William Hill may not remain the outsider for long

That William Hill has continued to drift down the UK bookie rankings after bungled attempts to join last year’s merger frenzy is not particularly surprising.

What was puzzling was the extent of the stock’s tumble on Wednesday after the UK’s largest gambling operator announced a profit warning in a trading statement.

The shares touched a loss of 14% on the day, taking their fall in the year to date close to 20%.

That sharply underperformed a not exactly barnstorming group of closely matched rivals.

The obvious trigger was William Hill’s warning that operating profits would miss market forecasts by as much as 15%, judging by Thomson Reuters’ consensus of £304.2m.

WMH stated on Wednesday it expected 2016 operating profit to be in the range of £260m-£280m, compared with £291.4m in the year before.

It was perhaps not the best day for William Hill to also announce it was in advanced talks to invest in ‘sportsbook’ software maker Openbet.

Incidentally, many investors will have noticed that Openbet’s clients include Ladbrokes, Paddy Power Betfair, Sky Betting and other rivals who might well look askance at newly conflicted ownership, or at least make distracting demands in terms of compensation.

What we found more dubious however was the implication that WMH shares were singled out after the group admitted it had its “worst Cheltenham results in recent history”.

The bookie’s lost bets at the key event might well have exacerbated already poor investor perceptions following its lengthening odds amid tougher regulations and online-only, or even pure API threats.

But the chances that the likes of Ladbrokes, Rank, Paddy Power Betfair et al were immune to events like Cheltenham—which saw an usual number of favourites winning—is slim.

Therefore, whilst William Hill shares underperformed those of second-worst bookie Rank by more than 7 percentage points for the year to date at the time of writing, we expect that distance to close after Rank’s trading statement in May.

Ladbrokes and Paddy have the benefit of several more months before they’re next due to update the market.

New online gambling rules aimed at curbing gambling addiction also damped William Hill’s online betting take, it said.

The procedures provide punters with the option to set ‘time out’ breaks or arrange longer ‘self-exclusion’ periods.

“We have seen an acceleration in the number of time-outs and automatic self-exclusions over recent weeks and this is impacting the level of actives across the Online business”, stated WMH on Wednesday.

Again, it would be uncanny if this pattern was unique to WMH.

At the same time, William Hill’s current financials are very much those of company that hasn’t been particularly adventurous of late, which is another way of saying that it is relatively cash rich.

The group sat on an above-average £323m cash pile at the end of fiscal 2015, compared to the next cash richest comparable bookie ‘Betty Power’, which had £247.8m.

True, WMH’s operating margin looks average for a bricks and mortar outfit, as does its long-term revenue growth rate.

But if WMH manages to get its act together this year, with even just an incrementally transformative deal—perhaps with Openbet, once teething troubles are sorted—its cash advantage could become a real operating edge as opposed to a latent one.

Unsurprisingly, William Hill shares have by no means overheated in forward price/earnings terms, and Thomson Reuters data suggest the shares were 50% below the warranted industry median at last check.

Further missed opportunities could well prolong the amount of time WMH stays this way, but following today’s tumble, the shares are once again a length away from long-term support.

Assuming the shares do not require all the leg room between current weakness and 312p-306p, the first opportunity on the upside should be 334p where a bullish flag formed at the mark equating to 78.4% of the rise from the last test of long-term lows.

Above lies what would have been a painful price gap for many; some might leap at the chance of a belated fill.

Changes in the corporate fundamental picture (perhaps including the management picture) would be required for more optimism than the above.

DAILY CHART

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