The William Hill (LSE:WMH) share price has bounced back from a 10-year low on news of recovering growth but is it really worth a flutter for value investors?
A major source of revenue is now closed off to the FTSE 250 stalwart: fixed-odds betting terminals (FOBTs). These mainstays of the bookmaker’s high-street outlets were incredibly popular but led to staggering losses for retail gamblers and were widely demonised as the ‘crack cocaine’ of betting.
William Hill took a huge hit when Chancellor Philip Hammond bowed to public pressure and slashed the maximum wager from £100 to £2. In response the 85-year-old firm posted a non-cash write-down of £882m in 2018, said it would close 700 stores and shed 4,500 jobs. Results for the year to January 1 showed crushing pre-tax losses of £721.9m compared with profits of £146.5m for the previous 12 months and earnings per share plunged to -83.6p, down from 16.6p the year before.
Since May 2018, the William Hill share price has sunk by more than 50%.
Reasons to be cheerful
Before the FOBT blow, William Hill had increased dividends every year since 2014. Now the stock is yielding more than 7.7% on a cheap-looking trailing P/E of 7.
And the bookmaker has made big strides overseas. The £242m acquisition of Malta-based online casino operator Mr Green has seen digital sales rise 8%. And in the same month as the FOBT sanction, the US Supreme Court blew the American gambling market wide open by backing a state ruling to legalise sports gambling in casinos and at racetracks.
With its operations in Nevada already well established, chief executive Philip Bowcock sanctioned expansion into six more US states. Bowcock said at the time that “key regulatory decisions…gave us much needed clarity to double profits by 2023.”
A May 2019 trading statement noted US net revenues were up 48%, softening the blow of a 15% drop in gaming income from the loss of the terminals.
2019’s half-year results show results in line with expectations. Earnings per share were still underwater at -7.1p, but compared to 2018’s catastrophic losses, that represents a win of sorts. Revenue was up 1% to £811.7m, while FOBT, the cost of ploughing money into American expansion and the Mr Green buy saw operating profits fall 33% to £76.2m.
Dividends are on track to return to pre-FOBT levels, said the bookmaker.
It had 27% market share across seven states in the first half and said it expects to profit from entering recently-legalised markets in Indiana and Iowa.
Bowcock pointed to “strong revenue growth in the US“, with over $1bn wagered in the first half, “positioning William Hill well for future growth.” A plan to acquire 34 Caesars casinos would give William Hill up to $35m in earnings in three years and access to five more states, including New York.
In it to win it
City analysts are bullish on future prospects, suggesting earnings per share could reach 9.89p by the end of 2019 and 13.3p by the end of 2020. At this price, that makes attractive forward P/Es of 14.8 and 11. I wouldn’t expect share prices to hang around too long, though.
Even as global growth slows and choppy US equity markets scare fearful investors into zero-yield options like gold and Bitcoin, I would rate William Hill a buy, given its business model, robust overseas growth and bookmakers’ habit of doing well when the wider economy is not.