Share tip of the week: Have a mid-term flutter
By
Paul Hill Aug 28, 2009
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They say the bookie always wins, but this year the UK gambling industry has done its best to prove the saying wrong. In the first half of 2009, Ladbrokes and William Hill have been hit by lower betting shop revenues, bad weather affecting sports fixtures and a series of losing bets.
But the 35% tumble in their shares since May looks overdone. Time and again, the industry has shown it remains a popular source of cheap entertainment, even in a recession. Of the two, I prefer William Hill, with its stronger balance sheet and better growth prospects.
Founded in 1934, William Hill provides three ways to gamble. There's the high street, which includes 2,300 shops, generating the bulk of profits; there's the online unit, which includes internet sports betting, casino games and poker; and then there's taking bets over the phone. What strikes me straightaway is the amount of operating cash flow (OCF) the firm spins off – about £300m a year, representing a yield of nearly 17%.
Furthermore, analysts expect 2009 revenues and adjusted earnings per share (EPS) to come in at £1bn and 20p respectively, rising to £1.1bn and 20.7p in 2010. That puts the stock on p/e ratios of just 8.7 and 8.4. The 2009 dividend is expected to be 8p, representing a yield of 4.4%
William Hill (LSE: WMH), rated a BUY by Daniel Stewart
The City seems to have got the wrong end of the stick about the group's ambitions. Analysts appear to believe William Hill is overly resistant to change. But actions speak louder than words. Since being promoted to the top job 18 months ago, chief executive Ralph Topping has thrown down the gauntlet. His initiatives have included an internet gambling joint venture with Playtech; a £350m rights issue in February; and a relocation of the online operations offshore to Gibraltar to escape the British tax system. The new joint venture is a particularly bold move, making William Hill one of the top three online players in Europe.
So what are the potential wild-cards? The company's net debt of £637m needs to be monitored. However, with a comfortable loan to earnings before interest, tax, depreciation and amortisation ratio of 2.1, and excellent cash flow, there should be little risk to the dividend. By my calculations, the group should be able to fund all of its future capital expenditure, interest/tax payments and dividends, and still have enough money left over to repay its debts at a rate of £80m a year.
Another worry is whether the industry can continue to withstand rising unemployment and weaker consumer spending. However, two years into the downturn, trading remains robust. Thirdly, gambling is tightly regulated across Europe. There is always a chance that governments will raise taxes, or even ban online gaming – as the US did in October 2006. Lastly (and I feel this is artificially affecting the stock), there's the possibility that Ladbrokes will launch a rights issue. This equity overhang is deterring some fund managers from buying into the sector because they want to mop up fresh capital later on.
All in all, with the added fillip from the football World Cup in 2010, William Hill looks a good mid-term flutter. Broker Daniel Stewart has a 259p price target on the stock.
Recommendation: BUY at 180p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments
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