The company is getting its digital act together, and is on a modest P/E and attractive yield.
Annual results from Ladbrokes (LSE: LAD) caught my eye last week. To my mind, Britain's second-biggest bookmaker is beginning to look like a very interesting growth-and-income prospect.
No quick fix
It's getting on for two years since Richard Glynn was brought into Ladbrokes as chief executive, tasked with rebooting the bookie for the digital age. When he arrived, he slammed the company's past complacency and warned shareholders it would take three to five years to put things right.
Since then, Ladbrokes' share-price performance has continued to lag that of its big rival, William Hill (LSE: WMH), investors prizing the latter's substantial lead in the high-growth area of online betting.
Mr Glynn hasn't exactly endeared himself to existing and potential shareholders. Having set out a vision of transformation through organic investment in smarter technology, he promptly began looking at potential acquisitions. Protracted takeover talks with two online betting companies, 888 Holdings (LSE: 888) and Sportingbet (LSE: SBT), were both ultimately abandoned.
Personally, I don't think Mr Glynn can be criticised too much for taking an exploratory walk down 'Acquisition Avenue'; and I also think he was right to back out of the deals, rather than overpay or take on undue risk simply to appease impatient shareholders.
Crucially, as Ladbrokes' latest results show, Mr Glynn's original vision of organic investment hasn't been neglected while he's been flirting with possible acquisitions.
Results
Revenue for the year ended 31 December 2011 came in at £976m, down 0.4% on last year, while normalised operating profit was down 8% at £190m. A whopping 66% fall in bottom-line profit and statutory earnings per share was due to a one-off income tax credit recognised in 2010.
The numbers, while slightly ahead of analysts' consensus forecasts, don't look particularly thrilling on the face of it -- especially as operating profit in the group's great white hope, the Digital division, was down 12% year-on-year. Negative growth was also seen in the small European Retail and Telephone Betting divisions.
However, there was a resilient performance, with modest growth in operating profit, from the 2,100+ betting shops of the core UK Retail division, while Digital appears far more promising when you look beyond the bare numbers. Furthermore, trading since the year end hints at a reinvigorated business, just beginning to gain traction and momentum.
Digital promise
Profit decline in Digital in 2011 was down to a challenging poker environment (this will be a strategic area of focus in 2012) and to unfavourable sporting results in the second half, which hit the sportsbook margin hard. However, in the words of the chief executive:
"This margin weakness masks positive underlying trends in the business, with strong growth indicators in sportsbook and casino in H2, driven primarily by the commencement of our marketing investment in August 2011."
Sportsbook sign-ups grew 77% and casino sign-ups 82% in the final quarter of 2011, and the plan for 2012 is to further increase marketing spend on the back of ongoing investment in smarter technology.
The company's investment in pricing, trading and liability management, through such things as automated algorithms, is beginning to show results. For example, Ladbrokes offered significantly more events in the lucrative 'Bet in Play' sector in the second half of 2011 and has plans to add a further 20,000 events in 2012, increasing its offer by over 60% to around 50,000 events. Furthermore, new proprietary tools will also optimise margins.
A new sportsbook website will go live this month. The company has high hopes for this and will be replicating its functionality across all gaming products, starting with casino in the second half of 2012.
With mobile net revenue having grown 174% year-on-year in 2011, Ladbrokes will be expanding its range of casino games on iPhone and Android. It will also be launching a new and bespoke mobile platform that will capture many of the features of the new sportsbook website.
Growth and income
At a current share price of 153p, Ladbrokes is on a trailing price-to-earnings (P/E) ratio of 10. Rival William Hill, if it meets consensus expectations for 2011 (its results are scheduled for Friday), will be on a similar P/E.
However, I'd suggest that of the two, Ladbrokes has the greater potential for earnings surprises on the upside going forward, with double drivers for share price growth of a modest P/E and more low-hanging fruit to go for than Hills in Digital.
On the income side, Ladbrokes is on a trailing dividend yield of 5%, expected to rise to 5.5% for 2012. The equivalent expectations for William Hill are 4% and 4.5%.
With its digital prospects, modest P/E and attractive dividend (almost twice covered by earnings), Ladbrokes looks a potentially very interesting growth-and-income prospect at the current share price.
It could pay to keep a close eye on whether early anecdotal evidence from punters is positive on the new sportsbook website. Ladbrokes could be set to gallop if it is.
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