UK retail bookmakers might be undervalued, say analysts

UK retail bookmakers might be undervalued, say analysts

Tuesday, January 10, 2017
Morgan Stanley pin hopes on a ‘more benign’ Triennial Review

The UK bookmaking sector is identified as one area where the prognosis for this year might not turn out to be as bad as has been forecasted, according to analysts at Morgan Stanley who have also put forward market leader Ladbrokes Coral as one of their picks for the year.

Looking forward it to the upcoming Triennial Review announcement due in March, the team lead by M Stanley’s Vaughan Lewis put forward the possibility of the announcement from the government being “more benign” than some fear.

“There is little (or no) evidence of an increase in problem gambling over the last 15 years, and the industry and regulations have made significant progress in the last three years, adding mandatory pre-commitment to the terminals, introducing pop-ups and breaks in play, dedicating at least 20 percent of advertising space in store windows to responsible gambling messages, and making stakes over £50 only available over the counter (interacting with a staff member) or account-based (with the ability to intervene if there are any signs of problem gambling),” the note points out.

“The review could conclude that these measures have largely addressed the issues, and that more study and data is required before making any material changes to stakes and prizes for bookmaker machines.”

Such an outcome would run counter to much of the commentary surrounding the outcome of the review with some analysts now forecasting a cut in permitted staking levels to either £20 or even lower.

Looking to the wider economic backdrop, Morgan Stanley also suggest a more positive outlook than some are assuming for this year and they go on to posit that retail bookmakers, including Ladbrokes Coral, William Hill and Betfred, might enjoy a better year than the 1 percent revenue decline forecasted.

“Our economists outlined a slightly more optimistic path for the economy here, and if unemployment remains stable and wage growth picks up (aided by the National Living Wage), there could be upside risks to forecasts in UK retail.”

This upside would immediately flow through to the bottom line. With fixed costs remaining high but stable, every percentage point improvement in retail like-for-like revenues is worth around a 3 percent rise in earnings per share (EPS) for the listed UK high-street bookies.

“A good year for retail profits and increased certainty around the Triennial Review could lead to a significant re-rating of the shares,” conclude the Morgan Stanley team.

The hope forms part of the basis of the analysts’ enthusiasm for Ladbrokes where they see the possibility of the company delivering better results than consensus is hoping for with strong cash generation potentially driving better shareholder returns.

The analysts see the progress of the online operation as being key. Pointing to the success of Coral’s online business in recent years – delivering a 24 percent EBITDA margin on a revenue base of circa £300m – the team suggest that a 25 percent EBITDA margin on combined revenues of £800m might prove to be conservative.

Totally Gaming says: Should the Triennial Review be less damaging than feared, then the bookmakers may well yet enjoy a better 2017 than many currently forecast. As Morgan Stanley point out, there are arguments for formalising the £50 journey limitations and making that the top-level stake but the question remains whether a 50% cut in stakes would be enough for the anti-FOBT campaigners and their supporters in the press.

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