credit facility. However, given the hit to EBITDA predicted this could be tough. Banks may be happy to overlook this in the short term, given the circumstances - but that's not a given.
In the meantime the board are taking some drastic action. William Hill will save cash by suspending the dividend and there's also scope to reduce things like marketing costs. Substitution is a behaviour gambling clients have shown before - so there's always the possibility people swap sports for gaming.
For now cash preservation and access to credit remains of the first importance. If or when things start to look normal again many of the same opportunities for growth will exist - but that feels a long way off at the moment.
Pre-virus the shares were trading around 14 times future earnings, above their long run average of 12, but have since dropped to 5.5 (although bear in mind that this was before the drastic change in earnings guidance issued today).
William Hill said it's too early to accurately determine the effect of COVID-19 but provided the market with some scenarios they're currently considering.
The scenarios include: international football resuming in August, the cancellation or postponement until 2021 of the UEFA European Football Championship, UK retail shop closures for one month, the cancellation of the Grand National and Royal Ascot and US sports resuming in time for the new NFL season in September.
If these outcomes were to take place, William Hill expects this year's group cash profits (as measured by EBITDA) will reduce by £100m - £110m.
At the moment horse racing and retail shops remain open but the group said an additional month of closure impacts EBITDA by £25m to £30m.
The group confirmed 53% of 2019's £1.6bn revenue was generated through the sports book business.
William Hill said it had a "robust financial position and has appropriate liquidity to absorb the impacts of the scenario outlined above". The group have an undrawn credit facility of £425m and are working to reduce their cost base and improve cash flow.
Prior to recent cancellation of sporting events, trading in the quarter was ahead of William Hill's expectations, driven by favourable sporting results and a strong retail performance.
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 disclosure for more information.
Previous William Hill plc updates
The London Stock Exchange does not disclose whether a trade is a buy or a sell so this data is estimated based on the trade price received and the LSE-quoted mid-price at the point the trade is placed. It should only be considered an indication and not a recommendation.
Trades priced above the mid-price at the time the trade is placed are labelled as a buy; those priced below the mid-price are sells; and those priced close to the mid-price or declared late are labelled 'N/A'.