Bad luck hits Ladbrokes as revenues fall

Kathleen Brooks

would think that with this summer’s packed sporting calendar bookmakers would be rubbing their hands together in glee at the prospect of extra wagers on who will win the World Cup or how many goals England will score.

But before spread betters try to capitalise on a summer boost for the bookies, it’s worth doing some homework and differentiating between weak and strong companies. Execution Noble, the investment banking group, reiterated its sell recommendation for Ladbrokes at the end of last week, after the UK bookie released earnings figures. Net revenues fell 6 per cent during the first four months of the year and although turnover from sporting bets rose, revenues from over-the-counter trade at its betting shops fell. The bank expects revenues to remain depressed for the coming months.

Analysts at Execution Noble think that Ladbrokes could lag behind its peers in the medium term: “Today’s performance from Ladbrokes indicates the bookmaker still has some way to go before its performance comes on par with William Hill,” wrote in a note to clients after Friday’s results were announced.

So, why has William Hill pipped Ladbrokes to the post? Firstly, free bets associated with Ladbrokes’ loyalty card are having a negative impact on its profit margins, say Execution Noble’s analysts. The card rewards customers who make a winning wager with points that can be used to make free bets. In Execution Noble’s view, closing the reward programme could reduce the risk to earnings in the future, although it concedes that doing this would be hard since it might alienate the bookmaker’s clients. In contrast to this, William Hill’s loyalty scheme has less of an effect on its profit margins.

Secondly, William Hill has emerged from the recession in a stronger position than its rival. Although both bookmakers saw a decline in the size of bets staked in their shops between 2008 and 2009, the decline in bet size at William Hill was a modest 0.1 per cent last year relative to Ladbrokes’ 5.9 per cent decline. William Hill has also boosted its online presence with a joint venture with Playtech in 2008, which is now showing positive results.

This position of strength in both its retail and online businesses will be important for William Hill because of the tax threats faced by the industry. Morgan Stanley thinks that bookmakers will be faced with an increased tax burden as the UK’s new government tries to repair the public finances.

“It’s politically easier to raise taxes on goods and services that are perceived to have a negative impact on health and society in our opinion. Pub stocks and betting companies look most at risk from higher “sin taxes,” it wrote in a note to clients last week. Any changes to the gross capital tax (GCT), currently at 15 per cent, and taxes for gaming machines could have an adverse effect on bookmakers’ bottom line.

Due to the tough environment for the gambling industry, spread betters should look for value and Ladbrokes’ share price is looking over-valued. It has appreciated by 18 per cent since the start of the year and is currently trading at a premium to William Hill.

But the economic fundamentals support a recovery in William Hill’s share price – at the very same time as the England football team are trying to win the Jules Rimet trophy in South Africa.