New Ladbrokes chief executive Jim Mullen has speeded up his review of the business after first half earnings fell by nearly a quarter.
Mullen said the company needed to change the way it ran the business, build scale (primarily in digital) and respond more quickly to the customer and to changes in the market place. He said:
I will complete my review of the wider business quickly and I will present some of the principal changes that I intend to make, in June, earlier than planned.
Ladbrokes reported a 22.3% fall in first quarter earnings before interest and tax to £14.3m. It blamed sports results which were more favourable to customers, especially a number of football matches, a weaker Cheltenham and a significant single digit millions loss to a small number of higher staking customers in the early part of the quarter. It also faced regulatory issues, including UK point of consumption tax, increased machine games duty and its withdrawal from unregulated digital markets.
The news has sent its shares 3.3p lower to 102.8p, and in a sell note Numis analyst Ivor Jones said:
In today’s statement there are two references to “scale” and we believe that achieving scale should result in a review of the board’s commitment to maintain the dividend this year.
[First quarter earnings were] £24.3m versus a consensus of £15m and our forecast of £18m in a period of poor results.
There is upside potential. An in-form online gambling business could benefit from the density of Ladbrokes shops on the UK high street and gain a much larger market share than it has presently. The new chief executive could close the profit per shop gap on William Hill.
A take-over offer could emerge from a potential owner with the regulatory risk appetite to exploit the Ladbrokes brand in more geographic markets than currently.
[But] Ladbrokes’ fortunes remain tied to tax and regulation the precise direction of which, post election, remain uncertain. However, both major parties have made large, unfunded, spending commitments and the current government has shown a willingness to increase the duty burden on bookmakers (introducing machine games duty), changing the application of remote gaming duty and then increasing machine games duty, effective last month.
The Labour Party Manifesto indicated an intention to give local authorities the power to reduce the number of, or eliminate, gaming machines from betting shops. This threatens bookmakers with a prolonged period of uncertainty over the profitability of their retail estates as local authorities consider how to implement their new powers.
While we can see how this could be a trough year for the business, both in terms of trading and sentiment, we believe the share price is likely to continue to struggle until some of the uncertainties are resolved.
Greg Johnson at Shore Capital said:
The first public utterance from new chief executive Jim Mullen is one of building scale and an effective proposition which covertly reads as an accelerated marketing budget in digital. Overall, we are pleased with the continued progress underlying although unfavourable sporting results are likely to put pressure on full year pretax profit estimates of £72m (earnings per share 7.0p), with the first quarter some £10m shy on a quarterly run rate. We have a roadmap to 18-20p of earnings on a fully recovered basis. However, many uncertainties remain; notably execution, regulation and the dividend. We retain a hold until some of these clouds clear. We do note a potential floor of 70p per share based on a worst case scenario of zero in retail.
Barclays said:
First quarter results were soft as expected given customer-friendly sports results (particularly in weeks 3,8 and 12) depressing Gross Win Margins and therefore Net Revenue. While the overall result may appear weak, we would initially highlight three areas which are positive: 1) 12.2% growth in Machine Gross Win which is a rapid acceleration since 2014 (up 4.4%), 2) Gaming Actives up 34.5% an acceleration since 2014, and 3) Jim Mullen, Ladbrokes’ new chief executive, has stated that he will present his ‘principal changes’ to the business in June, which is earlier than planned.
Having maintained guidance of 8.9p of dividend per share in 2015, Ladbrokes’ chairman stated that a new chief executive would consider if this was the right policy. We expect an update at the interim results and as we said [recently] ‘a dividend cut seems inevitable and we see a high probability that a new chief executive cuts it when appointed.’
