Shares digital

Ladbrokes (LAD) – Finals PTP: £344.2m (£238.1m) Divi: 9.05p (8.6p)

William Hill (WMH) – Finals PTP: £209.2m (£235.4m) Divi: 15.5p (14.5p)

Consumers might be facing higher household bills but that hasn’t stopped them feeling lucky with the odd punt or two. Fortunately for the bookmakers, the bets haven’t always paid off as they report robust trading. It was also comforting to see no sign of either company being severely impacted by either a slowdown in consumer spending or by the smoking ban.

Ladbrokes’ results have been propped up by its telephone betting business. High roller bets have inflated this channel as ignoring this customer type, group operating profit actually fell by 4.4%

William Hill’s problems with its internet service have already been flagged up and this matter is being resolved. Gaming machines are key to its growth, accounting for 29% of gross wins during the past year. Unfortunately regulatory risks put a dampener on this income stream.

The government seems intent on imposing restrictions to fixed odds betting terminals as it is worried by their addictive nature. To make matters worse, a war continues to brew over the horse racing levy, where 10% of profits are paid as a tax to the sports industry. The bookies want to pay less and had hoped an alternative to the levy would have been introduced. This aspiration was dashed last month after the government extended the scheme for another year.

William Hill should see lower rent on its betting terminals in 2008, but there is a host of negatives to factor in, according to stockbroker Evolution. Internet restructuring will cost £4 million; horse racing data service Turf TV adds another £12 million to costs; and it won’t have a £11 million tax provision released that benefited the first half of 2007.

Shares says: Hill and Ladbrokes’ valuations look cheap but bear in mind that regulation risks are growing, so we downgrade from buy to hold on both stocks.

by: Dan Coatsworth