The imminent conclusion of the UK government’s triennial review into gaming machine stakes could hit profits at bookmakers. Share prices of listed gambling firms Ladbrokes Coral (LCL) and William Hill (WMH) look at risk.

The triennial review is looking particularly closely at fixed-odds betting terminals (FOBT). These are the machines you find in bookies on the high street, running computer simulated races and casino games.

FOBTs have come under increasing scrutiny because they are seen as potentially dangerous to certain problem gamblers. The ability to run up substantial losses very quickly is a particular sticking point.

60% OF EARNINGS UNDER THREAT

Canaccord Genuity analyst Simon Davies believes the review could ‘knock 60% off group earnings per share’ if maximum stake limits are slashed to its worst case scenario £2 cap.

The current maximum stake is £100.

The analyst predicts that such legislation could spark the closure of around 1,700 shops nationwide, between Ladbrokes and William Hill.

That would see earnings forecasts slashed and could potentially hammer share prices.

POTENTIAL DELAY FOR FULL FINDINGS

However, the effects won’t be immediate as Davies believes the initial outcome will be inconclusive. He speculates a delay of up to 12 weeks if further consultation is needed on certain maximum stake reductions for machines.

While he says uncertainty is unhelpful, he is optimistic about the outcome thanks to the Treasury’s involvement as it could involve a ‘more pragmatic approach.’

‘We still view £20 as the most likely outcome [for a cap] and with implementation likely to be in 2019,’ he says. The analyst optimistically reckons that Ladbrokes and William Hill have balance sheets can absorb any scenario without cutting dividends.

DIFFICULT TO PREDICT IMPACT

For the time being the ultimate impact on the book making industry remains difficult to predict without further details.

Canaccord believes that one scenario could see cuts in high stakes activity at least partially offset by higher volumes of lower stake games, or as more customers migrate online.

Other risks remain for the gambling sector as an increase in the UK point of consumption tax rate from 15% to 20% could further affect earnings.

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Issue Date: 20 Oct 2017