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Can William Hill’s [WMH] share price avoid collapse as legislation cuts into profits?

William Hill’s [WMH] share price closed 2.3% off its opening price on Monday, after the betting company confirmed an expected fall in profits for 2018 by around 15% year-on-year. Before the announcement, the stock had been on a moderate uptrend, gaining 13.5% in the first 13 days of the year.

When William Hill warned in its report for Q3 that there would likely be such a drop, its stock fell 5% – it had been on a rare rise in 2018 at the start of the month. The company’s operating margin of £234m for 2018 was £46m off the £290m made in 2017. Before the announcement, the stock had already suffered through 2018, closing the year 52% down.Powered by CMC Markets, as at 24 January 2019

 

Tougher laws for customer due diligence online and a decline in high-street sales are to blame, according to the company. Moreover, further headaches are up ahead, most notably a law coming in April that will limit the amount customers can spent on fixed-odd betting terminals.

But even with the drawbacks of 2018, William Hill’s underlying profit grew by 4%, despite increased customer due diligence. While Hill’s expansion into the US (currently seven states), following America’s loosening of sports betting laws, has already paid for itself.

 

Slowdown no surprise

The profit drop was “not a major shock”, according to AJ Bell investment director Russ Mould, who says the change in max stakes on fixed-odds betting terminals from £100 to £2 means Hill must massively restructure its high street business, a claim echoed by Philip Bowcock, William Hill chief executive.

"2018 was a pivotal year for both William Hill and the wider industry,” Peacock said. “We now have greater clarity around the key challenges and opportunities for our business.

"In 2019 we will remodel our retail offer while building a digitally-led international business, underpinned by a sustainable approach as part of our nobody harmed ambition."

“In 2019 we will remodel our retail offer while building a digitally-led international business, underpinned by a sustainable approach as part of our nobody harmed ambition” - Philip Bowcock, William Hill chief executive

 

Mr Green and Co takeover

The company is set to secure a £242 takeover of Swedish gaming firm Mr Green and Co [MRG], which is listed on Nasdaq Stockholm. It will soon hold at least 92% of the company, up from a 13% stake held since October.

Mr Green, the buyout of which will increase the company’s international reach especially in the case of Brexit, has remote gambling licences in 13 countries, including Sweden, Denmark, Italy, Latvia, Malta and the UK and Ireland.

 

Mixed messages

The US expansion will take on new-found significance following the drop in overall profits, however there is a chance online gambling might be made illegal over state borders due to a new interpretation of the Wire Act by the Department of Justice, though these reports are still unconfirmed as the US government remains partially shutdown.

In any case, the news sent William Hill’s value down 2.2% on 15 January. The firm’s trailing 12 months EPS currently sits at a troubling -112.40, while the stock supports a dividend yield of 7.63%.

 

Market cap£1.49bn
Dividend yield7.63%
EPS (TTM)-112.40

William Hill stock vitals, Yahoo finance, as at 24 January 2019

 

The company will announce its full year results on 1 March, when the true extent of the various financial pressures on William Hill will be clear. However US betting profits could still help ensure the company’s growth going forward - Shore Capital analyst Greg Johnson estimates sales in the US will hit $92m in the second half of last year, in line with company forecasts.

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