The American gaming market is becoming increasingly crowded with UK-listed operators moving in to try to win big on the back of its liberalising rules about online bets.
William Hill, GVC and Paddy Power Betfair are all investing heavily in the US market, hoping to take advantage of the US Supreme Court’s decision effectively to wash away a federal ban on sports betting and enable individual states to open up their local markets.
In there with them is 888 Holdings, the online gaming operator that has been in America since 2013 and for a time was the only UK business to have a presence in the three states where regulated gaming is allowed.
888 Holdings was founded in the British Virgin Islands in 1997 and its first trading product was Casino-on-Net, launched that May. Now based in Gibraltar, 888 Holdings listed on the stock exchange in 2005. It offers casino, sports, poker and bingo games to individual customers and has a small business division that provides technology and other services, such as complaince, to enable enterprises to commercialise their own games.
Its not hard to see why the American market is such an attractive prospect for all the gaming and betting groups. The main reason is a regulatory crackdown on problem gambling in the UK, their home marketplace and for most their biggest revenue stream.
888 Holdings is an online-only business and so will not be affected directly by the government’s move to slash the maximum bet on fixed-odds terminals from £100 to only £2 that looks set to be introduced next April.
However, it has felt the heat of the regulator’s increasingly heavy supervision of its industry and, having taken steps to sharpen up its checks on customers and cut their risk exposures and maximum losses. Its revenues in the UK fell by 18 per cent in the first half to $86.5 million, though they still account for just under a third of overall earnings. The markets for poker and bingo have also suffered, in part because they have become so overcrowded and, this year at least, were overshadowed by the football World Cup.
In the US, and speaking in its favour, 888 Holdings is already well embedded in the three regulated states: New Jersey, Nevada and Delaware. In many ways its role in the US is as a technology provider. Its software underpins the tri-state pooled poker network that enables players in each of the three areas to compete against each other.
Its most recent expansion stateside has been in New Jersey, where it started offering sports betting in September on top of its casino products. The strengths of its tech offering should give it a running chance when other states put operating contracts out to tender but the competition is likely to be fierce.
888 Holdings also paved the way for its planned expansion in the US late last year, when it paid $28 million to buy out its joint venture partner in its poker network, Avenue Capital.
The gaming group’s markets move extremely quickly in terms of customer behaviour, competition and the behaviour of regulators. A little over a decade ago, for example, 888 Holdings (and the rest of the Brit pack) had to shut down overnight in the US when the original ban on online gaming was introduced.
Investors need to be alert to those regulatory uncertainties, which have helped depress the share price, down from its peak in May of 324¾p to 175p last night, 6½p lower on the day.
The shares trade on 11 times forecast earnings for a prospective yield of 4.5 per cent. That is hardly expensive and makes the shares a potentially useful hold for those unafraid of the dangers.
ADVICE Hold
WHY Strong prospects in the US and continental Europe but with significant associated regulatory risks
AA
Life for AA has been like one big breakdown one of its patrols is called out to investigate but struggles to fix.
The roadside recovery and insurance group remains locked in a legal dispute with Bob Mackenzie, its former executive chairman, more than a year after it sacked him for alleged gross misconduct.
His replacement, Simon Breakwell, is pushing through a turnaround plan that asks shareholders to accept lower profits and a smaller dividend in the short run in exchange for higher potential rewards from a rejuvenated business over the longer term.
Not unsurprisingly, AA’s share price is on the hard shoulder, off 5¼p to 70½p at a record low yesterday, not helped by large bets against it by hedge funds.
The AA was founded in 1905 and its membership is 13 million, consisting of 3 million individual motorists and 10 million covered by corporate contracts with car manufacturers. Its closest competitor, the RAC, has just over 8 million members. The AA was listed by its former private equity owners in 2014 for 250p a share.
Mr Breakwell thinks he has the answer to AA’s growth problem through a combination of making the group a digitally led business and selling more insurance.
At a strategic update in February he said he would spend £45 million this year developing app and “connected car” products, so they can diagnose a problem before the patrol arrives and keep customers engaged with real-time updates and insurance offers. He also hired 200 extra call centre workers and a further 65 roadside patrols.
The effect of all of this investment will be a fall in trading profits this year to between £335 million and £345 million, down from £391 million the year before and a 2p-a-share annual dividend, against 5p last time, until profits start to come back.
The shares trade on a lowly 4.8 times next year’s forecast earnings with a likely dividend yield of 2.9 per cent. The turnaround is clearly painful and, even when the improved AA customer offer is fully up and running, it is likely growth will be gradual. Yet as it stands the business is clearly undervalued and a buying opportunity.
ADVICE Buy
WHY Shares should respond to a sensible turnaround plan