William Hill profits squeezed by regulations but overseas and digital prospects grow

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William Hill PLC (LON:WMH) reported another loss for the first half of the year as the bookmaker’s shops were hit by the lower stake limits on fixed-odds betting machines.

The FTSE 250 group said the results were in line with management expectations as it goes through a “period of transition” and increasingly focuses online and overseas, helped by a 66% increase in international online  revenues and US$1bn wagered in eight of the 12 US states that have legalised sports betting so far.

In the 26 weeks to 2 July, net revenue was up 1% to £811.7mln but led to a £63.5mln loss before tax.

A £114.3mln of charge in the period, as management decided to close 700 bookie shops due to the regulatory overhaul, led to losses continuing, though the charges were significantly smaller than those a year ago that led to the £819.6mln loss last time.

Stripping out exceptional charges, adjusted operating profits were still down 33% to £76.2mln due to the FOBT stake limit and investment in US expansion, with increased digital compliance measures for the UK’s “safer gambling environment” regime another cost.

Digital and USA begin to deliver

Online revenue was up 14% to £367.3mln on a reported basis, with international online now providing a third of net revenue up from less than a quarter last time.

Digital net revenues were down 2% pro forma if excluding the acquisition of Sweden-based Mr Green and down 3% in the UK, but an improvement on the 8% decline reported for the first 17 weeks of the year.

In the US, revenue in the core business was up 16% in local currency although EBITA shrank 27% against an unusually high margin in the prior period.

William Hill said that the proposed merger of joint venture partner Eldorado Resorts and Caesars would provide access to 34 additional casinos, and circa US$20mln-US$35mln retail EBITDA within three years.

The UK bookie is entitled to operate mobile sports in states where Eldorado obtains a licence, as well as to exclusively operate sports books in the acquired casinos.

Analysts pleasantly surprised

Broker Peel Hunt said EBITA was well ahead of its forecast £63mln but noted the divisions saw a considerable divergence in performance.

With US EBITA down 27% against an unusually high margin prior period, Peel’s analysts said: “William Hill has an aspiration to double EBITA to £450-490m by 2023 which, in the context of today’s results seems a distant prospect. However, the groundwork is being laid for a more sustainable business with real growth prospects in the US and the valuation is undemanding.”

Russ Mould at AJ Bell observed that investors were appearing prepared to take the long-term view.

“While America has often been a graveyard of UK corporate ambitions, think Tesco’s failed Fresh & Easy venture, the UK gambling sector is seen as being well placed to take advantage of the opening up of sports betting across the pond, even if it has made a slowish start.

“The industry arguably had its fingers burned before with online betting in the States but there are hopes for a more successful outcome this time.”

“William Hill’s with US-based Eldorado effectively provides it with a licence to operate and the latter’s merger with Caesars Entertainment could have a major benefit to William Hill as the scale of the enlarged business would be material, with 60 casinos across 16 states.”

— Share price and analyst comment added —

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