Cash out of William Hill

Hill's recent half-year results already showed some signs of slowing growth. While overall net revenues - flattered by tax changes - grew by 20 per cent to £751m, online growth was a more sedate 18 per cent compared with a 30 per cent rise in the first half of last year. Meanwhile, operating profits grew 8 per cent to £181m compared with 14 per cent growth in the first half of 2012. Earnings in 2013 were also boosted by a higher than normal sportsbook gross win margin of 9 per cent (7.8 per cent in 2012). And pre-tax profits were flat after taking account of interest costs, which were £4.1m higher at £19.8m, and a £5.6m increase in one-off charges. We are concerned this could mark the start of a longer-term trend.

One criticism of online gaming is the extent to which costs are now seemingly rising faster than revenues as newer, more-casual gamers spend less consistently than professional punters. The problem is that all customers cost the same in terms of IT support and investment. So, while online marketing spend kept pace with revenue growth in the first half, other costs rose by 21 per cent. And there have been some other interesting changes in spending. For example, the online capital spending cap has been pushed up 50 per cent to £30m to fund the launch of mobile offerings in Italy and Spain, two of the eurozone's most recession-hit economies.

The investment in Italy and Spain looks like a recognition that William Hill must hunt further afield to find new gamers willing to use its services. Indeed, Hill is increasing investment in customer management given the high proportion of UK gamblers that already have a William Hill account. In short, it looks like the company is having to work harder to generate the growth rates to which it has become accustomed.

At the same time, Hill's erstwhile online partner Playtech has gone off to start a venture with its great rival, Ladbrokes. True, buying Playtech out of its share of William Online frees Hill's management from a sometimes difficult relationship and gives it full control of a prime online gaming asset. Arguably, though, that requires the company to be even more technology-based without Playtech's specialist input. The industry as a whole does not have a particularly solid track record of managing its technology and William Hill will need to be at the top of its game.

Another source of potential problems could be the Australian Sportingbet business Hill acquired for £459m earlier this year. The Australian economy is looking weak on the back of diminished demand from China for its natural resources, and that has fed into foreign exchange weakness that puts the division at an automatic disadvantage when it reports in sterling. That problem, coupled with a lower than expected first-half profit contribution, caused broker Numis Securities to reduce full-year profit forecasts for the Australian division by £6m to £16m. So far, that has been offset by a reduction in central costs, but reorganising the Australian business is a definite priority.