Ladbrokes Coral doubles divi as merger benefits grow, current trading robust

Ladbrokes Coral confirmed first-half operating profits at the top end of previous guidance, doubled its interim dividend and said synergies from last year's merger were expected to be more than double the original estimate.

The bookmaker, which last month pre-released its top-line results, posted results on Thursday and an update for the seven weeks since, where it said net revenue was 6% ahead of last year and sports gross win margins were ahead in the UK and Italy but behind in Australia.

Interim results showed group operating profit of £158.3m for the first six months of the year, up 7%, on proforma revenues up 1% at £1.2bn, of which controversial fixed-odds betting terminals accounted for 33% of group revenues.

Profits before tax shrank 8% to £23.1m though to underlying earnings per share increased 58% to 5.7p and basic earnings per share halved to 1.0p.

The dividend was doubled to 2.0p, which chief executive Jim Mullen said reflected "the progress made, the opportunities offered by the merger and our confidence in the future".

Having completed the merger of the Ladbrokes and Coral businesses last November, the main aim for the year had been to complete the integration of the two teams and the digital offering onto a single platform.

Synergies from the merger will "step up substantially" in the second half, Mullen said, to deliver a full year saving of £45m and he now thinks synergies will reach £150m per annum by 2019, more than double the original estimate.

The second half is also expected to see the government's triennial review on the sector, which is predicted to see the maximum stake on FOBT machines slashed from £100 to around £10-20, or even as low as the £2 cap the Labour party is pushing for.

UK retail, which derives 57% of sales from FOBTs, had a tough first half as expected given changes to UK racing media rights and Ladbrokes' horse racing margin that Mullen said will both "protect the profitability of our shop estate well into the future".

Giving an update on more recent trading, the seven-week period from 1 July 2017 was reported to have seen total group net revenue rise 6% up on last year or 5% at constant currency rates, with digital net revenue up 15% and sports up 29%.

Sports gross win margins were ahead in the UK and Italy but behind in Australia in the weeks to 20 August, with gaming net revenue slowing to 4% growth as UK retail revenue fell 1%, with a strong margin performance in the seven weeks and an improving stakes position as we re-established coverage of all UK horse racing.

Said Mullen: "In summary, we are in good shape, we have come a long way in a short time and we have positioned the business well for making the most of the opportunities presented by the merger.

"The interim results leave us in line with our expectations for the year and while there remains much to do, we are confident in the opportunities that exist for the business."

Ladbrokes Coral shares were up more than 1% in early trading but by 1015 BST were down 0.7% to 116.77p.

Broker Shore Capital said it was a "solid" set of results, with EBITDA better than its expectations of £200m in spite of well publicised unfavourable sporting results, with UK retail showing better than expected cost control.

Current trading was felt to look "robust" with more favourable sporting results bar Australia, improved staking position in UK retail and good growth in digital sports book although gaming more muted.

"Our full year EBITDA estimates of £440m (PBT: £266m; EPS: 11.8p) looks well positioned given the strength of the first half and further synergy benefits to come through."

Analyst Nicholas Hyett at Hargreaves Lansdown summarised the results as showing a weak UK retail performance offset by very strong progress in the group’s digital business.

"However, trading in the seven weeks since the end of the half will be more welcome news for investors. With a full racing line up back on UK shop screens, staking looks to be recovering and margins are looking healthy, meanwhile digital growth remains robust."

He cautioned that the second half of the year should see the result of the UK government's triennial review of the gambling industry, and particularly rules governing fixed-odd betting terminals, which account for 57% of UK retail sales.

"As the political football of choice for UK politicians and media alike, increased regulation of these machines looks inevitable. That threat probably explains why the group is currently trading at a significant discount to its historical average."

Neil Wilson at ETX Capital said the maximum stake on these machines is likely to be cut from £100 to at least £10-20, "but it depends on the amount of pressure Labour can exert on the government now the Conservatives have lost their majority – Labour has pushed for a cap of £2.

"A £2 limit would amount to a serious problem for bookies and probably hasn’t been fully reflected in the share price declines of the last 12 months."

However, he wondered if the government might cave in to pressure from the Treasury, as tax revenues from bookies are high and there are plenty of jobs tied up with the shops.

"The government may not wish to give up the tax money at this time, which might result in a more modest reduction in maximum stakes."