Ladbrokes (LAD.L): Much
has happened since I last wrote on the stock in April. The fact that the dividend
was cut, as I suggested, has been overtaken by the July news of the proposed
merger with the privately owned Coral Group. The need for action was clear with
Ladbrokes’s interims, to 30th June 2015, showing revenue up 1.3%,
but pre-tax profits down 43.9% at £24.7m and basic eps down 44.2% at 2.4p. Much
of the fall was due to the new point of consumption tax and changes to machine
gaming duty. There was also £78.9m of exceptionals as the UK retail chain faced
on-going surgery and Ireland was placed into Examinership. The interim dividend
was slashed by 76.7% to just 1p.
The Coral deal is in the early stages of the regulatory steeplechase,
but there was also a new strategic plan announced for Ladbrokes. This plan (with
a £20m annual cost to profits) focuses on marketing as a lever of growth and
sets out various aims to be achieved by 2017. These can be summarized as
getting the UK retail chain back to the 2014 base line and growing on-line and
Down Under. They also want to widen the “recreational” customer base, for which
I would read ‘new mug-punters required’. Net debt to EBITDA was seen as hitting
2.5-3.0x this year before returning to “c1.5-2x in the medium term”. The new
dividend policy set out a base of 3p for FY2015 with cover set at 2x underlying
eps. Lazy looking consensus forecasts for FY2015 seem to have worked back from
the 3p dividend to (a rather optimistic?) 6p of eps for a PE of 18.2x at 109p
and a yield of 2.8%.
The merger with Coral would lead to significant cost synergies of at
least £65m, by year 2, on combined EBITDA of £392m, whilst increasing exposure
to Europe. Ladbrokes holders would get 51.75% of the enlarged share base, with
Jim Mullen staying on as CEO of the enlarged group. Initially net debt to
EBITDA would be c3x, before falling below 2.5x in 12-18 months of completion.
Ladbrokes’s new dividend policy would roll forward, but with no increases from
3p until cover goes above 2x.
It remains to be seen how much horse-trading the regulators will need,
but there is no sign of an end to the pariah status that politicians seem to
have imposed on the betting industry. Shutting over-lapping outlets, on often moribund
secondary UK high streets, will no doubt attract even more political venom.
Both the strategic plan and the merger look like defensive moves, with growth
still likely to prove elusive in a competitive industry. The timescales
involved and the current valuations mean that I think it is still a stock for income
investors to avoid for now. That said, the stallions at Playtech are moving to
a declarable stake by taking shares in the recent placing (going to 9.7%) and
agreeing to take more shares for payments to be triggered upon completion of
the merger deal. They are serious players and will keep the whip ready,
encouraging Jim Mullen to do his best. (Neil Cumming, 12th
August 2015)
These comments are not a personal
recommendation to deal. Any investments can fall as well as rise in value, so
you could get back less than you invest. I may have a financial interest in
some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk Twitter: @DividendPower
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