William Hill on a winning streak

There is an old saying that you'll never see a poor bookmaker. Try telling that to the UK's big bookmakers, William Hill and Ladbrokes. They were left looking decidedly cash-strapped as a result of the credit crunch; slashing dividends and extending the begging bowl to shareholders to help them through the hard times when banks were withdrawing credit.

They also say the bookie always wins. That's proven a fallacy, too, as football result after football result went the punters' way, compounding the industry's misery caused by retrenching gamblers who scotched the idea that gambling was recession-proof. Evidence suggested gamblers were placing bets less frequently, risking lower amounts and not reinvesting their all-too-regular winnings. Meanwhile, cold weather saw a third of January and February 2009's horse-racing calendar cancelled.

But things are looking up for William Hill, whose £350m rights issue back in April took a serious bite out of its previously-troubling mountain of borrowings. Net debt has almost halved in the past two years to around £590m, well within the group's £839m aggregate borrowing facility. And strong cash generation of between £60m and £90m a year, even after paying dividends, means that the group could have net cash by 2015, while falling interest payments should also bring a boost to profits. 

William Hill also issued its debut corporate bond, raising £300m from institutional investors on paper that carries a 7.125 per cent coupon and matures in November 2016. That replaces shorter-dated facilities that wind up in 2011 and, as broker Shore Capital points out, the group isn't likely to need anything near as large as its main £539m facility when that matures in March 2012.

As well as alleviating financial concerns, falling debt brings another plus. Should the group's enterprise value, which is defined as the value of equity plus debt, remain stable, then the equity component must rise. And, as William Hill is rated at the lowest ratio of enterprise value to cash profits among London's gambling stocks, then improving trading is likely to see a re-rating back into line with its peers. Besides, City analysts point out that William Hill's profits per shop are 20 per cent higher than Ladbrokes, which makes the rating gap look anomalous.

Operationally, William Hill is certainly back on track, reflecting improving conditions across the industry as well as its own self-help measures. Results and gambling have returned to trend, and that has meant gross-win margins are back in the normal range of between 17 and 18 per cent of amounts staked over the full year. In a trading update last month, William Hill said that operating profits before amortisation would be £255m for 2009, ahead of most analysts' expectations even after further cancellations to the horse racing calendar in the final quarter.

Analysts are naturally cautious about the continuing effects of the UK's persistent cold snap on business, especially as William Hill failed to give any indication of trading so far this year. However, football matches will still be played at some point. And horse racing is becoming a less important component of the group's retail revenues, accounting for less than a third of gross win compared with more than half 10 years ago.

Gaming machines now account for 43 per cent of gross win, and the rollout of William Hill's new 'Storm' machines should maintain the strong growth from machines, whose gross win climbed 11 per cent in the first half. However, the government is believed to be considering an overhaul of the tax regime on machines, which it sees as highly addictive. So this highly profitable revenue stream may be turned down.

However, William Hill's decision in 2007 to replace its disastrous self-developed online gaming platform with assets purchased from technology partner Playtech is looking a good one. William Hill Online saw operating profit climb 35 per cent in 2009, and it's likely to have contributed around £75m last year with, analysts reckon, the potential to hit an annual run rate of £120m by 2012. That would supplement William Hill's highly cash-generative bricks-and-mortar business with a high-growth online one. The company launched new casino and poker products in January to take advantage of Playtech's highly liquid network, and its Gibraltar-based online sportsbook - launched in December 2008 - should come into its own during this summer's football World Cup as punters take advantage of its in-game betting options.