Why 888 results failed to win over investors

An upturn for shares in 888 Holdings has been undone after a poor reaction to half-year results today.

The respite for 888 Holdings (LSE:888) and its struggling share price came to an abrupt halt today, despite encouragement from its Sports and Casino operations and better trading in the UK.

Shares in the online gambling group were trading at above 300p as recently as May 2018, only to de-rate as low as 138p the following year as investors worried about regulatory pressures and the impact on profitability as 888 taps into the potentially lucrative US market.

The company's half-year figures were in line with expectations today, with the impact of higher gaming duties and increased investment in regulated markets causing adjusted earnings per share to dip to 6.7 cents in the six months from 10.5 cents a year earlier.

CEO Itai Pazner said it had been a solid first-half performance, driven by further evidence of recovery in the UK as the group draws a line under previous regulatory difficulties. Trading during the second half has also been in keeping with hopes, with average daily revenue 6% higher than the same period a year ago.

Having staged a recovery since June to stand at 169p last night, shares were back under pressure after reaction to today's results left the stock as much as 12% lower at one point.

Source: TradingView Past performance is not a guide to future performance

One factor to blame was pressure on the Dragonfish B2B unit, with April's hike in Remote Gaming Duty prompting some brand partners to prioritise reductions in their marketing investment and optimise cost bases over investing in new customer acquisition. 

While 888 is clearly facing some short-term pressures, investors will hope that it is building the foundations for underlying earnings to grow strongly in subsequent years.

Analysts at JP Morgan Cazenove believe this is the case, based on their price target of 220p for the year to December 2020. Counterparts at Numis Securities said the company had displayed “encouraging top-line momentum”, prompting the broker to reiterate its Add recommendation based on shares currently trading on a price/earnings (PE) multiple of 14.3x. 

The interim dividend was cut to 3 cents a share today from 4.2 cents last time, with the stock offering a projected 2019 yield of 3.8%.

The UK now represents 35.2% of group revenues, with the amount generated by first-time depositors increasing 30% year on year to reflect the impact of marketing investment and the "encouraging future growth prospects". 

The recovery in the UK comes after 888 worked to improve consumer protection practices in the wake of 2017's record £7.8 million fine from the UK Gambling Commission.

Following a ruling by the US Supreme Court to legalise sports betting, 888 has also been working to capitalise on opportunities in what should become the world's largest regulated betting market. However, it told investors last year that tapping into this market would require meaningful investment and have an impact on profitability in the short term.

The company said today it had been encouraged by the launch of its Orbit platform in New Jersey at the end of July, which has been supported by increased marketing activity in the state.