William Hill Is Riding On Conservative Party’s Win

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Nicholas Kitonyi writes: William Hill, the UK-based giant gambling company along with its counterparts seems to have received a new lease of life for at least the next five years thanks to Conservative party’s win during last month’s election.

Shares of William Hill Plc (LON.WMH) had taken a tumble days leading to the UK house elections which took place on May 7. The company’s stock price fell by close to 30 pence from 390 pence to about 361 pence between April 10 and April 30, as investors feared the consequences of a Labour party win, especially for those who invest in UK gambling stocks.

Chart courtesy of hl.co.uk

Now, even after announcing decent Q1, 2015 results on April 23, the impact lasted only momentarily as the stock price slid back to around the 360 pence mark. Even some analysts were not quite impressed and still moved on to downgrade the stock, which put more pressure on price. However, as the voting time neared, William Hill’s stock price began to recover slightly, and rallied on Friday, May 8, following the elections.

This set the stage for what the stock is experiencing now, a continuous rally. Investors had feared that the company’s income would suffer if the Labour party was to win, and hence pass the tax bills that would have weighed heavily on operating income.

Fundamentals remain decent from one fiscal year to another

The price of William Hill Plc has experienced mixed performances since the beginning of the year. However, from a fundamentals perspective, the company has been doing quite well over the last five years posting continuous growth in revenue and earnings.

The company also boasts impressive dividend yield, which increased to 3.30% in 2014 compared to 2.86% posted in 2013. Therefore, investors have plenty to look out for in a positive light with regards to fundamentals, which are ideally the basis for a company’s long term performance.

Source: 2014 company financials

William Hill’s price to earnings ratio has grown to double digits over the last three years compared to the preceding 2 years when it averaged about 7.85 in P/E ratio. However, the company’s 2014 P/E of 12.05 is the lowest in three years, but from trailing 12-month analysis, the P/E is now at a new high of about 18x over the last twelve months.

This is particularly due to the recent surge in price triggered by the conservative party’s election win in May. Investors are now optimistic on the stock as it appears to have avoided the wrath of increased taxation had the Labour party won.

So what are some of the company’s products that are driving growth?

William Hill is a gambling company involved in both the land-based and online-based gambling markets. Over the last few years, companies have been expanding their presence online by introducing various products and services such as sports betting, online slots, online poker, online social games, and casinos among others.

William Hill has not been left behind as it seeks to leverage the slowing land-based business with online slots and sports betting. Some of the company’s leading online products include 21Nova.com, Prestigecasino.com, WilliamHill.com and Eurogrand.com, among others. The company is witnessing an amazing growth in online gaming activity, after posting 20% growth in the unit in February, 29% growth in March and an overall, 16% growth for the first quarter of 2015. The company has also made key acquisitions over the last few months, including the acquisition of Australia-based Sportingbet, later renamed to Williamhill.com.au.

The company’s poker revenue was down 32% for the quarter, while Casino and Bingo revenues increased by 10% and 8% respectively. Overall, gaming revenue increased by 8%, in line with the company’s international projections. On the other hand, sportsbook net revenue increased by 11% for the same period.

The company continued to see an increase on duty on retail gaming machines, which was up 5 percentage points to 25% from 20% at the beginning of March this year. This is part of the reason why the company’s earnings growth appears to have hit a snag this year compared to statistics of the last five years.

Conclusion

The bottom line is that shares of William Hill are currently on a run following the conservative party’s election win in May.

Investors may be wondering how long this rally could last, with some possibly thinking that now could be a good time to cash out. However, while it is pretty clear that the election win by the conservative party triggered the run, we can also see that the company has solid fundamentals.

And despite have gone what appears to be a slowdown in growth rates during Q1 compared to what we witnessed over the last five years, the company has been recording some important milestones with regard to growth in online gambling, which appears to be the next frontier for gambling companies.

By Nicholas Kitonyi

Copyright © 2015 Nicholas Kitonyi - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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