Barclays upgrades William Hill, initiates coverage of Paddy Power

“In an industry with duplicated cost bases and where scale matters, it is no surprise consolidation is kicking-off; it is only surprising it has taken this long. In this new era, we seek to identify trends that are underappreciated by the market and that will inform investment debate over the next five years.”

It noted that over the last two years, earnings expectations for William Hill have fallen and online amounts wagered growth has slowed.

Barclays pointed out that the stock is down 24% since June versus the FTSE 250 down 6% over the same period and the shares now look cheap.

It said the stock has de-rated from 16x to 12x price-to-earnings, adding that it hasn’t looked this cheap relative to the market for five years. It now offers an attractive price-to-earnings growth of 1.3x, a yield of 4% and the potential to boost EPS via share buybacks.

“Ultimately, we think William Hill is coming towards the end of a process of transitioning the online business to be more technology and product focussed,” the bank said.

Barclays said the stock is a solid investment in the long term.

It said William Hill was the most trusted UK gambling brand according to its consumer survey. In addition, the company generates strong cash flows and is a top 3 player in the UK .

Barclays said the balance sheet is strong and in the absence of M&A, share-buy backs could be on the agenda.

“We estimate a £400m share buy-back at today’s price would be around 9% EPS accretive.”

The bank initiated coverage of Paddy Power at ‘overweight’ with a 104p price target, saying the merger with Betfair makes strategic sense.

“Our survey presents evidence that revenue synergies could be material,” it said, reiterating its ‘overweight’ rating on Betfair and lifting the price target to 3,420p from 2,600p.