Blockbuster deals and major new regulations were remarkably absent in 2016 compared with the previous year. After having to deal with the point-of-consumption tax and machine gaming duty, this was a welcome hiatus last year for the gamblers. That said, the politicians aren’t resting on their laurels.
In October, the Department for Culture, Media and Sport launched a review of fixed-odds betting terminals (FOBTs). These machines have been associated by campaigners with causing particular problems for some gamblers and there have been calls for the maximum stake of £100 to be reduced to £2. As a result, the industry has already implemented a £50 maximum unless a punter specifically requests to bet more. We will be watching out for further developments.
Regulation was a big driver of the wave of consolidation seen in 2015 and while that year’s major deals all completed in 2016 – the creation of Paddy Power Betfair (PPB), Ladbrokes' (LAD) snapping up of Gala Coral and GVC's (GVC) acquisition of Bwin Party – no further major deals were agreed. There were some close shaves, though, especially for M&A wallflower William Hill (WMH). The company was initially approached by 888 (888) and Rank (RNK) in a proposed three-way tie-up, but William Hill’s board strongly rebutted the approach. Then Canadian giant Amaya stepped into the breach, but Parvus, the British company’s largest shareholder, was among critics of the proposal.
A deal may still need to be done, though. William Hill, like some of its rivals, needs to keep the momentum going where its online gambling business is concerned. Having punters registered on digital platforms makes it easier – and crucially cheaper – to market to them and entice them to bet. The importance of the online offering is also made clear by the heavy investment being made by the likes of Ladbrokes Coral and William Hill in self-service betting terminals (SSBT), which allow customers to access their online account in store and use that to bet, rather than filling in a slip and handing it over the counter. Ladbrokes leads the field in the number of SSBTs and in the six months to 30 June 2016 10 per cent of stakes made in its UK high-street stores were made on such terminals (up from 4 per cent in the prior comparable period).
The star of online in 2016, though, was undoubtedly GVC, which successfully digested Bwin and restored its dividend as promised. The company took a break from shareholder payouts to help it fund the acquisition, but promptly returned to the dividend roster shortly after also being promoted into the FTSE 250. The shares rose 36 per cent in 2016 thanks to its strong operational performance. In the final quarter of its financial year, group daily net gaming revenue rose 12 per cent on a pro-forma basis, which assumes Bwin had been acquired prior to the same quarter a year earlier.
Key points to watch in 2017, not just for GVC but all its rivals, will be how well net gaming revenue rises, particularly on the digital side for those with a physical estate. And where companies do have retail estates, it will be important to see how these are performing and whether SSBTs are helping sites drive sales and profit. Beyond this, the development of businesses overseas will be incredibly important, especially as MPs look set to squeeze the sector further.
Some might see this as a chance to take some profits if their gambling holding has managed to jump all the hurdles of the past few years. A possible indicator this might be wise was the £330m sale of 38.7m Playtech shares by Brickington Trading, a wholly owned subsidiary of a trust of which Playtech's (PTEC) founder, Teddy Sagi, is the ultimate beneficiary. Mr Sagi had initially sought to sell 32.2m shares, but ended up disposing of more due to strong investor demand. That said, Playtech and GVC have both paid special dividends this year, so it might be worth holding on to them considering their strong cash generation.
| Price (p) | Market value (£m) | PE (x) | Yield (%) | 1-year change (%) | Last IC view | |
| GVC | 625 | 1,831 | NA | 3.2 | 34.6 | Buy, 645p, 21 Dec 2016 |
| Ladbrokes Coral Group | 129 | 2,460 | 12.7 | 2.3 | 10.7 | Buy, 141p, 4 Aug 2016 |
| Paddy Power Betfair | 8,600 | 7,225 | 29.8 | 2.2 | -4.9 | Hold, 9,975p, 24 Aug 2016 |
| Playtech | 822 | 2,607 | 19.2 | 3.1 | 7.7 | Buy, 932p, 25 Aug 2016 |
| Rank Group | 195 | 760 | 12.6 | 3.3 | -31.4 | Buy, 230p, 23 Aug 2016 |
| William Hill | 287 | 2,465 | 12.7 | 4.4 | -24.4 | Buy, 290p, 9 Jan 2017 |
Favourites: Putting some chips on GVC was a smart move and we continue to believe the management team can keep the momentum going there, especially since it upped the size of its special dividend at the end of 2016. We also see promise in Ladbrokes and William Hill, but sturdy performances need to be seen from their retail estates alongside growth in online businesses. The latter will surely get a boost if it’s third time lucky on the M&A front, too.
Outsiders: The gambling sector is one we’re very bullish on, so it’s difficult to pick a rank outsider. While we only have Paddy Power Betfair on a hold, this is purely because the valuation is relatively full for new investors at 32 times Davy’s expected 2017 earnings. We wouldn’t bet against it, though, especially given £65m in cost savings are set be realised this year – a whole year earlier than planned.
