William Hill makes poor start

Finally, the effects of last year's new point of consumption (POC) tax are starting to bear down on UK gambling companies. The latest group to quantify the cost is high-street bookie William Hill (WMH). The introduction of POC in December 2014 and the increase in the Machine Games Duty rate in March 2015 added £20m to William Hill's costs in the first quarter. This pushed operating costs 11 per cent higher, which in turn pulled group operating profits down by nearly a fifth.

It didn't help that the group suffered its largest ever lossmaking week in January this year. That was after a string of punter-friendly Premier League football results, which were won by clear favourites. The group lost £14m in the third week of January and, as the end of the football season draws nearer, management says it has yet to make up the shortfall. Gross win margins stayed pretty flat across the board, which chief executive James Henderson admitted was disappointing.

But the retail business had a better February and March and, as more people use their phones to gamble, mobile revenues soared by 48 per cent. Internationally, the amounts wagered in the US grew 42 per cent, although the Australian business didn't fare as well. Wagering amounts there fell 20 per cent in the first quarter due to the introduction of higher race field fees last July and a subsequent "reshaping" of the client base.

Numis says…

Hold. William Hill should be able to fill in the hole in profits created by unusually poor results early in the year. However, it hasn't happened yet and new duties, tough comparatives and unprecedented political risk are conspiring to hold profits, and the share price, back. There's scope for the shares to perform once sporting margins normalise, we've lapped the World Cup, costs have been absorbed and political risks associated with the general election are clarified. Until then we expect the shares to struggle to make progress. This year, we expect pre-tax profits of £259m, giving EPS of 23.8p.

JPMorgan says…

Neutral. William Hill is in a difficult position. Given the UK retail business still accounts for close to half of group cash profits, we understand the logic of seeking international diversification, including via mergers or acquisitions. But we're not sure we see attractive targets or markets to enter that wouldn't depend on regulatory changes. Shareholders' interests would be better served via cash returns instead. For now, we think the group's competitive position in the online market in the UK is reflected in the valuation. But the strong balance sheet is attractive, and drives our neutral recommendation.