Morning Equity Briefing |
Gaming
Current valuations do not stack up; we see 40% upside to Ladbrokes and William Hill over next 18 months
David Jennings
Concerns that the retail businesses of both Ladbrokes and William Hill are in structural decline present an excellent buying opportunity. We have seen no evidence to suggest that the reduction in retail EBIT for both is anything other than cyclical in nature. While the UK consumer backdrop will pose challenges in 2011, we see good scope for Ladbrokes to improve its retail performance substantially over the next two years through a better machine offering and the cost savings already announced. As such, we think 2012 consensus is 8% too low. William Hill remains the better positioned group online, and we see good scope for it to continue to grow its sportsbook in 2011. While Ladbrokes has the balance sheet capacity to acquire 888, we feel that it negotiates from a position of strength. Our discounted cash flow valuation yields up to 40% upside for both stocks. Current share prices appear to be pricing in consistently falling group revenues and margins. However, we believe that scenario is highly unlikely. We continue to like the cash-flow generation of both (2012 FCF yield LAD 12.7%, WMH 9.2%), with the prospects for yields to improve further as debt is paid down.
We retain our 'outperform' rating on Ladbrokes and raise our William Hill rating to 'outperform' from 'neutral'. In terms of catalysts, there is slightly more scope for positive surprise at Ladbrokes and we therefore have a slight preference for it at this point.
For further detail, see our research note to be issued this morning.