The UK gambling industry isn't facing an easy future. As one of the so-called 'vice' sectors, it will be confronted with punitive regulatory change and a likely lack of support from any political party. It can't even rely on consumers, as a collective social conscience starts to build against it. Indeed, we reckon the risks facing the sector look greater than for most other sectors - making it wise for investors to tread carefully in 2015.
Regulation looms especially large and, last year, many UK-listed gambling companies saw their share prices suffer as the new Point of Consumption (PoC) tax came into being. The PoC rules were effectively implemented in two parts. In October, companies registered offshore were required to obtain a licence from the UK Gambling Commission in order to offer their services and products to UK customers. Then, from December, a new 15 per cent levy was applied to all revenues generated from UK customers - irrespective of where the company was officially domiciled. It appears the government is targeting foreign companies looking to capture a slice of the UK gaming market. In the past, many online gaming companies - UK or otherwise - have registered offshore in order to avoid tax. Now, they can't escape.
Many of the companies targeted by PoC are registered in Gibraltar and are members of the Gibraltar Betting and Gaming Association (GBGA). In August, the organisation mounted a legal challenge against the new tax regime. It claimed the new duty could actually harm consumers by encouraging the growth of, and migration to, "unregulated or poorly regulated operators", which would present "genuine risks" to UK consumers. But the challenge failed and the PoC regime took effect on 1 December 2014.
But PoC is just one example of the government's crackdown on the industry. In last year's Budget, for example, chancellor George Osborne announced a 5 per cent increase in the duty paid on fixed-odds terminal betting. The tax will rise from 20 per cent to 25 per cent because the machines are considered both addictive and harmful in nature. Indeed, some have dubbed them the "crack cocaine" of the gambling world. The rise in duty followed the introduction of machine game duty (MGD) in February 2013.
That backdrop of regulatory upheaval hit shares in a number of major FTSE 350 players especially hard in 2014. William Hill's (WMH), for instance, slumped by a fifth between early March and mid-April, while Ladbrokes' (LAD) have fallen 38 per cent year on year. These two traditional high-street bookies face a bigger challenge than most. As online gambling continues to take a bigger share of the market, such bricks-and-mortar operators must re-evaluate the profitability of their retail estates. In fact, William Hill earmarked another 109 shops for closure following the budget announcement, although Ladbrokes is taking a different approach.
Indeed, Ladbrokes has announced a three-pronged plan, part of which includes increasing machine gaming revenue in the retail business. The company's mobile app is taking off, too. During last year's World Cup tournament, the mobile business saw active customer numbers soar 700 per cent. That helped the overall digital division to increase stake values by 40 per cent compared with 2010's World Cup.
Some of those without a traditional retail estate are faring even better. 888 Holdings (888), in particular, has proved that mobile is the future. Indeed, a robust performance at its mobile business helped boost the group's revenues by 13 per cent at the half-year stage. But a similar online operator, Bwin.Party Digital Entertainment (BPTY), has needed to work hard to win back investors' confidence after releasing a fairly dismal set of half-year figures. Management admitted that "fundamental changes" were necessary in order to transform the operational performance, although a 30 per cent hike in Bwin's share price since mid-October would suggest that progress is being made.
Meanwhile, niche businesses - such as gambling software specialist Playtech (PTEC) - are poised to finish the financial year in good health. Playtech's adjusted profit rose 45 per cent at the half-year stage to €97m (£77m) and analysts suspect another special dividend could be in the works come the year-end.
| Company name | Share price (p) | Market value (£m) | PE ratio | Dividend yield (%) | 1-year performance (%) | Last IC view |
| Betfair | 1,552 | 1,435 | 216.5 | 0.2 | 56.3 | Hold, 1,464p, 5 Dec 2014 |
| Bwin.Party Digital Entertainment | 109 | 892 | 22.5 | 3.4 | -10.0 | Hold, 84p, 17 Oct 2014 |
| Ladbrokes | 114 | 1,048 | 12.6 | 7.8 | -28.4 | Hold, 134p, 13 Aug 2014 |
| Playtech | 652 | 1,912 | 16.1 | 3.0 | -9.7 | Buy, 698p, 29 Aug 2014 |
| Rank | 158 | 617 | 12.7 | 2.9 | 5.3 | Hold, 170p, 14 Aug 2014 |
| William Hill | 369 | 3,231 | 14.1 | 3.2 | 3.7 | Hold, 342p, 4 Aug 2014 |
Favourites
No FTSE 350 gaming company is immune to such factors as regulatory change, but we favour those companies that are still managing to find growth in squeezed markets. Our favourites include niche business Playtech. Its shares trade at a slight premium to the sector, but we think that's justified given the group’s growth track record. 888's international diversity also leaves it looking attractive.
Outsiders
Shares in Bwin have started to recover, but the company has a lot of work to do to improve its operational trading. Similarly, William Hill and Ladbrokes face plenty of challenges given their extensive - and underperforming - retail estates.
