Investec downgrades William Hill and Ladbrokes Coral, rotates into online

Investec downgraded William Hill and Ladbrokes Coral as it rotated its chips on more digital-focused gambling stocks Playtech, 888 and GVC.

Hill's was cut to 'sell' from 'reduce' and its target price to 243p from 289p, while the newly merged Ladbrokes Coral was given an 'add' rating, down from 'buy' pre-merger and with the price target trimmed to 144p from 175p.

Paddy Power Betfair, which has a bricks and mortar estate but a strong digital bent, was also upgraded to 'hold' from 'sell' but its price target kept at 9,170p, while the pure-play digital stocks were all given 'buy' ratings, with Playtech's target price kept at 1,122p, 888 at 240p and GVC at 7600p.

"2017 looks set to be tough for the bookmakers given numerous regulatory headwinds," Investec said.

A number of regulatory headwinds are seen, including the possible transposition of the fourth Anti-Money Laundering Directive (AMLD) with consultation closing on 10 November, triennial review of the Gambling Act with consultation closing on 4 December, a new racing levy estimated at 10% to online and retail from 1 April 2017, and cancellation of deduction of eGaming inducements in calculating UK point of consumption tax from 1 August 2017.

"We believe the Triennial Review consultation will focus on problem gambling, which has remained unchanged over the last three years based on Gambling Commission surveys," which is felt quite likely to be a lower soft betting limit on B2 machines of £20.

Investec believes the market has not fully priced in all the risks to earnings from these various regulatory variables.

"We expect M&A to continue as regulatory headwinds increase. However, we believe the takeover of a retail operator will not occur until the outcome of the Triennial Review consultation is known."

Analysts suggest rotating out of retail gambling as their findings suggest higher downside risk relating to these bookmakers heading into the triennial review, though they still see upside to Ladbrokes on synergistic merger benefits, with stocks offering geographically diversified exposure outside the UK being good for mitigating regulatory risk.