Profits fall at Britain's biggest bookmaker as big spenders lose less.
Ladbrokes (LSE: LAD), the UK's largest bookmaker, released its 2010 results on Thursday.
Betting on recovery
Excluding contributions from high rollers (punters spending £10,000+ a year), Ladbrokes reported revenue up 1.3% to £977 million. Operating profit before tax, finance costs and exceptionals rose 20% to £202 million.
In its 2,100 UK outlets, over-the-counter bets slid 7% to £2.5 billion, but machine bets rose 4% to £9.2 billion. Overall, this led to an 11% improvement in operating profit from the retail arm, where costs fell 0.8%.
In addition, poor results for punters during last year's World Cup boosted football margins, helping to increase operating profit from digital operations by a tidy 36% to £63 million.
Big spenders fall short
Alas, the above figures flatter Ladbrokes' overall performance. In 2009, it reported operating profit from high rollers just short of £67 million. For 2010, this contribution crashed to a mere £5 million, down a staggering 93%.
Adding back these volatile big spenders into the equation, we find that operating profit actually fell to £207 million, down 12% on 2009.
This below-par performance probably explains today's fall in Ladbrokes' share price, down 4% to 136.5p as I write.
A better balance sheet
Cash flow improved by 21%, rising to £273 million in 2010, thus enabling Ladbrokes to chop a chunk off its debt pile.
Ladbrokes' shareholders will be relieved that group net debt has tumbled from over £694 million to £492 million, down 29%. Thus, based on its current market value of £1.2 billion, Ladbrokes' gearing has fallen to 40%, which relieves the pressure on its once-stressed balance sheet.
Threats to bets
Like many traditional bricks-and-mortar businesses, Ladbrokes is under pressure from Internet rivals.
The big wave threatening Ladbrokes and other high-street bookies is the sustained growth of online betting. After all, why settle for inferior odds from your local shop when you can use online odds-comparison websites or smartphone apps to bag the very best prices?
Likewise, the growth of peer-to-peer betting exchanges such as Betfair (LSE: BET) has eaten some of Ladbrokes' lunch. Then again, having been floated in London at £13 a share last October, Betfair's share price has since crashed 29% to 917p. Hence, even pure-play online-betting businesses have taken a knock of late.
A good bet?
Ladbrokes reacted to these and other threats by closing 30 outlets, opening 40 new ones, and refurbishing 102 shops in 2010. This year should see a net 30 shops added to its estate, thanks to 50 openings and 20 closures.
In addition, Ladbrokes reshuffled its board of directors and management team, bringing in fresh blood in 2010 to stimulate growth in its retail and digital divisions.
Based on earnings per share of 15.2p, Ladbrokes shares trade on a price-earnings ratio of nine, which is well below the market average.
A proposed final dividend of 3.75p takes the full-year payout to 7.6p a share, up 155% on the previous year. This gives Ladbrokes a healthy dividend yield of 5.6%, covered twice.
If Ladbrokes' proposed £50 million investment in e-commerce software leads to higher growth in digital, mobile and in-play betting, then its shares could be re-rated more in line with its FTSE 250 peers. However, the payoff from this spending is at least two years away, so investors worried about execution risk might want to watch and wait.
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