Picking a winner among the UK's bookies in the past two years has depended on which companies have the biggest exposure to regulated betting while being able to broaden their appeal to punters by offering 'in-play' betting and betting via mobile phones. Clear divisions have opened up between the big bookmakers. Shares in William Hill (WMH) and Paddy Power (PAP) have got premium ratings after these companies successfully 'digitised' their services. That has left Ladbrokes (LAD), the Queen's bookmaker, struggling to catch up, although its bosses are determined to improve its digital offering through a self-help programme. Even so, Ladbrokes' rating is significantly lower than its main rivals because investors assume the group won't be able to improve its digital offering quickly. However, that assumption is starting to look dated as the latest results show that Ladbrokes' core business of taking and placing bets is in excellent shape and that its strengths are being undervalued.
- Leader in machine gaming
- Strong retail business
- Online finally improving
- Excellent cash generation
- More online investment needed
- May not make up lost ground
The healthy state of the core UK over-the-counter betting business was the biggest factor behind Ladbrokes' solid results for 2012, which showed basic earnings per share up 62 per cent to 21p. The 8 per cent growth in the UK retail division's net revenue to £740m translated into an impressive 18.6 per cent increase in operating profit to £180m and emphasises Ladbrokes' success in 'fruit' machines.
The retail estate has been extensively revamped over the past two years to accommodate a new generation of fixed-odds betting machines and more machines per shop. New machines have proved popular with punters, with double-digit percentage growth in amounts staked and net revenues from 8,000-plus machines growing 14 per cent to £340m. Overall, the retail estate - perhaps counter-intuitively in a digitally-dominated world - is starting to look like Ladbrokes' biggest asset. For example, Ladbrokes has much greater density of outlets than Paddy Power and a flexible approach to operational issues such as store-by-store opening times. The effect of these advantages helped push up the average income per customer and operating profit per shop rose by 15 per cent to £82,000 in 2012.
The results also showed that work on the digital side is beginning to bear fruit, even if revenue, up 9 per cent to £178m, is barely a third of what William Hill expects to achieve with its online operation. That said, progress is progress and better software has helped widen the win margin by allowing betting risks to be offset much more efficiently, though fast-rising costs meant that operating profits in the digital division fell 39 per cent to £32m. Besides, it's debatable whether Ladbrokes' stock-market value includes much at all for its digital side, so any recognition of progress will be all upside for the share price.
LADBROKES (LAD) | ||||
|---|---|---|---|---|
| ORD PRICE: | 223p | MARKET VALUE: | £2.03bn | |
| TOUCH: | 222-223p | 12-MONTH HIGH: | 234p | LOW: 147p |
| DIVIDEND YIELD: | 4.6% | PE RATIO: | 11 | |
| NET ASSET VALUE: | 46p | NET DEBT: | 92% | |
| Year to 31 Dec | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 0.98 | 147 | 41.5 | 7.6 |
| 2011 | 0.98 | 135 | 13.0 | 7.8 |
| 2012 | 1.08 | 200 | 21.0 | 8.9 |
| 2013* | 1.12 | 186 | 18.2 | 9.1 |
| 2014* | 1.18 | 212 | 20.7 | 10.3 |
| % change | +5 | +14 | +14 | +13 |
Normal market size: 15,000 Matched bargain trading Beta: 0.8 *Investec forecasts | ||||
Cash flow is another reason why investors should look more seriously at Ladbrokes. In 2012, after covering finance expenses of £32.7m, spending more than £100m on capital investment and a dividend payment totalling £74m, Ladbrokes still generated £68m of cash, almost double the amount for 2011. That level of cash flow safeguards the dividend even while the balance sheet gets stronger - in 2012 net debt fell by £67m to £387m.
The chief bear point for Ladbrokes relates to the continuing underperformance of its digital side. The final plan to update the digital sportsbook will be implemented by the end of this quarter, and success will be gauged by whether yield per user starts to improve during the course of the year. Only time will tell, but the worry is that more cash will need to be poured into equipment and marketing before a tipping point is reached. That won't be cheap as the marketing spend was already 23 per cent of net revenue in 2012 - about £45m - but the feeling is that Ladbrokes must do everything possible to avoid being left behind.
