There are any number of questions facing Jim Mullen, the chief executive of Ladbrokes since the start of the month. The most important, from an investors’ point of view, is what happens to the dividend after Peter Erskine, the chairman, suggested in February that it was “currently” the intention to maintain it at 8.9p for 2015.
The answer is self-evident. The payment will be cut. The shares are yielding more than 8 per cent, the payment is uncovered by this year’s earnings and Ladbrokes needs the cash to invest in its flagging retail estate.
No one is going to blame Mr Mullen for taking the decision to cut. A more intractable question is what he does about that retail estate.
Ladbrokes is one of the best-known gaming brands on the high street, but in terms of spend per shop it is running behind rival chains. The first-quarter period was poor, in terms of gross win margins the worst since 2009, according to Mr Mullen. The question is, and he denies this, whether this represents a systemic weakness in assessing risk or is a one-off from big sporting events of the sort that all bookies see now and then. The fact that those rivals seem to have suffered, too, suggests the latter.
Ladbrokes is also suffering the loss of workaday punters wandering in for a casual flutter, both in terms of numbers and how often they do this. The company is talking about aligning online activities, now enjoying the inevitable improvement from last summer’s relaunch, with its retail offer. Just how this will be done will have to wait on the strategic review, brought forward to June.
The third problem is the most intractable of all. Labour intends to allow local authorities to reduce the number of gaming machines on the high street or even eliminate them entirely. No other administration is inclined to be sympathetic to the bookies.
The effect of such draconian action, especially on those hated fixed-odds terminals, is incalculable. Mr Mullen has indicated that he is prepared to take firm action, having put the Irish division into effective administration on Tuesday. The shares, though, off 3½p at 102¾p, sell on 14 times’ earnings, which seems to take little account of the potential risk.
Revenue up 3.3%
EBIT £14.3m
Forecast dividend yield for 2015 8.7%
MY ADVICE Avoid for now
WHY The political risks from a crackdown on machine gaming are incalculable, while a dividend cut looks inevitable
Punch Taverns may have achieved a significant milestone in its turnaround in October, agreeing a deal with bondholders that cut debt by £576 million, but it still looks like a work in progress.
This is not least because Duncan Garrood, the new chief executive, does not arrive until June and may have his own ideas. The aim is to focus on the core pubs — almost 2,900 of them, accounting for 90 per cent of earnings — while selling the non-core estate, or about 760 pubs, defined as those bringing in £25,000 a year or less. The core estate is in the process of being refurbished, with 122 pubs getting a makeover in the first half to March 7, at a cost of £106,000 per pub. Some expensive London properties are being sold, however, because the prices on offer are too good to refuse.
Meanwhile, free cashflow will allow debt, about £1.5 billion and secured against the largely freehold estate, to be cut by £200 million over the next three years. Punch is also back to like-for-like growth — seven quarters of it in a row so far, although the absence of a World Cup this summer will be a drag.
All was going swimmingly, then, until along came the market rent only option, which will allow pub tenants to free themselves from the requirement to take beer from their landlords. This will require Punch, and others, to look again at that estate, converting where possible to a managed or franchised model.
The shares, up 1½p at 105p, look ridiculously cheap, on 4.6 times’ earnings. They are only for the brave, though, given the uncertainties that remain.
£193m-£200m forecast annual EBITDA
MY ADVICE Avoid for now
WHY Market rent only option has added to uncertainty
Analysing Primary Health Properties ought to be easy enough because the company is a little like the infrastructure funds that feature here regularly. It buys assets — in its case, properties occupied by GPs and pharmacies — takes the yield on these and redistributes much of it as dividends to investors.
The swing factors are the availability of new properties, what happens to interest rates and its level of debt. As to the first, its portfolio is worth more than £1 billion and deals totalling perhaps £100 million a year should bring it to a targeted £1.5 billion in due course. Interest rates have provided cheap finance to expand and made the dividend yield on the shares, about 5 per cent at the present level, off 1½p at 399¾p. Debt has climbed to a point where dividends are not covered by earnings, but this will turn around over the next couple of years, so those payments look safe enough.
The other imponderable is the election, but neither seasoned political observers nor I can see any policies that might affect PHP’s business model. I have tipped the shares for that income before and am happy to do so again.
Value of portfolio £1.05bn
MY ADVICE Buy
WHY Dividend yield of 5 per cent seems assured
And finally...
Figures from United Rentals, Ashtead Group’s bigger American rival, prompted a positive note from Jefferies on the London-quoted plant hire group. United ran into headwinds from the lower Canadian dollar and its exposure to the US energy market and has moved plant from the energy sector. Ashtead does well out of the high dollar, has little exposure to US energy and gets 85 per cent of revenues from the United States and its Sunbelt operation there. The shares still lost a couple of percentage points in a dull market.
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