Investment: Gambling on the betting industry is no sure thing

Is this sector one to avoid, like the 100-1 shot in the Derby? Not necessarily
Click to follow

Time to take a punt on the gambling sector? There has been a theory that gloomy economic times might encourage gaming. A few quid punted provides a momentary escape from the gloom and offers the hope of a payout to make the world look more cheerful.

It sounds terribly sensible. But it doesn't always hold water. Punters will still take a punt, but during the downturn they often reduce the size of their stakes. More bets, less money gambled. Like any consumer industry, gambling is not immune from the squeeze on its customers' pockets.

And that is not the only threat. The Government is reviewing the flight offshore of bookmakers' "remote" gaming operations, which allows them to duck the 15 per cent gross profits levy that replaced betting duty.

The aim is to find a way of recouping that tax. So is this sector one to avoid, like the 100-1 shot in the Derby that just can't win? Not necessarily, because there are one or two bargains to be found.

Betfair is not one of them. The exchange looks a better bet than it did six, or even three months ago, having prized Breon Corcoran away from Paddy Power to be its chief executive. It has also installed City veteran Gerald Corbett as deputy chairman. He ought to be able to keep the company's investors from going off the rails.

That said, Betfair still faces considerable challenges and rival bookies have stopped moaning about it and started competing. Trading at 25 times forecast earnings for the year ending April 2012 with a yield of just 1 per cent, it is overpriced.

Also in the online space, continues to cause concern for the simple fact it has two chief executives. If the company can make this unusual situation work, it will be a first. At about 10 times 2011 earnings, with a prospective yield of 2.8 per cent, the shares come at a slight premium to Ladbrokes and William Hill, having lost much of the ground they gained in April when rival websites (which offered poker illegally to US players) were shut down. It has positioned itself smartly if the US market reopens. But we wouldn't be buyers based on something that is more a hope than an expectation.

Sportingbet shares are lightly rated (just above 7 times 2012 earnings) and yield well (5 per cent), but legal worries killed a deal with Ladbrokes and there are other, more attractive places to invest. 888, another candidate for a deal with Ladbrokes, has a similar rating but no yield. Again, its proposition just doesn't look that compelling.

Those looking for a punt could do worse than Probability, which specialises in mobile phone gaming. Viewers of cable or daytime TV will have seen its stomach-churning ads. A look at its results, however, show they work.

The new generation of smartphones has helped no end, and it should turn a profit this year. While the company is tightly held, and the shares can be volatile, the probability is Probability will eventually get bought for a substantial premium. William Hill had a look this year. Take note and buy.

A company that does deserve a premium is Paddy Power. Despite the difficulties in its home market it has charged into Britain, loudly proclaiming itself "the punter's pal" and indulging in all sorts of PR stunts and Paddywhackery. But behind all the blarney are some very sharp businessmen. Mr Corcoran's loss is a blow, but Paddy has the strength to recover. The shares are now very highly rated (20 times forecast 2011, yielding 2.2 per cent). All the same, given the way this company is growing outside Ireland and its past outperformance, it is one to be on the right side of. Hold.

Ladbrokes is looking a bit like the Grand Old Duke of York, having marched its troops to the top of the hill and marched them down again with 888 and Sportingbet. The "magic sign" will now have to sort out its online offering on its own.

All the same, trading on 8.6 times 2011 forecast earnings with a 5.9 per cent yield, it is not over priced. We'd, just about, be buyers.

If Paddy Power is worth holding despite a lofty rating, what of William Hill? It is growing footfall fast, expanding cautiously internationally and improving its use of racing content. It also has a decent online business, even if it does face a tax hit.

Hills is no longer racing to have the biggest chain of betting shops if those shops aren't profitable. Debt is manageable and the shares trade on just eight times forecast full-year earnings with a solid yield of 5 per cent. This is far too cheap. Hills is a strong buy.