Why high-yielding William Hill is undervalued by 50%

Investors are being urged to look past bad news on profits and focus instead on the many positive catalysts. Graeme Evans explains the thinking.

A doubling in William Hill profits over the next five years was a bet few investors fancied today, as attention continues to focus on the bookmaker's regulation-hit UK business and the cost of expansion in the United States.

With full-year profits for 2018 now expected to be between £225 million and £245 million - compared with £291.3 million in 2017 and the market’s £242.6 million consensus - shares fell another 6% to a six-year low today.

That was despite CEO Philip Bowcock's attempt to put a positive spin on longer-term prospects as William Hill attempts to build a "digitally led and internationally diverse gambling business".

By moving William Hill away from being a UK-centric and land-based business, Bowcock hopes to at least double profits between 2018 and 2023. This is based on 10% annual compound growth in digital revenues to £1 billion in constant currency, alongside increased operational efficiency.

Bowcock said:

"With more markets opening up to online gambling around the world - including the US - we can build on the heritage of the respected William Hill brand to take a leading position on the gambling world stage."

Source: interactive investor (*)      Past performance is not a guide to future performance

Following the US Supreme Court's decision in May to legalise sports betting, estimates quoted by William Hill suggest that the US market could generate between $5 billion and $19 billion of revenues by 2023.

Assisted by its already profitable Nevada operation, William Hill aims to grow US earnings from $50 million currently to about $300 million in five years' time. Expansion costs, however, mean William Hill US is expected to make a loss of up to $20 million in 2019.  

In existing markets, regulatory and tax changes will impact online profit growth in 2018 and 2019, including from heightened customer due diligence and an increase in Remote Gaming Duty to 21%. These factors will reduce profit by £20 million in 2018 and a further £25 million in 2019. 

As the group's dividend policy is to pay out 50% of underlying earnings, William Hill told investors that this year's pay-out will be calculated excluding US expansion.

It also pledged to pay a dividend of not less than 8p a share from 2019 onwards, regardless of underlying earnings and until the group's performance brings it back into line with the dividend policy. At 6%, William Hill is currently one of the best yielding stocks in the FTSE 250. 

UBS recently adopted a 'buy' recommendation and 300p price target on the company, with analyst Heidi Richardson describing the medium-term opportunity, as highlighted by the new growth targets, as attractive.

She conceded, however, that the focus of markets today will be on the lower profits guidance and weaker online performance.

The Retail arm continues to be challenged by high street conditions, with gaming as well as sportsbook revenues declining in the most recent trading period. Aside from the later stages of the World Cup, football and racing margins have been weaker than expected.

The UK government's clampdown on fixed-odds betting terminals by cutting the maximum stake from £100 to £2 from next October is also expected to reduce profitability in Retail by between £70 million and £100 million. This figure is after mitigation measures, including £15 million of cost reductions.