William Hill prepared for uncertain 2015
Operator says it is well placed to deal with PoC as a testing 12 months await the entire online industry
William Hill’s trading update this morning brought a mixed response from the City with analyst recommendations of sell, hold and buy reflecting the level of uncertainty that has engulfed operating conditions for gambling firms both at home and abroad.
And while regulatory clouds continue to gather above retail, including the impact of potential changes to betting and time limits placed on fixed-odds betting terminals, William Hill’s online business is also facing up to increasing external pressures and its positive momentum is likely to be tested this year.
It might be glaringly obvious, but mitigating the UK’s Point of Consumption tax will be crucial to the company’s full-year performance.
The firm says its reduced exposure to the UK market – 82% of its online revenues are derived from the UK, down from 85% at the end of 2013 – leaves it “very well positioned” to deal with the challenge. If Hills’ Italy and Spain-facing businesses turn a profit this year as its CEO predicts, that figure could look even healthier sooner rather than later.
And despite an expectation that the PoC hit would reduce advertising spend at major operators, Hills said its marketing costs will “remain broadly flat in absolute terms” in 2015. The ratio of marketing spend to revenues is however expected to decrease from the 25% rate in 2014 – which was down on the 27% invested the previous year.
“The marketing to net revenue ratio will fall further as we reduce the marketing ratio run rate as a response to the onset of the Point of Consumption tax,” Neil Cooper, William Hill CFO, said this morning.
Early days
Despite minor marketing tweaks, chief executive James Henderson (pictured) said it was “too early to tell” what impact the introduction of the PoC tax has had on the market in terms of competitor strategy, with bet365, and to a lesser extent Sky Bet, set to be boosted by a reduction in UK tax.
In Europe, meanwhile, recent changes to how VAT on electronic services is calculated will cost the firm in the region of £5m during the year – although the industry is set to challenge its application. VAT on betting and gaming is exempt in most EU member states however countries such as Germany and France do tax certain verticals.
And in awarding a hold recommendation, Peel Hunt analyst Nick Batram said this morning’s trading update “highlighted some of the headwinds faced by the group – and industry in general” as the company’s share price declined 3%.
“William Hill is well positioned overall but the short-term political risk and cost pressures means there is little reason to be more positive at this stage,” Batram said.
Furthermore, a switch to a revenue-based sports betting tax in Italy and a lowering of the tax rate in Spain have both been mooted and would provide some welcome news, particularly as the company attempts to turn these two countries into profit-making businesses in the coming 12 months.
Australian strategy
However, William Hill’s Australia facing business has also been hit by increased costs with a hike in race fees coming as Q4 sports wagering amounts contracted by 19% – although gross win margin here was up by almost 10% after the company “reshaped” its customer base.
The firm is about to embark on a major rebranding of its Australia-facing brands with Sportingbet, Centrebet and Tom Waterhouse all to all fall under the William Hill brand by early next year.
This in itself creates more uncertainty for the firm with a migration process to begin next month. How this will impact the business in the short-term is unknown, although Henderson said William Hill’s “exceptional” CRM team should mean any impact will be minimal.
The firm has put aside £5m in additional marketing costs to improve the awareness of the William Hill brand, which in a recent consumer survey gained a 21% recognition mark, compared with 80% for competitor Sportsbet, underlining the task ahead.
“Putting our full weight behind one brand is critical and we’ve increased the marketing to ensure a positive launch,” Henderson said, while adding that he expected the brand awareness gap would narrow rapidly throughout the year.
According to Numis analyst Ivor Jones , the firm has made the right choice in deciding to rebrand under the William Hill banner but expects there to be some impact to the business.
“This [the rebranding process] will result in disruption to customers as they are migrated, and management highlight £5m of associated marketing and other costs,” Jones said. “Although belatedly, we believe this is the right decision for the long-term future of the business,” he adds.
Despite all these challenges, the underlying business remains in good shape with gaming revenues up 11% in Q4 and sportsbook turnover up 16% – although revenues were hit by an “extremely unfavourable” set of football results on 26 December – which Cooper described as a “Boxing Day wipe out”.
All in all, William Hill is positioned as well as, if not better than, any of their main competitors as they seek to deal with what is set to be a testing 2015.
How the year unfolds will be an interesting watch while this time next year Jones expects William Hill’s prospects to look “considerably brighter than they do today”.