When online betting in the newly liberalished American market is the gambling sector’s hottest ticket, it is perhaps unsurprising that investors have been underwhelmed by 888’s acquisition of William Hill’s non-US business — shops and all. The shares have fallen steadily since hitting a record high in September, taking total losses for the FTSE 250 constituent to almost a fifth in the past three weeks.
In his half-year statement on September 1, Itai Pazner, the chief executive, warned that revenue growth had slowed in the summer as the group’s online business faced the impact of retail and leisure venues reopening internationally. He added: “For the remainder of the year, the board remains mindful of the tougher comparables in the fourth quarter, a period that enjoyed an exceptionally strong performance in both betting and gaming revenues during 2020.” Investors shrugged that off at first, focusing on the expected expansion of the market, but then started worrying.
Ostensibly, 888 has plenty of positives. Since the US Supreme Court’s decision to overturn America’s ban on sports betting, the company has formed a partnership with Sports Illustrated, the revered magazine. In June it launched a Sports Illustrated mobile sports betting app in the United States. Authentic Brands, the magazine’s parent company, has been paid a licensing fee for the name and logo, and will collect additional payments related to how many players are recruited.
Daniel Dienst, Authentic Brands’ executive vice-chairman, said: “Gambling, sports wagering in particular, has moved out of [the vice] world. I think it’s part and parcel of the culture of how people engage with sports.”
Indeed, Americans bet $24 billion with legal “sportsbooks” in the first half of this year, according to the American Gaming Association, which comes down to $2 billion in gaming revenue for the industry. Macquarie Research estimates that by 2030 that will grow to $30 billion from $400 billion of total wagers. “Suddenly this has become a legitimate activity where all the big media companies are participating,” Pazner said.
888 also has bought the non-US assets of the William Hill betting chain, giving it a big presence on British high streets, multiplying its market share by four and making it the third biggest operator in the country behind Flutter and Entain.
“The growth we’ve seen in UK betting and gaming has been online,” Vaughan Lewis, 888’s strategy officer, said. “Retail betting has been broadly stable and betting shops have a loyal customer base. It’s a pretty attractive proposition because they have fairly steady trading and predictable costs. They generate cash that will help us invest in digital.”
However, bringing Sports Illustrated and William Hill into the mix raises the possibility of 888 becoming a bid target. Jason Ader, of the New York-based SpringOwl Asset Management, a gaming specialist, said: “The cost of starting up a mature online gaming business is still greater than the cost of buying one. The UK companies are a lot more valuable than their share prices would lead you to believe because there’s simply been no way for US businesses to replicate what they’ve been doing for the last ten years.”
Peel Hunt, the broker, forecasts earnings per share of 29p for this year, rising to 30p next year. The interim dividend rose from 3.2 cents to 4.5 cents, putting the payout on course for 20 cents for the year and a prospective yield of 3.7 per cent.
ADVICE Hold
WHY Shares have come up a long way and the recent price fall is worrying. Wait and see what the management says next week
Electrocomponents
Some of the most rewarding stock market shares are in companies that the public has hardly heard of, supplying the nuts and bolts that keep industry’s wheels turning. Hidden between King’s Cross and St Pancras railway stations in central London, Electrocomponents is a prime example, pushed further towards the fore when supply chains are such a political hot potato.
Its latest trading update earned a mixed reception from investors on Friday and a dip into the red to begin the week. That seems harsh.
Electrocomponents buys 3.6 million bits and pieces a year, from personal protective equipment to hammers, screwdrivers and printed circuit boards, and spreads them around 1.2 million customers in 32 countries, principally Britain, Europe, the United States and Asia. The average profit margin, a healthy 9.4 per cent, suggests there is not too much competition from rivals or haggling by buyers.
While first-half activity has been strong and ahead of expectations, Lindsley Ruth, the chief executive, admitted that the company had been suffering from higher outbound freight charges, labour inflation and “costs to serve” — the total costs of serving a customer or making a product. “We remain cautious about the external challenges,” he said.
In the six months to the end of September, like-for-like revenue was 31 per cent up on the same period last year. Compared with two years ago, to strip out the Covid effect, like-for-like growth was 22 per cent.
Its size alone ensures that Electrocomponents is tied to the global economic cycle, which has been broadly working in its favour this year. But it cannot entirely escape the international lorry driver shortage, higher energy costs or the threat of significant interest rates returning. It is, however, drawing closer to customers. Revenue from RS Pro, the own-brand product range, rose by 28 per cent on the first half of 2019. Web revenue grew by 26 per cent on the same basis.
The shares offer a slither of a dividend yield, 1.6 per cent, but, apart from last year’s exceptional circumstances, the board has regularly increased the payout.
ADVICE Buy
WHY Conservative financial management means shares should continue their rise
