Ladbrokes Coral makes its debut

Ladbrokes Coral makes its debut

Tuesday, November 1, 2016 Posted by Andy McCarron
Analysts assess prospects for merged company

Ladbrokes Coral has made its debut as a merged company on the London Stock Exchange, fully 15 months after the deal was first announced.

According to the prospectus published last week, on a pro-forma basis the company had revenues on 2015 of £2.5bn, with three-quarters coming from the UK and the rest from Italy, Belgium, the Republic of Ireland, Spain, Australia and elsewhere.

A lot has been said by both companies regarding the importance of building up scale online, and the merger does indeed produce an entity with a larger digital presence with pro-forma online EBITDA of £81m (with Coral Group bringing £74m and Ladbrokes adding just £7m).

However, the new entity is much more reliant on the enlarged high-street presence. Even after the intervention of the Competition and Markets Authority (CMA) which instructed the firm to offload 360 shops in order to satisfy local competition concerns, the company still has an estate of circa 3,600 outlets.

It leaves the company with an exposure of around 56% of total revenues coming from UK retail – and given the prospect of the recently announced Triennial Review consultation on the part of the UK government, it means the company starts life in a potentially precarious position.

Even the buy notes form the analysts acknowledge as much. Morgan Stanley said this morning that around 60% of total UK retail revenues for the group were now generated from machines, with the lions’ share of that coming from the higher-staking B2 machines.

The “high sensitivity” of Ladbrokes Coral to these machines is demonstrated by the fact that the Morgan Stanley team estimate the B2 machines alone will contribute gross profits of circa £317m in 2018 compared to total forecast retail EBITDA for that year of £272m.

“There is significant political pressure against these machines, with a wide range of parties arguing for a reduction in the maximum stake from £100 (stakes above £50 need to be place over the counter or via a registered player card) to £2,” said the note.

The analysts ‘bear case’ is that the Review will recommend maximum stakes go back to £10, which would knock up to £100m off their EBITDA forecast for the company for 2017. The team do not say what would happen if maximum stakes were cut back to £2, but they do suggest that the current Price/Earnings valuation multiple of circa 12.6 times suggests their current bear case is “close to being priced in”.

At Canaccord, the team there point out that the so-called £50 journey legislation that was introduced last year took around £30m from the combined company profits and suggest that any further hit from the Review could be more than made up by further synergy benefits. The company has signalled it is looking to achieve synergies in terms of costs of around £65m but the Canaccord team believe they are being too conservative and reckon that up to £100m in synergies can be achieved, saying they believe that is more “realistic”.

“We think the fit looks good, and synergies offer upside,” they told clients. “This provides plenty of ballast, at a time of increasing uncertainty around UK gambling regulation.”

Back with the online prospects, the analysts at Goodbody pointed out that the growth trends for both companies in recent months have been “very encouraging”. At Morgan Stanley, the team suggest that the application of Coral’s operation and marketing efficiency can now be applied to the whole group and that the EBITDA margin for the combined entity will move up towards Coral’s previous levels of around 24%, in line with the peer group

Totally Gaming says: These analyst notes are worth bearing in mind when it comes to what the Triennial Review might means for UK retail in the months to come. Whether the full impact of harsher regulatory treatment is “fully priced in” by investors will likely be tested next year.

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