Bookies get ready for a bashing both off the track and on it as new legislation takes effect

Russ Mould
1 April 2019

“With Tiger Roll looking set to go off the shortest-priced favourite in Saturday’s Grand National since Red Rum in 1975, Britain’s bookmakers may take a bashing if the popular Irish horse scoots home for a second straight year, but they face an even bigger challenge away from the track as new legislation comes into force today,” says Russ Mould, AJ Bell Investment Director.

“The maximum stake for Fixed Odds Betting Terminals in bookmakers’ shops will drop to £2 today from the prior limit of £100, in a move which looks set to hit the nation’s 8,000 to 9,000 betting shops hard, with potential knock-on effects for other industries.

“Shares in the big quoted betting firms are taking the cut in stakes in their stride today, although this is mainly because they have already fallen sharply in value. Analysts have slashed earnings forecasts to reflect an expected drop in income from the electronic gaming machines, which provided £1.8 billion in gross gambling yield (the amount bookmakers keep in profit after paying out any winnings to punters) compared to £1.3 billion from actual bets placed over the counter, according to data from the Racing Post.

“Of the big four quoted bookmakers, Paddy Power Betfair has done best in share price terms over the past 12 months with a 19% drop, while William Hill has done worst, more than halving.

“This mirrors the profit momentum analysts expect for 2019, with Paddy Power Betfair expected to show the smallest drop in earnings per share and Hills the largest. 

 

12-month share

2019E

2019E

2020E

2019E

2019E

 

price change (%)

PE (x)

EPS Growth

EPS Growth

Dividend yield

Dividend cover

Paddy Power Betfair

(18.9%)

19.0 x

(16.3%)

12.9%

3.1%

1.67 x

GVC

(40.8%)

9.3 x

(21.5%)

17.0%

6.3%

1.73 x

888

(42.3%)

13.2 x

(21.0%)

15.7%

6.0%

1.26 x

William Hill

(52.4%)

15.1 x

(48.0%)

30.4%

5.5%

1.20 x

Sector

 

13.5 x

(24.7%)

17.2%

4.7%

1.59 x

Source: Company accounts, Sharecast, consensus analysts’ forecasts

“March’s trials in Birmingham have prompted all sorts of dark rumours, with one suggesting a 55% drop in gross winnings for bookmakers in shops where the new £2 limit was applied.

“But the anticipated profit plunge is not the result of just the cut to FOBT stakes. The UK Government has increased Remote Gaming Duty from 15% to 21% to compensate for tax revenues that will be lost thanks to the drop bookmakers’ takings on gaming machines, as well as regulatory developments elsewhere.

“Key changes here include Australia’s point of consumption tax on online gambling (an issue for Paddy Power Betfair and GVC-owned Ladbrokes) and also America, which is relaxing its rules on sports betting on a state-by-state basis after last year’s repeal of 1992’s Professional and Amateur Sports Protection Act (PASPA). 

“The US shift opens up a potentially huge market and the big British bookies are already jostling for position there. Paddy Power Betfair has bought FanDuel; William Hill is building on its existing presence in both Nevada and also at New Jersey’s Monmouth Park racetrack via a partnership with Eldorado Resorts; GVC has teamed up with MGM to add to its existing Stadium Technologies business; and 888 has launched 888sport in New Jersey.

“The US market could be huge although the customer land grab will probably bring start-up losses before it brings profits and the exact shape of the market remains unclear, in terms of how it will break down between online and physical outlets, the products and sports that will be available and any taxes that may be imposed.

“Hopes for the US market are high all the same, judging by how analysts expect the bookies’ profits to start to recover in 2020, with GVC, Hills, 888 and Paddy Power Betfair expected to show a 17% advance in net profit between them next year. Possible cost cuts, in the form of betting shop closures, may also have a role to play here, with research carried out for the Association of British Bookmakers even warning of 4,000 shop closures and 21,000 job losses.

“The full knock-on effects will not be known for some time in terms of how punters respond and what effect their actions have upon bookmakers’ estates and employment levels and related industries – not least because the £2 limit does not apply to online wagering, which looks like a glaring loophole in a law designed to protect gamblers from what can be hefty and rapid losses.

“The horse racing industry will be watching developments here just as keenly as it will be watching this week’s racing at Aintree. If bookies’ profits are hit and shops close then horse racing will receive less income from both the betting levy and media rights, a state of affairs which has already prompted Arena Racing Company, the owner of 16 British racecourses, to announce a £3 million cut in its prize money contribution. Racehorse owners and trainers responded to that with harsh words and a boycott of a March fixture at Lingfield Park.

“There is also the possibility that the FOBT stakes limit prompts a further round of consolidation within the betting industry. Smaller, independent bookies could find the going particularly hard, especially if more wagering goes online but even the bigger players could become involved, especially as the UK betting industry has changed beyond all recognition since Red Rum’s glory days at Aintree in the 1970s.

“The Big Four bookmakers then were Ladbrokes, Coral, William Hill and Mecca but the dominant players now are GVC (owner of the merged Ladbrokes-Coral entity among others), Paddy Power Betfair, Stars Group (the owner of SkyBet) and Bet365.

“William Hill and 888 have been involved in failed bids before, including for each other, and it will be interesting to see if their share price falls lure a predator as the effect of the FOBT stakes reduction becomes clear and the US market begins to settle down.

“And don’t forget that Red Rum unexpectedly lost in 1975, having won the Grand National in the previous two years, as he came second to L’Escargot. Tiger Roll isn’t a certainty on Saturday and there always remains the chance that results on and off the track keep going the bookies’ way, even as regulation continues to tighten.”

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