Morgan Stanley downgrades William Hill after profit warning

Morgan Stanley downgraded William Hill to ‘underweight’ from ‘equalweight’ and cut the price target to 290p from 425p following the company’s profit warning last week.

The bank also cut its earnings per share forecasts for 2016 and 2017 by 16% and 18% to 22p and 24p, respectively.

“Trading on 15x price-to-earnings in 2016, the shares are towards the high end of their own long-term range, and with elevated risks in Retail and a lack of visibility in Online, we think risks to forecasts remain on the downside,” MS said.

It said the cash generation, strong balance sheet, dividends and share buybacks provide some support, but a significant re-rating is unlikely until the growth outlook improves significantly in Online, which is unlikely until the second half of next year.

Within the gambling sector, Morgan Stanley expressed a preference for Playtech and 888 Holdings, both of which it rates at ‘overweight’.

It argued that Playtech offers a diversified way to invest in the structural growth in Online gambling through its revenue share model, from its around 120 B2B customer base. In addition, it said the stock’s valuation of 10x 2016 EV/EBITDA does not reflect the strong growth profile.

As far as 888 is concerned, it noted a growing global presence and said the 2016 EV/EBITDA valuation of 9x fails to reflect the attractive growth profile and high cash generation.

At 0817 GMT, William Hill shares were up 0.1% to 334.90p.