William Hill - Security in Gambling Diversity

Here's the bit in IC which mentions WMH:

..."So this is an interesting juncture to re-enter the world of gambling, made doubly so - as I alluded to two weeks ago - by the fact that the UK's largest bookie, William Hill, was ejected from the FTSE 100 on 19 December. This gives further technical reasons to back the bookie ('Playing FTSE with the laggards', 22 April 2005). But there are yet more reasons to have a punt on the shares.

First of all, the company is going to come up against some pretty miserable comparatives next year. In 2005, William Hill's first-half pre-tax profits dropped 8.5 per cent to £109m and in a trading statement last month, the company guided full-year estimates down to around £190m from £207m in 2004. However, including the £13m of cost savings from the £504m acquisition of 624 Stanley Leisure betting shops in June, brokers at Bridgewell Securities expect adjusted pre-tax profits to bounce back to £213m in 2006, which gives EPS of 40p and puts the shares (WMH: 518p) on a forward earnings multiple of 13. Let's not forget there could be upside to these estimates, too - especially if some of the major sporting events on the betting calendar next year, including the World Cup football championships in Germany, go the way of the layers.

William Hill's financial strength should not be underestimated, either, as this is a business with an impressive cash-conversion rate (operating cash inflows of £247m in 2004 exceeded operating profits by a healthy 7 per cent). So, as William Hill is targeting a ratio of net debt (£915m at the end of June) to cash profits of 3.5 times over the medium term, it is going to be able to return chunks of cash to shareholders. At the half-year stage, the dividend was lifted by 11 per cent to 6.1p, and brokers are pencilling in a full-year payout of 18.4p (up from 16.5p in 2004), rising again to 21p in 2006. This puts the shares on a forward yield of 4 per cent, comfortably ahead of the market. Chief executive David Harding has also committed to an earnings-enhancing share buy-back, worth between £200m and £300m over the next 18 months, underpinning the share price further.

Financial engineering, aside, there are risks. Clearly, the competition created from the rapid growth of betting exchanges, such as Betfair, has been a thorn in the side of traditional bookmakers. And gross win margins (which fell as a result of the unfavourable betting results this year), could be under structural, and not just cyclical, pressure. But there is still growth in the business and William Hill has hit back with an array of interactive and online betting products, such as its poker, casino and television platforms. What's more, the success of its 7,500 fixed-odds betting terminals, which generate a net weekly profit of £400 each, has diversified its revenue stream, so making it less reliant on the more volatile traditional horseracing and sporting results.

So if, like me, you believe the best time to buy shares in a bookie is when betting results have gone against the layer, then William Hill's shares, which have fallen 15 per cent since mid-September, are as good a buy as any. Buy.

This article will appear in the 30 Dec issue of Investors Chronicle