Shares in major quoted gambling groups are holding up well considering the UK government has announced its intention to crack down on betting machines dubbed by critics as the ‘crack cocaine’ of the industry.
On Tuesday, ministers released a long-delayed review into the gambling industry which recommends new limits on fixed-odds betting terminals (FOBTs) - betting shop machines offering games such as roulette.
Yet as Simon Davies of Canaccord Genuity explains: ‘Overall, surprisingly few decisions have been made after a year of deliberation. But the new review does point to a consensual outcome, which reduces the risks to the Retail Betting companies.’
SIGH OF RELIEF
Vocal anti-gambling campaigners and some MPs have argued the machines disproportionately attract addicts, though the industry begs to differ, unsurprisingly, setting the scene for a high-stakes battle.
Following its review, the Department for Culture, Media and Sport has said the maximum stake on FOBTs should be reduced from from £100 down to £50, £30, £20 or £2. It has set out plans for a 12-week consultation to allow interested parties to make their case as to where the government should settle.
Presently, FOBTs allow punters to place bets of £100 every 20 seconds. They provide the largest source of revenues at some retail bookmakers, including Ladbrokes Coral (LCL), bid up 1p to 126.3p and William Hill (WMH), which ticks 2.7% higher to 259.4p.
FOBTs also generate significant income for Paddy Power Betfair (PPB), failing to join in the rally and off 5p at £76 in early dealings.
As the Financial Times reminds readers, only last month, analysts at Barclays forecast that if the maximum stake was reduced to a paltry £2, Ladbrokes Coral would lose £437m in annual sales from FOBTs, William Hill would kiss goodbye to £288m in annual revenues and Paddy Power Betfair would lose £60m.
Canaccord Genuity’s Davies continues: ‘As we expected, the government fudged its decision on the Triennial Review into stakes/prizes for B2 machines and announced a further 12 week consultation which will run to January 23rd.
The only commitment is that maximum stakes will be reduced from £100 to one of four options: £2, £20, £30 and £50. The government will also look at a range of "social responsibility" measures across all gaming machines, improved player protection in online gaming and a "package of measures on gambling advertising", all of which are aimed at providing protection for problem (or vulnerable) gamblers.’
But as Davies explains, ‘we still think that a £20 maximum stake is significantly the most likely outcome. And it is one which we believe would be greeted favourably by investors, given the weak share price performances of Ladbrokes and William Hill over the past year.’
Since a £20 maximum stake would have a far more benign impact on earnings for the pair than a £2 maximum stake, Davies views this turn of events ‘as a positive outcome for the industry, given the alternatives. Implementation is now likely in 2019, giving Ladbrokes Coral and William Hill another year of Retail cash flows driving down leverage, so we do not view the dividend of either company as being at risk, and they both offer attractive yields.'
The government has also asked the Gambling Commission to look at whether the 'spin speed' on FOBT games such as roulette should be increased from the current 20 seconds per bet. There will also be a 'package of measures taking effect to strengthen protections around online gambling and gambling advertising' to help protect children.
A further boon for the industry is that there’ll be no review of densities of machines in betting shops, and while it refers to a potential review of spin speeds, this is certainly not an area that has been highlighted.
‘Government has also rejected calls for a relaxation of regulations on other machines - so no rise in machine densities for casinos, which removes a potential positive for Rank (RNK)’, says Davies, though shares in the latter name are unruffled this morning, improving 1.9p to 234p.
Significantly, the Canaccord Genuity scribe also sees a final decision on the Review as ‘sparking a second wave of industry consolidation in which Ladbrokes Coral and William Hill look like inevitable participants.’
Ladbrokes Coral remains Canaccord Genuity’s ‘preferred play, on valuation grounds', the broker having a 165p target price for the company.