Ladbrokes
Merged share of high street 45%
Ladbrokes has been in the dog house for so long that the arrival of a favourable analysts’ note on its merger with Coral to create the group with the most betting shops on the high street must have come as a surprise.
It is hard at this stage to estimate what the merged group will look like, but the deal will at least go ahead, after an overwhelmingly positive vote from investors last November.
The uncertainty is over the inquiry by the Competition and Markets Authority. Putting together the two online operations, both of which run on Playtech’s platform, would create a group with about 15 per cent of the UK online market, within striking distance of the leader William Hill and creating no competition difficulties.
It would also offer synergies of £25 million or more — there are always savings to be made from combining online businesses, one of the reasons behind the deal. Coral is ahead in online, with annual revenues up by 36 per cent at the last count, even if Ladbrokes has been, belatedly, making up ground.
Those 4,000 betting shops, though, are well ahead of the 2,400 of William Hill, widely seen as the more efficient operator. Options for the CMA range from demanding the sale of 1,000 of them, which would be punitive, down to ordering 750 to go, which is the number Numis Securities, author of that positive note, is going for. The CMA will not announce its decision until the second half of this year at the earliest, even if this is fast-tracked, as Ladbrokes wants. Another uncertainty is greater regulation of gambling. The point-of-consumption levy is a year old, and we will know when Ladbrokes releases figures for 2015 next month whether it really has cost the company the £50 million estimated. This could surprise on the upside.
Numis is worried about the effect on the Ladbrokes balance sheet, given the amount of debt being taken on, and whether this will require a rights issue. This seems to assume a hefty loss of business on the high street to online. Ladbrokes shares, up 2¼p at 122½p, have halved since March 2013 and sell on 20 times this year’s earnings. That may look expensive, but if the CMA outcome is benign that multiple comes down sharply on a long-term view.
My advice Buy long term
Why Providing the outcome of the CMA investigation is good, the combined group will be in a much better position to take on gaming rivals
Johnson Service
Debt at end of June 2015 £72.4m
The national living wage arrives in April, and companies affected by this are reassuring the market that it will not hurt them. Time will tell, but one of them, Johnson Service, says that any effects, along with attempts to mitigate these, are fully reflected in analysts’ forecasts for 2016.
It gets four fifths of its revenues from textile rental, providing linen and the like for hotels, restaurants and others, and it has been the focus of acquisitions over the past couple of years. The company is probably best known for its dry cleaning side, including Jeeves of Belgravia, but this is a difficult market, reliant on consumer confidence, and one of those types of spending that can be postponed in hard times.
Johnson is the second-biggest corporate in textiles, but has a bit more than 10 per cent of the total market, so further expansion by acquisition is likely: there are a large number of very small businesses of the sort the company is buying.
There are benefits of scale, while the big hotel and restaurant chains will look to larger companies with more reliable service. The long-term story is good, but the shares, up ¼p at 88½p, sell on 14 times earnings, and look fairly valued.
My advice Avoid for now
Why Earnings multiple does not suggest much upside
PureCircle
First-half sales $54m
PureCircle is one of the odder investments on the stock market and, with a market capitalisation that exceeded £1 billion at one stage, one of the least studied.
It produces stevia, a sweetener derived from a particular plant. This has spent several decades gaining acceptance and regulatory clearance but can now be found in many soft drinks and on the shelves of UK supermarkets, alongside and as an alternative to sugar.
With the growth of obesity worldwide it will increasingly be used in food and drinks. More sceptical market-watchers will recall Tate & Lyle’s sucralose artificial sweetener, which likewise spent decades on the brink of being the next big thing and then was clobbered by Chinese competition.
PureCircle is very much a one-product company, and its published figures so far have not begun to justify that stock market value even if the potential is huge.
The shares were hit early last year partly by tighter Chinese supply, which increased costs. The trading update for the second half of 2015 shows a 52 per cent rise in gross margins and a $5 million net profit, against a loss of $900,000 last time.
This is significant, because first profits were delayed by those supply problems, and as revenues grow, they can only increase sharply. The shares, though, up 10p to 425p but well behind their 600p-plus peak, still sell on more than 70 times this year’s earnings, and you would have to project forward to the 2017-2018 financial year to see any meaningful multiple on that basis. Probably too early to buy into the stevia story.
My advice Avoid for now
Why A speculative stock despite immense potential
And finally . . .
Rockhopper is best known for its exploration activities off the Falklands, but the purchase of Mediterranean Oil & Gas in 2014 brought with it various assets in Europe, including several off Italy. The Italians have been dithering over whether to allow offshore oil exploration to go ahead. A general ban within 12 nautical miles of the coast has just been reinstated. This will apply to the Ombrina Mare field there, and the company is now looking at the implications. Its Guendalina gasfield is not affected.
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