888 falls to a loss despite William Hill revenue surge

There has been plenty going on of late at Gibraltar-incorporated gambling company 888 (888), a lot of it far from encouraging. The board warned in July that the company’s UK gambling licence would be at “immediate and significant risk” of removal by the regulator if activist investor FS Gaming, which had proposed board changes at the firm, took control of the business - although the company does not expect the ongoing licence review to have any impact on operations. Per Widerström, who will take the reins as the new chief executive in October, will be faced with a stubbornly high debt pile and continuing compliance concerns after his predecessor stepped down in January amid anti-money laundering failures in the Middle East. 

In this context, shareholders would have been keen for a boring set of interim results. The company just about delivered that, despite the shares being marked down by over 3 per cent on the back of a decidedly mixed performance. Substantial headline revenue growth was unable to prevent a pivot to a loss, with management pointing to the impact of higher interest costs and acquisition-related expenses, and the debt position and weak cash inflow of only £11mn are standout points of concern.

The revenue uplift was down to the acquisition last July of the non-US business of William Hill, a move that has materially enlarged the business. There was encouraging news here regarding synergies from the deal. 888 delivered £66mn of synergies in the half and now expects to hit its £150mn target in 2024, a year ahead of plan.

But the revenue position on a pro-forma basis (as though the company had owned William Hill in the comparative period too) revealed a different picture. Pro-forma revenues fell by 7 per cent, partly as a result of a tougher compliance environment in online markets. The board expects full-year pro-forma revenues to fall by mid single digits due to a slow recovery in the Middle East. The company is aiming for an adjusted cash profit margin of at least 20 per cent for 2023. 

Elsewhere, the leverage position remains elevated. Net debt was down only slightly as a result of £59mn-worth of FX movements, with the leverage ratio falling from 5.6 to 5.1 times. 

Analysts at broker Numis said that “headline valuation multiples appear attractive but reflect the high leverage (and slow deleveraging) as well as the relative lack of geographic diversity”. The company’s reliance on the UK market, which contributes two-thirds of its revenues, remains a competitive disadvantage against gambling peers with bigger overseas operations. The shares trade at six times forward earnings, according to consensus forecasts on FactSet. This is a 50 per cent discount to the five-year average, but there are good reasons for that. Hold.

Last IC view: Hold, 67p, 14 Apr 2023