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Tuesday, 23 October, 2018

William Hill shares slide as FOBT decision leads to £883m in exceptional charges

Philip Bowcock said William Hill had performed well in the first half of 2018
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William Hill's share price fell on Friday after the company introduced exceptional charges totalling almost £883 million following the government's decision to drastically cut the maximum FOBT stake to £2.

The company said the dramatic exceptional charges (for details see below) linked to the government's Triennial Review – in effect reducing the value of their 2,334-strong betting shop estate – had led to a statutory loss before tax of £819.6m for the first half of the year, compared to a profit of £93.1m in 2017.

There was, however, better news from their American operation following the US Supreme Court's decision in May to lift the ban on sports betting.

Group net revenue did increase by three per cent to £802.6m during the period, helped by what the company said was a good performance during the World Cup in Russia and online net revenue growth of 11 per cent. Adjusted operating profit from existing operations rose one per cent to £130.8m.

"It's been an interesting first half," chief executive Philip Bowcock told the Racing Post. "We've clearly got answers about the two key questions we had, one being the Triennial, the other one being Paspa [Professional and Amateur Sports Protection Act]  in the US, which has enabled us to give some real clarity about how we're going to set up the business going forward.

"I'm very pleased with where we're going and where we are and there's a lot to get on with."

The big cut to the maximum FOBT stake has reduced the value of Hills' 2,334-strong betting shop estate
Hills have said previously that the decision to cut FOBT stakes to £2 from £100 would make around 38 per cent of their retail estate – 900 shops – loss-making.

Retail net revenue fell three per cent for the period, and while football gross win grew more than 20 per cent it was more than offset by declines in horseracing and greyhound racing.

Bowcock said betting shops were suffering with the rest of the high street, but that racing's performance was a concern.

He added they would wait for an announcement on a date for the implementation of a £2 stake before making a decision on shop closures, although they were looking at lease renewals as they came up. "We can't get over the fact there will be shop closures," he added.

Things were very different in the United States, where net revenue was up 50 per cent and adjusted operating profit up 132 per cent.

The company, which already operates in Nevada, New Jersey and Delaware, revealed they have signed new deals with 11 casinos in Mississippi and one in West Virginia to run sportsbooks and have possible deals forthcoming in a further 15 states.

Ladbrokes and Coral's owner GVC announced a new joint venture with casino giant MGM Resorts this week, but Bowcock said Hills were under no pressure to follow suit.

"I think we have to be pragmatic and think about the economics of these things," he said. "If something comes along that clearly creates value we'll go ahead and do it. But I'm under no pressure to do it."

Affordability checks

Hills recently announced a strategy to combat the problems caused by gambling called Nobody Harmed.

Bowcock said Hills have started affordability checks with some customers and have closed accounts as a result.

"I believe we should be socially responsible and if that means we have to ask customers some uncomfortable questions then so be it," he added.

Analyst Gavin Kelleher, at Goodbody, said that overall these were a "slightly mixed set of results from William Hill", with good momentum in online offset by weakness in gaming and retail.

He added: "The US business is delivering strong growth and the deals in Mississippi and West Virginia are steps in the right direction."

However, Hills shares were down 7.25 per cent at 271.1p on Friday afternoon.


THE £882.8m EXCEPTIONAL CHARGE IN MORE DETAIL

William Hill reported: "The recommended £2 maximum FOBT stake has led to a significant decline in expected future cash flows in the retail (betting shop) segment leading to an impairment of £882.8m recognised in the period.

"This was based on our current estimate of a reduction in the retail segment’s annualised adjusted operating profit (including mitigation measures) of c£70-£100m. A regulatory change of this nature is unprecedented and its impact on customer behaviour will not be known until some years after implementation."

Principal assumptions underlying Hills' model of the impact:

1 There will be some product substitution by certain customers.
2 Certain competitor shops will close and that we would capture a proportion of these customers.
3 All shops that become loss-making will be closed other than a sample of shops which are estimated to only make small losses compared to much larger shop closure costs and therefore would be kept open until their lease expiry.


How the exceptional charges total breaks down in light of anticipated loss of FOBT income

£m Description
680.7 Intangible assets - goodwill
151.5 Intangible assets - licence value
38.6 Land & buildings
12.0 Fixtures, fittings & equipment

882.8
 

Members can read the latest exclusive interviews, news analysis and comment available from 6pm daily on racingpost.com


 

It has been an interesting first half. We have clearly got answers about the two key questions we had
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