Investment Column: Bet on William Hill's to win for its investors

Henderson; Debenhams
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The Independent Online

Our view: Buy

Share price: 168.9p (+7.2p)

William Hill's shares galloped ahead like the legendary Kauto Star, who may yet give the bookie a huge public relations fillip by winning an historic fifth straight King George VI chase at Kempton Park on Boxing Day.

After a grim early part of the year, results are finally moving in "Billy's" favour, and this means that full-year profits are set to come in towards the top of the range of analysts' forecasts for operating profits of between £247m and £262m. Usually the best time to buy a bookie's shares is after a run of bad results, when the stock is often unjustly marked down. But we liked the positive tone of Hill's trading statement yesterday, which showed not just good earnings from the ever-volatile sporting results, but also that visitors to William Hill's betting shops are feeling confident enough to begin pumping money into those infernal "fixed-odds betting terminals" again.

Described by critics as "the crack cocaine of gambling", they are still reliable earners and investors would do well to pay heed to the comments about growth from the chief executive, Ralph Topping, which suggests that punters are returning to the shops.

Are there dark clouds? The interminable row about funding for racing drags on and the Government may yet act to claw back some of the tax it will lose through William Hill shifting its remote gaming businesses offshore, if it has the stomach for it.

But, all the same, these shares are hardly overpriced at just 8.9 times forecast full-year earnings and are cheaper than Ladbrokes at 9.4 times, although the prospective yield (4.64 per cent) is not as good as the latter's 5.19 per cent.

It has not been plain sailing for William Hill in recent years, but we like what Mr Topping is doing and, on this sort of rating, the shares offer value even against a slightly uncertain political and regulatory backdrop. As such we would be willing to place a bet on the shares doing well from here. Buy.


Our view: Hold

Share price: 135p (-1p)

We made Henderson a buy in February on the back of strong investment performance and buoyant post-crisis markets. It proved to be reasonably good advice. The shares have gained 10.6 per cent since, marginally outperforming the FTSE 350 index. Yesterday's interim management statement showed that Henderson's decent investment performance has continued, with 67 per cent of equity and 65 per cent of fixed-income funds outperforming benchmarks.

However, the markets were not so supportive. Andrew Formica, the chief executive, pointed to gloomy economic news and volatile equity markets for caution on the part of both retail and institutional investors. Headline assets under management rose £2.8bn in the second quarter to £59.2bn, but market and currency movements of £3.1bn masked a small net outflow of £100m.

But overall, the third quarter wasn't bad given the economic backdrop and equities are bouncing back, at least for now: the FTSE 100 hit a six-month high yesterday.

Henderson is trading on an undemanding 13.8 times forecast full-year earnings. With the age of austerity just beginning in Britain and doubts lingering about the US, markets could stay choppy for a while. So, despite our long-term favourable view, we would not be buying any more of the stock, but it remains a solid company that should be in the portfolio, so hold.


Our view: Hold

Share price: 76.5p (+5p)

Debenhams provided long-suffering shareholders with some pre-Christmas cheer yesterday with its plan to reinstate the dividend at the interims in 2011. The move put a turbo-charger under the chain's shares, which closed strongly ahead, edging closer to their 12-month high of 89.5p (although still way off the float price of 195p in 2006) after the full-year results.

The divi was not the only good news in the numbers. The retailer, which has 167 stores in the UK, Ireland and Denmark, posted a 21 per cent jump in headline profits to £151m for the year to 28 August. A key driver was the massive shift in product mix towards own-label lines, which typically have lower prices and therefore reduce headline sales per square foot, but deliver higher profit margins. Debenhams said like-for-like sales had also grown since the end of the year.

More importantly, it has slashed its net debt by £73.5m to £516.8m over the year. However, even for well-run retailers like this, life will not get any easier over the next 12 months because shoppers will have less money. Therefore, despite trading on a 2011 forecast multiple of just 8.3 (a big discount to the sector) we advise caution. Hold.