It has become essential for bookies to have a decent online and mobile betting platform to survive in a competitive market. But as such online gaming matures, the nature and, more importantly, the cost of achieving growth has made the story far more nuanced. It is a trend that caused us to recommend selling shares in Irish bookmaker Paddy Power (PAP) ('Paddy Power is a losing bet', 23 May 2013), which have since fallen 6 per cent in a flat market. And although UK bookmaker William Hill (WMH) is currently basking in the glory of having full control of William Hill Online after buying Playtech's 29 per cent stake for £424m, we believe it could be the next in the queue to see its highly-rated shares feel the pull of gravity as the inevitable law of diminishing returns kicks in.
- Strong online brand
- Cash generative retail business
- Growth is maturing
- Playtech no longer doing online legwork
- Australian business needs reorganising
- Dividend yield two-fifths lower than key rival
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.