In contrast to the booming mergers and acquisitions market, initial public offerings have been relatively thin on the ground. So it was welcome news for the gambling industry last week when Betfair managed to pull off its £1.4bn flotation. The only minor irritant for William Hill, Britain's leading bookie, was that the float has caused a temporary sell-off in its shares. Fund managers have had to trim their stakes in Hill so as not to exceed their overall sector weighting. But this equity indigestion actually presents a buying opportunity.
The firm operates 2,350 licensed betting offices, largely on UK high streets. It also has a handful of other aces up its sleeve. These include its in-store gaming machines, an expanding online business with Playtech and the age-old gambling truism that the 'house always wins'.
Last year was tough, with an 8% drop in revenues from its betting offices due to the recession, comprising a 3% fall in the number of wagers and a 5% reduction in the average bet size. Yet the company's gross winnings were down only 4%, salvaged by in-store fixed-odds betting terminals. These 8,779 Las Vegas-style slot machines continue to do well. In the third quarter, on average they raked in an eye-popping £844 per week, up 14% from £736 12 months ago. The decision to lease the terminals puts William Hill ahead of rival Ladbrokes, which owns an ageing fleet of machines that haven't been keeping pace with punters' tastes. Along with its virtual casinos and live betting services, William Hill has ramped up its promotions and managed to attract a younger clientele.
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Tip of the week: William Hill (LSE: WMH), tipped as a BUY by Deutsche Bank
For 2010 the City expects net revenues and adjusted earnings per share (EPS) of £1.04bn and 18.5p respectively, rising to £1.06bn and 18.7p by 2011. So the stock trades on an average price/earnings (p/e) ratio of less than nine and offers a 4.5% yield. I would value the group on an eight-times operating profit multiple. After deducting net debt of £530m and a £57m pension deficit, that generates an intrinsic worth of around 210p per share.
Fine, but what are the wild cards? Well, looking ahead to 2011, the group remains cautious. That reflects doubts about the impact of the January VAT increase to 20%, the challenging economic environment and the potential impact of the government's austerity drive. The row with the Jockey Club about funding horse racing drags on, while the Treasury may yet act to claw back some of the tax it will lose from the firm shifting its remote gaming and telephone businesses offshore to Gibraltar. Further out there is also the issue that betting offices will become less profitable as online gambling expands.
That aside, there are outstanding opportunities abroad, especially as these markets gradually implement regulation similar to Britain's. And with the added fillips of the Ashes cricket series this month and the Rugby World Cup in 2011, it's time to stake some chips on William Hill. Deutsche have a target price of 220p.
Recommendation: BUY at 165p
Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments
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