Investment View: Bigger onshore betting houses look better bets
If you’ve doubled your money on William Hill I wouldn’t blame you for taking some profits
Tax has become a taxing issue for the gambling industry. Controversy is raging over how much big companies pay and what they do to keep their bills down. Nearly all of the remote gaming industry (telephone and internet) used by British punters is now based offshore.
That's great news for punters and shareholders, not so good for the exchequer and Britain's balance of payments.
The Government's solution is to reform the gross profits tax, which replaced the hated betting duty, into something not too dissimilar to, erm, betting duty.
From 2014 all bets placed from Britain by British citizens will be taxed at the point of sale, shifting the location of the tax charge from where the bookie is based to where the punter is based. What we don't know yet is the rate of the levy that will be charged, although details are expected soon. Investors should watch this very closely.
In general, however, what this change ought to do is favour the big, previously onshore operations, for two reasons.
First, it ought to improve the competitiveness of their betting shop estates versus the remote business. Second, the big, established bookies operated onshore for a long time while paying a 15 per cent gross profits tax applied to all onshore betting businesses while competing against offshore-only internet operators. So, for that matter, did Betfair.
So they are used to operating – and profitably – under that sort of tax burden. Introducing a new gambling tax which captures everyone should favour them.
Therefore my bets, from an investment perspective, would be on big, established brands – with one exception, which I will return to later. That means William Hill, Ladbrokes, Betfair and Paddy Power.
The first two have both recently pulled off deals.
William Hill took out an internet-only operation in the form of SportingBet, in a joint deal with GVC Holdings which handed it the Australian business with an option over the Spanish arm. As an internationalisation play it made all sorts of sense.
I like the deal, and I still like William Hill as an investment. However, since the group earned a place in last year's Ten to Follow, when the shares were a buy at 202.8p, they've nearly doubled. They finished the year at 348.1p and are now testing the 400p level, which leaves them trading on just over 14 times this year's forecast earnings with a predicted yield of 3 per cent.
I'm still willing to hold for the long term, although if you've doubled your money I wouldn't blame you for taking some profits.
Ladbrokes has some catching up to do when it comes to valuation, trading at 12.8 times this year's estimates, but offering a tasty forecast yield of 4 per cent.
This is a business which has had its problems, but its acquisition of Betdaq, the number two betting exchange, is an interesting move. The success of the deal will depend on how the company goes about integrating the business, and whether it can tempt customers who were using Betfair to stay put with the new Ladbrokes exchange.
I've been holding for a long time, and I'd say stick with the company for now to see if this gamble can pay off. If you've followed this column's recommendations on Ladbrokes you'll be happy. The shares have done well.
I closed my eyes, held my breath and took a risk with Betfair for this year's Ten to Follow at 686.5p, after it pulled out of a number of markets thanks to difficulties with regulators, prompting analysts to take the scissors to their forecasts.
I'm expecting Breon Corcoran to cheer the City by pruning costs and perhaps restoring some of the sparkle to a business which had lost its way a bit. The shares haven't done much since and the rating is a fancy 19.8 times forecast earnings for the year ending April 2014. But I'm sticking with the bet.
Paddy Power's shares trade at 22 times next year's earnings. They're looking pricey, and while they're by far the cleverest marketeers out there, with a winning online offering, growing the betting shop estate in the UK (a big selling point for the investment) might get difficult in the current political climate. I'd be inclined to book some profits, as the shares have had a stunning run. Buy again if they show weakness.
Probability has long been the hot tip of this column. I declare an interest in that I have worked for the company in the past.
I like it because it's niche, and is in a sweet spot specialising in mobile phones, with punters increasingly using smartphones to gamble. It recently raised £2.5m to fuel growth. I tipped the shares at 67p last year. They've come off a bit because of the cash call, but that shows big investors have faith in the business. As do I. Buy.
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