William Hill tumbles at first fence as profit warning follows 'worst Cheltenham'

In what was effectively a profit warning, William Hill has pulled up short with a disappointing first-quarter update after a loss-making Cheltenham horse racing festival and weaker than expected online performance.

After what it admitted were the "worst Cheltenham results in recent history" and the acquisition of lower-value online clients, the bookmaker said it expected operating profit for 2016 will be in the range of £260-280m.

That was 9-16% below the Bloomberg consensus estimate of £308m and company-compiled consensus of £307m

While the broader group continues to trade well, online profits in 2016 are expected to be £20-25m lower than last year's due to a lower level of active users on its website stemming from regulatory changes that have led to an acceleration in the number of time-outs and automatic self-exclusions over recent weeks.

Chief executive James Henderson said the group was also experiencing softer UK growth as a consequence of acquiring lower value customers.

A happy succession of results for Cheltenham punters combined with unfriendly European football results to cut gross win margins online by 1.9 percentage points below expectations in the period to 6.2%.

Strategic fixes for the online business have been put forward by interim divisional management, which will refocus the business on maximising UK customer yields, improving performance in non-core markets and assessing opportunities for cost efficiencies

On a broader view, the William Hill Group was said to be "overall in line with our internal expectations, helped by favourable UK football results, a strong Super Bowl result in February and improving momentum in Australia following the changes made in 2015.

The group also confirmed that it is in advanced discussions with a partner, thought to be Las Vegas-based NYX Gaming Group, which would see it invest in OpenBet, a software provider to all of Britain’s major bookmakers.

Whether or not these plans come to fruition, the company said it remained committed to the share buyback programme previously announced.

"Today's statement reflects the combined effect of our assessment of the impact of recent regulatory changes and unfavourable sporting results including the worst results at Cheltenham in our recent history," said Henderson.

He added that while the rest of the group was performing in line with expectations, management would continue to focus on improving online performance to enable it to outperform the market.

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 newly introduced regulatory measures and the balance poor sporting results.

"The impact from the regulatory changes, introduced on 31 October 2015 is of concern to us," Nomura added, with the margin for error on the current guidance remaining 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."

Broker Peel Hunt downgraded its operating profit expectations to the bottom end of management guidance and noted that at their last close, the shares were trading on 17 times its new 2016 earnings and a 3.5% yield.

"Management commitment to further share buybacks and a bid on OpenBet but this won't be able to offset negative sentiment this morning," analysts added.

Charles Huggins of Hargreaves Lansdown said the challenge for William Hill is to reduce reliance on problem gamblers and recruit more 'recreational' clients.

"2016 was supposed to be the year when William Hill’s online business regained its mojo, following a number of operational challenges last year," he said. "The fact that the group has already warned of lower profits from this division, barely a month after issuing full year results, is very disappointing.

"We can forgive the group an unfavourable run of sporting results, which is clearly outside of its control and to be expected from time to time. The acceleration in the number of time-outs and automatic self-exclusions in its online business is more worrying. Basically this means that ‘problem gamblers’ are being locked out of their accounts."