UBS downgrades William Hill amid increasing competition

William Hill was under the cosh on Friday after UBS downgraded the stock to ‘sell’ from ‘buy’ and slashed the price target to 365p from 410p as it pointed to an increasingly competitive backdrop.

“We believe that, with consolidation in the industry, and with a re-vamped Ladbrokes investing heavily in marketing (leading to significant operational outperformance in the last two quarters), the industry backdrop will become increasingly competitive,” it said.

UBS reckons this could put a lot of pressure on Wiliam Hill’s growth rates in online and in Australia and cut its EBIT forecasts for 2016/17 by 8%. The bank said it is now 7% below consensus for 2016.

“With the positive catalyst we were waiting for (share buyback) behind us, we now see the risk/reward as skewed to the downside,” it said.

UBS sees several potential regulation-driven negatives in 2016/17. It pointed to the impact of automatic self-exclusion/time-outs in UK Online, further impact from non-core market exits, and the potential introduction of a horse racing 'right'.

“While we think the regulatory environment in 2016 will be more benign than the last two years, we believe it prudent to have a more balanced view within the regulation-driven gaming subsector.”

The bank prefers Ladbrokes, which it rates at ‘buy’. It noted superior growth rates in the last two quarters, albeit from a small base, and said this gives it confidence the strategy is working.

“We also see Ladbrokes as the operator less exposed to the drag from grey market exits, given 97% of gross win is from regulated markets, versus 88% at William Hill.”

At 0837 GMT, William Hill shares were down 1.3% to 394.20p.