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Analysis of UK-Based William Hill Plc

March 28, 2014 | About:
JustinGD

JustinGD

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Today I will be analyzing William Hill Plc. The company provides gambling services such as sports betting, online casino and operating gaming machines at its betting shops. While I don’t really dig gambling, I can definitely dig making money off solid gambling stocks. And I definitely think that William Hill is really a solid gambling company. William Hill trades on the London Stock Exchange. The stock closed at $346.70 pence on Thursday. I do not own shares in William Hill. However, I may invest in the company in the near future.

The company generated healthy average return on equity (ROE) and return on assets (ROA) of 21.99% and 10.56%, respectively. The company’s ROE and ROA figures are even more impressive if you consider that £1.17 billion of the company’s £2.41 billion in total assets consists of intangible goodwill. William Hill’s asset-light business model should allow it to keep reinvesting for growth while still setting aside a significant chunk of the profits for dividend payments.

Amounts wagered by customers grew by 32.55% in 2013. However, there was only a 10.42% increase in gross profit as a large part of the increase in amounts wagered came from the Australian operations which have a lower gross profit/amounts wagered ratio. William Hill acquired its Australian operations in 2013. But a 10% increase in gross profits is still pretty decent so I won’t be a jerk about it. I think it’s important to look at both the increase in amounts wagered and increase in gross profits to get a better picture of William Hill’s business growth. This is the case as gross profit takes into account both payouts to customers and gross profits tax, duty and levies.

Despite the increase in gross profits, William Hill did experience lower profits before tax (PBT) from £277.7 million in 2012 to £257.0 million in 2013. The decline in PBT was partly due to exceptional costs of £22.8 million which includes early termination of a bridge loan facility, integration of assets and reversal of a previous gain. Another reason for the lower PBT was the introduction of Machines Games Duty last year which resulted in an additional £10 million in indirect taxation costs. There was also an additional week in 2012. While PBT might be lower, I think that the company’s earnings will still be resilient over the long-term. I mean there will always be demand for gambling just like there will always be demand for stuff like cigarettes, beer, sex toys and good cheeseburgers. From 2007 to 2013, there wasn’t a single year where PBIT (before taking into account exceptional items) declined by more than 10%. Keep in mind that the 2007 to 2013 period included the great financial crisis where almost everyone thought that the whole freaking world would go bankrupt.

The company faces significant tax increases in the near future. According to this article on The Telegraph, William Hill expects that the Point of Consumption Tax will cost it between £60 million to £70 million a year. The Point of Consumption Tax is a new online gaming duty that will be implemented in December. The same article also states that William Hill will try to mitigate some of the impact of the Point of Consumption Tax by cutting costs by £15 million to £20 million. Another factor which can potentially mitigate some of the impact of higher taxes is that the company’s U.S., Australian and online divisions may keep experiencing good growth and contribute more profits.

William Hill has a P/E ratio of 13.06 which I guess is reasonable even after taking into account the increased taxes that the company will face in the future. In my calculation of the P/E ratio I accounted for dilution as well as added back profits attributable to non-controlling interest as William Hill bought out non-controlling interest during the year. The stock has a dividend yield of 3.35% which is pretty healthy. I think that this stock may deliver decent returns over the long term and maybe even pleasantly surprise shareholders. Anyway, thank you for reading. Take care and stay rational.

Please visit my blog (Greedy Dragon Investment Blog) if you're interested in my analysis of other companies, discussions of value investing principles or musings of stuff related to business and investing. 

Disclaimer:

This article simply represents my opinion. I’m not encouraging anyone to follow my opinions. I’m not a professional wealth manager. I may and probably will make errors in my calculations and analysis from time to time. I may choose not to follow conventional ways of calculating certain figures and the figures I calculate may differ significantly from the actual figures you may get using conventional formulas. Whatever investment decisions you make should be based on your own independent judgement. I will not be responsible for any of your losses.

What you do with your money is your business. Do your own research, come to your own conclusions and take personal responsibility for both the profits and losses from your investments. That’s what a great investor does.


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