Nomura keeps tenative 'buy' on William Hill despite profit warning

Nomura has maintained its 'buy' rating on William Hill after the bookmaker issued a profit warning due to newly introduced regulatory measures and poor sporting results.

Hills revealed operating profit for 2016 will be in the range of £260-280m, which was 9-16% below the Bloomberg consensus estimate of £308m.

After the analyst call, Nomura explained that of the £36m lower EBIT guidance, all related to its online division, with £20m-25m reflects full-year projections of reflects full-year projections of newly introduced regulatory measures and the balance poor sporting results, most of which was from the recent Cheltenham festival.

"The impact from the regulatory changes, introduced on 31 October 2015 is of concern to us," Nomura added.

Regulatory changes introduced in October to help problem gamblers self-exclude or time-out from their betting accounts has negatively affected EBIT by £2m in the year to date, Nomura noted, meaning around 3,000 accounts per week were affected, 50% more than the company indicated the start of the year.

With the cumulative effect, according to the company’s models, being £20m-25m the investment bank said the margin for error on the current guidance remained "high" and "likely to be compounded when further regulatory measures are introduced on 30 April regarding limits on auto-play".

"We expect these regulatory changes to have broader industry-wide implications, with greater impact on those companies exposed to online and specifically gaming sportsbook."

On the conference call, Nomura said the interim MD of the online division "devoted much time to the new strategy of value over volume, claiming that the lifetime value of customers was more important than customer acquisitions", while many recently acquired customers had been unprofitable, ‘abusing’ bonuses and sign-up promotions.

Prior to downgrades (and today’s share price correction), the stock had been trading at 12.6 times 2016 earnings.

Despite hanging onto its recommendations, analysts admitted they thought uncertainty regarding the online division from regulatory measures and the management and strategy changes "may mean that the shares will struggle to reach their full potential in the near term".