Are William Hill’s shareholders letting the defeat it is facing in its home market get in the way of its prospects for a striking away win?
The bookmaker’s shares have been plumbing near-seven-year lows as it prepares for a forced reinvention in Britain after the government crackdown on fixed-odds betting terminals.. This is expected to lop as much as £100 million off its retail gaming profits when the rules come in.
At the same time, a more relaxed approach to online gaming being taken in the United States has opened up a $19 billion opportunity over the next five years.
William Hill is betting its future on a concerted expansion in America, alongside a big push in digital and online gaming, and it wants to take its profits before exceptionals in the US from about $50 million this year to about $300 million by 2023. Investors are either ignoring the potential or are incredulous.
The group, founded in 1934 as a company that took bets by post and over the phone, has become Britain’s second largest high street bookmaker, with 2,342 betting shops, and it is a serious player in online gaming in the UK, Italy and Spain. It has been in the American market for six years, with an established business in Nevada and new sports betting operations in Delaware, New Jersey, Mississippi and West Virginia.
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William Hill has been forced to act in Britain after the government cut the maximum stake that punters can place on fixed-odds terminals, used for games such as roulette and bingo, from £100 every 20 seconds to £2. The legislation is scheduled to come into force next October and the company was warned already that it will have to shut as many as 900 of its shops and put up to 4,500 jobs at risk as the rules are expected to push 38 per cent of its high street estate into the red.
At a capital markets day for investors this week, William Hill said that pre-tax profits from retail gaming this year were expected to be between £70 million and £90 million, assuming three months of trading under the new regime. Pre-tax profits should come in at between £50 million and £70 million over the next two years. Pre-tax profits last year in this division were £153.6 million. However, the bookie reckons that the American market will be worth as much as $19 billion a year by 2023, up from its present $5 billion. It is investing $200 million to $250 million next year on technology, marketing and more staff in the US.
The US assault is accompanied by a digital expansion, including the roughly £240 million that William Hill is spending in buying Mr Green & Co, a high-growth European internet gaming group expected to bring in £175 million in revenues next year. The result of all this investment and retrenchment means that profit growth next year will be virtually non-existent and that the dividend this year will be more like 8p a share, rather than the 13.6p that investors had expected.
The anticipated reward is a stable, smaller business in Britain, a high-growth, high-profits operation in the United States and £1 billion a year in digital revenues by 2023. The hope is that profits will have doubled by the same year.
William Hill’s shares have fallen by 40 per cent since January and now trade at less than seven times last year’s adjusted earnings, with a prospective yield of 4.2 per cent.
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The US growth is a target rather than a promise and there is obvious execution risk along the way. William Hill also will be jostling for position in the US with Paddy Power Betfair, GVC and 888 Holdings, not to mention the local competition. The odds against this bet coming off are too high.
ADVICE Avoid
WHY The company’s ambitions are laudable but the risk of failing to deliver is high
Direct Line
Direct Line has been operating in a tough market for car and household insurers this year and it is little surprise that its shares have fallen by 11 per cent since January.
The cost of motor cover, having risen steadily for three years, has been falling at its fastest rate since 2014, an average of 3 per cent this year. In spite of the lower returns, competition in the crowded sector has reached fever pitch, prompting a warning about the hostile environment from Hastings, a rival, last month that sent its shares falling.
For household insurance, harsh late-winter weather at the start of this year led to a slew of claims about frozen and burst pipes and the worry has been that the unusually hot weather over the summer would prompt an increase in subsidence claims.
As if that were not enough, the regulator has been showing more interest, asking whether insurers have been tinkering with their prices to offer better deals to new and prospective customers at the expense of their existing policyholders.
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Into this comes Direct Line, the largest car insurer and a constituent of the FTSE 100. It was founded in 1985 as a division of Royal Bank of Scotland but was spun out with its own listing in 2012, as a condition set by the European Commission after the bank’s rescue in the financial crisis. Direct Line also operates the Green Flag and Privilege brands.
A 1.2 per cent fall in motor premium sales by the insurer in the third quarter, to £456.4 million, was driven in part by lower average prices, although Direct Line does not specify a percentage drop.
There is worrying evidence across the industry that insurance claims are rising at a faster rate than prices, putting pressure on margins, and Direct Line’s update hints that this might be the case in its motor unit, though the increase remains within target range. Sales of its own-brand household cover were up modestly.
Direct Line’s shares, down 4p at 318½p, trade on an attractive ten times last year’s earnings and Barclays is forecasting a 9 per cent yield in the year ahead. The shares look attractive. Unfortunately, the sector does not.
ADVICE Avoid
WHY The general insurance market is too crowded and the pressure on profits too high
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