Which looks better value -- William Hill or Ladbrokes?
The betting and gaming sector illustrates how an industry evolves in response to technological developments.
When William Hill (LSE: WMH) first opened for business in the 1930s, bets were placed by post. Telephone betting was an early innovation, and the retail betting shop business started in the 1960s when off-course betting was legalised.
Postal betting has long gone the way of the dodo, and telephone betting is showing signs of heading for extinction. The bricks and mortar retail business has become a mature cash cow, and the new growth story is online betting and gambling. Already the industry is eyeing mobile betting as the next big thing.
New technology creates opportunity for product innovation, such as in-play sports betting which is made possible by instant online communication (though probably the Royal Mail would have been reliable enough in the 1930s to permit postal in-play betting on test matches).
Industry Structure
William Hill and Ladbrokes (LSE: LAD) are the two big listed players in the sports-based licenced betting office business, with market shares of 25% and 22% respectively. Together with Coral, Betfred and the public sector Tote, these five companies account for 80% of that market.
PaddyPower (LSE: PAP), which benefits from the lower tax regime of its Irish base, has a similar profile whilst Rank Group (LSE: RNK) is primarily engaged in operating casinos and bingo halls.
The online market is much more crowded. All of the companies I have mentioned have extended their original bricks and mortar business to encompass online sports betting, casino, bingo and poker.
Listed online players include Sportech (LSE: SPO) and its football pools business, 888 Holdings (LSE: 888) and PartyGaming (LSE: PRTY) as well as betting exchanges such as Betfair which provide a platform for punters to make bets against each other.
As a leading player with an established brand and strong market share, William Hill should have a competitive advantage. After a shaky start in online operations, it formed a joint-venture with Playtech (LSE: PTEC), an online gambling software provider, and so it should be positioned well for growth, and eventual consolidation, in this segment.
That was the theory when I bought shares earlier in the year. Since then they have dropped some 14% (versus a 2% rise in the FTSE 250). So should I capitulate, or trust that the market will re-rate the shares?
Culture, Demographics and Tax
Though turnover has been hit by the recession, there is evidently long-term growth in the betting and gambling market. Gambling is seen as more socially acceptable than in the past, a cultural shift partly due to the high profile of the National Lottery and driven by ready access on the internet.
Market segmentation is somewhat stereotypical:
- Betting shops attract more C2DE customers with older punters playing horses and younger punters betting on football and in-shop gaming machines;
- Online sportsbook and gaming attracts younger ABC1 customers;
- Bingo -- retail and online -- attracts mainly women from the C2DE demographic;
- Telephone betting is favoured by older punters placing relatively high bets on horse races, but the UK firms are at a disadvantage to operators in low tax jurisdictions.
William Hill vs Ladbrokes -- a virtual knockout?
William Hill and Ladbrokes are similar businesses:
- Both have extensive licenced betting office operations in which they have recently rolled out new gaming machines;
- Both are targeting online betting and gaming markets in Europe as regulation opens up the markets, and have relocated their online operations to low-tax Gibraltar;
- Both are struggling to regain profitability in their telephone betting operations;
- Both strengthened their balance sheets last year with rights issues and bond issues to reduce and diversify debt.
Year to end
December 2009
(£m) | William Hill | Ladbrokes |
|---|
| Amount staked | 15,489 | 15,028 |
| Net revenue | 998 | 1,032 |
| EBITDA | 259 | 289 |
| Net cash from operations | 170 | 133 |
Net revenue
growth/(decline) | 3.5% | (10.3)% |
Online revenue
growth/(decline) | 8.1% | (6.7)% |
| | | |
| Net debt | 603 | 691 |
| Net assets | 756 | (60) |
| | | |
| Prospective P/E | 9.1 | 9.3 |
| Prospective dividend yield | 4.2% | 4.9% |
Trading Update
William Hill released a trading update for the half year on Tuesday, anticipating revenues up 3% and a maintained EBITDA, with revenue and operating profit from online operations up 24% and 43% respectively. Revenues were boosted by the World Cup, but knocked back by a run of bad horseracing results including a circa £5m loss from Royal Ascot which normally produces a £5m profit. The shares promptly dropped 2.4% to 174.6p.
To my mind, the figures show that William Hill does a better job of milking cash from its mature business than Ladbrokes does, its growth business is growing better and it has a stronger balance sheet, yet it is barely rated higher. I think the shares offer growth at a reasonable price, and I shall hold on to mine for the time being.
More from Tony Reading:
Tony has shares in William Hill.
