William Hill - Q1 IMS

This is one that has been whacked recently by the tax changes announced in this years budget. Consequently as a result it is looking interesting as it is very over sold on the back of the downgrades to profits that arose from the budget changes. The valuation is also looking quite interesting as it is trading on around 11 to 12x earnings for the next couple of years with a forecast yield of about 3.7% at a price of 334 pence. It is also cum the final dividend of 7.9p until 30th April 2014 which represents a yield of 2.36%. So that's the brief background - what did they have to say in the IMS today about current trading?

The headline was one of strong underlying growth but with football margins apparently hitting margins. Otherwise key headlines from the results are reproduced below:

·   Continued outstanding growth in Online Sportsbook turnover, up 39% with mobile up 78%

·   Gross win margin performance hit by two substantial loss-making weeks driven by football results

·   Strong Online gaming net revenue growth, up 16%, benefiting from 142% growth in mobile

·   Largely completed roll-out of Eclipse gaming machines into half the Retail estate

·   Improving Australia KPIs with unique actives +22%, new accounts +8% and cost per acquisition -11%

·   Strong US performance with wagering +23% and Operating profit4 up 188%

·   Mobile Sportsbook and Casino launched in Italy

The bottom line from this was that operating profits were down by 14% despite turnover being up by 7% versus last years strong first quarter. This seems to be just one of those periods when results have been "punter friendly" and in the longer term the house or book maker usually wins. They also stress their diversification into overseas territories like Australia, Italy, Spain and the US and the growth in their on line business and mobile based channels.

They mentioned regulations that they have now complied with and the tax changes from the recent budget. it seems the tax change is not without consequences and may end up raising less revenue than the government thought as the Company said on these issues the following:

"As regards UK Retail, we have now successfully implemented the ABB's voluntary Code for Responsible Gambling and are pleased with the progress to date. However, as a direct result of the Government's unexpected announcement about an increase in Machine Games Duty to 25%, we have reviewed shop profitability and will be closing a portfolio of 109 shops this year, putting c420 shop employees at risk of redundancy.  This is particularly disappointing as, through the economic downturn, we have worked hard to grow our Retail base but this further planned increase in indirect taxation makes this action necessary." 

While on the outlook they said:

"Looking ahead to the rest of 2014, it is positive to note Online had recouped much of its shortfall against internal expectations following week 2 before we were hit again in week 12. While there is no guarantee we can make up the difference, we continue to believe the increased customer confidence from such wins should be good for business, especially in this World Cup year. We are very well placed to take advantage of the World Cup opportunity, coming in the second quarter, with an unrivalled football product range, the most downloaded Sportsbook app in the UK and a leading mobile gaming offer for cross-sell." They also flagged a 1% increase in their guided tax rate for the current year so probably more downgrades to come from that and the disappointing results in these numbers. Aside from this they mentioned that their net debt for covenant purposes had fallen in Q1 to £710 million from £796 million.

Summary and Conclusion
With these results being difficult and the Company uncertain as to whether they will make up the shortfall in the rest of the year and more downgrades likely - it is probably too early to rush out and buy this one. With the uncertain outlook and forecasts under pressure it is probably best ot base valuation off of earnings power of around 27 to 29 pence or say 28 pence for the sake of argument. This would leave it on around 12x at 334 pence with a yield of 3.7% or so from a 12.45 pence dividend forecast. So it looks reasonable value, but probably lacking a catalyst in the short term. Probably OK as a long term buy / hold and maybe the World Cup, not unexpectedly, might provide a boost this year.

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