Gamble of the week: A bet for the brave

published 6 January 2012

Christmas came two days early for the online gambling sector. On 23 December, news broke that the US Justice Department has reversed its long-held opposition to internet betting. Although its legal ruling dealt mainly with lottery tickets, it also opened the door for online poker, casino and bingo. That's a potential game-changer for William Hill, Britain's leading bookie with a portfolio of 2,300 British betting shops.

The board saw this day coming long ago last year it cleverly built up an initial US beach-head by forking out $55m on three local businesses. Assuming the full regulatory green light is given, William Hill will have a chance to exploit its first-class online division, where volumes are rocketing 25% annually. The total American market is worth around $10bn in yearly sales.

Elsewhere the group is performing solidly too. For the nine months to September, turnover rose 5% with chief executive Ralph Topping talking confidently about hitting a full-year EBITA target of £270m. Especially encouraging and perhaps as a dress-rehearsal for an American drive was the success of the online division's newly launched Italian casino website. It has already scooped up an 8%-9% market share from scratch, and is now the biggest foreign player operating in Italy.

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The City is anticipating 2011 sales and adjusted earnings per share of £1.1bn and 23.2p respectively, rising to £1.2bn and 24.1p for this year. So the stock trades on a p/e of nine, and offers a 4.5% dividend yield. I value the group on a nine- times EBITA multiple, which, after deducting net debt of £460m and a £16m pension deficit, delivers an intrinsic value of 275p a share.

William Hill (LSE: WMH)

The challenging economic conditions across Europe, as well as possible regulatory changes to Britain's licensing regime, could put a brake on growth. And in October William Hill saw a mass walk out by its online support staff in Tel Aviv, albeit this has now been resolved after the dismissal of seven senior managers. Meanwhile, a major row with the Jockey Club about the future funding of horse-racing still drags on and in 2013 the board has to decide whether or not to buy out a 29% stake in the online division owned by Playtech.

Despite these risks, there are outstanding opportunities overseas in the many regions already regulated along similar lines to Britain. With the added boosts of the London Olympics and the European football championships this summer, I think it's time to place a few chips on William Hill. Preliminary results are due out on 24 February.

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.