On the assumption that Ladbrokes Coral waits until its full-year figures in March to give further guidance on the benefits of the merger completed on November 1, it will have been almost two years since the news of talks first broke before investors have a clear idea of what they are getting. This is a timescale more associated with mega-mergers in the US than in a sector of the UK market that is already consolidating.
Don’t blame the protagonists. The Competition and Markets Authority embarked on a detailed inquiry before deciding that combining the respective high street empires of Ladbrokes and Coral would create a lack of competition in some places and required the sale of 360-odd outlets, which is agreed but still going through.
When the merger was announced in August 2015, the two indicated that they could see annual savings of £65 million by putting the businesses together, mainly by combining the two online operations. It is a racing certainty that this figure will be exceeded when the market is finally updated in March, or just conceivably ahead of the figures in February.
Meanwhile, yet another uncertainty has been introduced, the government’s triennial review into the industry, which is looking at the stakes and prizes on offer at fixed-odds betting terminals, which provide about half the profits for the retail estate. The news will not be good for the industry when it arrives, probably in the summer.
The trading statement for the merged group for 2016 at least provided some pro forma figures on what the company would have looked like for the full year. Separate them out and Ladbrokes’ operating profits were ahead by 25 per cent to £101 million and Coral’s 16 per cent to £179 million.
The online operations made good progress while the retail estate continued to decline, reflecting a further withdrawal from the high street and a fall in bets taken over the counter. Ladbrokes’ Australian business, which is entirely digital, continues to build market share.
The shares have come back sharply since the autumn. Up 4p at 128½p, they sell on less than 11 times’ earnings. Unless the review is unexpectedly swingeing, that fall looks overdone.
My advice Buy
Why Price has fallen back a long way on regulatory fears, while the benefits of the merger have the potential to surprise on the upside
Pearson
The market should really have seen Pearson’s dividend cut from 2017 coming. The payment for 2016 was barely covered by earnings and, as this column pointed out, there was always the potential for further shocks that would undermine the payment further.
The next shock duly arrived yesterday. It is almost impossible to forecast future payments because these depend on the outcome of negotiations with Bertelsmann, its joint venture partner, which will produce either the £1.2 billion Pearson’s stake is worth or unspecified dividends if the publisher is recapitalised. Even after this, it is impossible to say how much will go to investors.
Take the base sum, then. Pearson shares as of Tuesday night were yielding 6.4 per cent on this year’s payment. Assume from yesterday’s profit warning that earnings come in at about 52p and cover is a sensible two times, and that yield falls to 4.5 per cent.
Pearson cannot be trusted not to release more shocks, given the parlous state of its biggest market, US education, while on that yield it cannot be deemed an income stock.
My advice Avoid
Why Yield is poor given potential for more bad news
Experian
There are so many moving parts in any set of figures from Experian, the data and credit-checking business, that it is easy to miss the overall picture and get bogged down in detail.
Its consumer business in America and more recently Britain has been held back by a change in the way it operates. Experian is shifting to a model that provides basic services free but encourages consumers that use them to take on various financial products. This works well in America and is being introduced here, but it does mean some revenue dilution in the meantime, and in the UK and Ireland there was a 12 per cent fall in the quarter to the end of December, with a further decline expected in the fourth.
The other variable is currencies. Experian is unusual as a global business in that it lost out on sterling’s fall since the referendum because almost a fifth of it is in Britain and Ireland and it reports in dollars. This will be offset by the rise of the Brazilian real and the business there looks set to benefit from impending changes in legislation over the provision of credit data.
The big picture is that the growth of Experian’s markets means that it can increase organic revenues by 4 per cent to 6 per cent a year, even if a rise at the bottom end of this range in the third quarter reflected the timing of a contract last time.
The company is buying back $400 million of shares a year but is still piling up excess cash. The shares, off 27p at £15.51, sell on 21 times earnings but still look a solid long-term proposition.
My advice Buy
Why Reliability of business and growing cash pile
And finally . . .
One of the reasons Equiniti came to the stock market in October 2015 was to make small infill acquisitions to the core business, which provides payment and other services to companies. This offers good prospects for organic growth, but acquisitions can only add to this and two more purchases came along yesterday, a data analytics and cybersecurity company and a loan broker, both in the UK. These add to the suite of services the company can offer. Equiniti shares, at 189p, are now well ahead of the 165p float price.
