William Hill still reeling from the Budget statement

UK-based betting and gaming company, William Hill, made the list of losers last week, based on George Osborne’s Budget statement on Wednesday (19^th March).

As a quick reminder: Mr Osborne announced intentions to increase the tax rate on fixed-odds betting machines to 25%, up from 20%.

The rate hike on betting machines was a surprise

That’s because – despite widely-discussed concerns regarding a possible link between betting machines and gambling addiction – expectations were that the government would wait for the results of a study by the Responsible Gambling Trust (RGT) to be published this autumn, prior to making any move.

Even then, many believed a move by the government would likely centre around changes such as reductions on stakes and prizes; and/or perhaps limits on the number of machines per shop.

So it’s no surprise that the shares of players within the sector have been hammered on the back of the speech, not to mention the subsequent series of analyst downgrades.

William Hill, whose shares plunged around 7% on the day, continues to feel the chill of a sell-off this week (down 1.8% at time of writing). Rivals (including Ladbrokes and Paddy Power) aren’t faring particularly well either.

Of course, William Hill’s upward revision to the impact of the rate hike didn’t help

Following the speech, William Hill released a statement suggesting that – based on 2013 figures – the new rate would have cost the company an additional £16m. That figure was revised up the following day (20^th March) to £22m. The negative sentiment across the sector continued: since the speech, the company has declined some 11.6%.

Its online business seems decent but future headwinds are worth noting

William Hill’s online business has indeed been going particularly strong: fiscal 2013 revenue came in at £446m, around a 10% increase on the previous year, contributing some 30% to overall revenue.

Operating profit for the business also grew at a healthy pace of around 17% to £148m – representing 44% of overall operating profit.

But the new 15% so-called point of consumption tax on online gambling, which will take effect from December, is set to have an adverse impact on margins on companies across the sector.

In William Hill’s case, its online business is headquartered in Gibraltar, which currently enables the company to enjoy lower tax rates. Estimates for the company suggest a cost of between £60m to £70m in 2015 with the introduction of point of consumption tax.

Meanwhile, it stands to reason that competition will likely increase across the sector as players look to boost their market share in light of the additional cost – and that will have an impact.

To help mitigate the drag on profits, the company aims for £15m to £20m in cost savings in 2015.

That’s of merit and further cost-cutting is not beyond the realms of possibility.  William Hill does look well positioned for the long term (more so than some of its peers) and it has some wherewithal to chase growth by embarking on acquisitions, should it choose to do so.  But it’s likely to continue feeling the overall drag on the sector in the interim.