Ladbrokes Coral begins at 'overweight' with Morgan Stanley

As Ladbrokes Coral completed its merger and began its first day of trading as a combined entity on Tuesday, analysts gave their initial takes on the stock, which will trade under the ticker LCL.

Morgan Stanley put the bookmaking group, which begins life with a market cap of close to £2.6bn, on a 'overweight' rating and set a price target of 190p, with expectations that the merged business will deliver a compound annual growth rate in earnings per share between 2017 and 2019 of 23% driven by online growth, merger synergies and strong cash generation.

Ladbrokes Coral has guided to synergies of around £65m from the merger, while the Ladbrokes business has been improving thanks to strategic changes begun last year.

"We benchmark to its closest peer William Hill and see higher growth, similar UK retail exposure, a larger online business and a significant valuation discount," Morgan Stanley said, citing significant hidden value in online and overseas revenues.

The investment bank sees upside risks to the £65m synergy target, margin upside in online, strong cash generation, and rising returns to shareholders but warns of a potential £100m bear case hit if the UK government clamps down on fixed-odds betting terminals, with other regulatory risks in Australia and Italy.

Shore Capital said the base case scenario is for group earnings before interest, tax, depreciation and amortisation (EBITDA) to build from pro-forma £375m and earnings per share of 10p towards £500m and EPS of 15p by 2018.

But, as it slapped a 'buy' recommendation on the shares, ShoreCap sees a bull case scenario where the enlarged business eliminates gap with peers in cost and revenue per shop and improves its online margin towards 30%, with EBITDA building to circa £650m and EPS of 23p.

"Our analysis suggests that Ladbrokes Coral is worth circa 180p per share based on our central case assumptions rising to over 220p per share on our bull case assumptions," the broker said.

At opening price of 134p Ladbrokes Coral trades on 8.0 times 2017 forecast EBITDA, with an implied valuation of 3.0 times EBITDA.

"We see significant upside from here on all but draconian restrictions on machine play," ShoreCap's analysts concluded.