CS moves William Hill, Paddy Power to 'neutral' over regulatory risks

CS decided that the base case of regulatory risks for UK machine gaming plus online taxes in the UK on gaming and in Australia implies between 2-23% of 2018 estimated profit before tax is at risk.

Hill's was downgraded to 'neutral' due to the scale of regulatory risk and the fact that it had more expensive valuation than Ladbrokes Coral, which was kept at 'neutral'.

PPB was hiked from 'underperform' given lower regulatory concern and the shares' major de-rating after integration concerns were raised for investors over lower growth in sports and gaming, balanced by a batter outlook for 2018 post the platform integration.

Australia is the key regulatory threat for PPB but based on next year's numbers, the shares that were trading for over 30 times earnings are now 20 times EPS.

As for Hill's, expectations for online growth are "low" and recent trends have been encouraging.

"However, regulatory risk is significant and the EBIT mix is now similar to LCL post-merger, making it tough to argue WMH is cheap."

Post-merger estimates for LCL include substantial online profit growth and hence higher execution risk.

LCL is felt to have the greatest exposure to regulatory risks of the peer group and so this prevents a higher rating despite a 2018 p/e ratio of just over eight times.