Going gets heavy for the big bookmakers
Saddled with tough new rules, are their shares worth a flutter?
WITH Tiger Roll set to go off as the shortestpriced favourite in the Grand National since Red Rum in 1975, bookmakers will take a bashing if the popular Irish horse scoots home for a second straight year.
But they face an even bigger challenge away from the track as legislation comes into force.
The maximum stake for fixedodds betting terminals (FOBTs) in bookmakers’ shops – dubbed the ‘crack cocaine’ of gambling because of their addictive nature – was cut from £100 to £2 on Monday, in a move aimed at protecting punters. For the bookies, that is a big hit.
Research carried out for the Association Of British Bookmakers has warned that up to 4,000 betting shops could be forced to close, out of a total of between 8,000 and 9,000. They claim around 21,000 jobs are on the line.
The stock market is alert to the situation. The share prices of the big bookmakers – Ladbrokes Coral owner GVC, Paddy Power Betfair, William Hill and 888 – have fallen in the past year as analysts slashed earnings forecasts to reflect an expected drop in income from the casino-style gaming machines.
City number-crunchers have pencilled in a combined drop in net profit of some 25pc for 2019 across these four bookies. This is because FOBTs accounted for such a big proportion of earnings – £1.8bn of profits last year compared with £1.3bn from bets placed over the counter, according to Racing Post. But the cut to FOBT stakes is not the only thing likely to send profits plunging – firms are also being hit favourites have obliged in the great race since 1960.In addition, regulatory changes elsewhere are creating fresh opportunities.
This is especially so in America after last year’s repeal of 1992’s Professional And Amateur Sports Protection Act. That has opened up a potentially huge, though highly competitive, market, and the big British bookies have already begun to jockey for a piece of the action.
Paddy Power Betfair has bought fantasy sports provider Fan Duel; William Hill is building on its existing presence in Nevada and also at New Jersey’s Monmouth Park racetrack via a partnership with Eldorado Resorts; GVC has teamed up with MGM to add to its existing Stadium Technologies business and 888 has launched 888sport in New Jersey.
Analysts expect the bookies’ profits to start to recover in 2020. There is also the possibility that the FOBT stakes limit prompts a further round of consolidation within the betting industry.
William Hill and 888 have been involved in failed bids before, including for each other. There is always a chance that the falls in their share prices lure a predator once the effect of the FOBT stakes reduction becomes clear and the US market begins to settle down.
Investors may be particularly intrigued by William Hill, even if trading remains tough. The firm has added to its existing businesses in the USA with several shrewd strategic partnerships. It has also begun to raise its game online here in the UK and its shares have fallen the furthest out of the four quoted firms, meaning the tide may be ready to turn.
ANOTHER with potential is JPJ, a UK online bingo and overseas online/ casino group that looks very cheap, though it has a large debt pile. Caution is in order with Paddy Power Betfair, which is a ‘hold’ at best. It’s rarely a good sign when a long streak of dividend increases comes to an end, and that is what happened last year.
888 is the other bid candidate. The share price performance has been awful. It may not be cheap enough for a predator yet but is getting there. GVC has more than halved in six months, not helped by demotion from the FTSE 100 and executive share sales that went down rather badly.
If you think we’ve seen the worst of the regulatory push for now, at least, it may be worth a flutter.
by Russ Mould