HSBC downgrades bookmakers as 'series of risks' looms
HSBC downgraded shares in William Hill, Ladbrokes Coral and Paddy Power Betfair as they face a consumer spending slowdown and a series of other risks in the coming months.
Hills and Laddies were moved to 'reduce' ratings from their previous 'hold' and PPB to 'hold' from 'buy'.
As well as the well-established threats around fixed odds betting terminals, HSBC said investors should also consider the possibility of a consumer slowdown among other risks, such as intense competition online, tightening regulation and higher levies/taxes - not all of these risks will necessarily materialise but "the balance is negative".
"A consumer downturn isn’t certain, but we analyse the bear case given the risks and conclude that, while the online market could remain flat, retail revenues could decline by circa 10% and operators could face EBITDA downgrades of circa 20-30%."
While the bookmakers have some capacity for cost mitigation, it will be difficult if this comes on top of tighter machine regulations and other regulatory change.
With some but not all of these risks already being priced into the shares, Hill's target price was cut to 265p from 274p, LCL to 126p from 145p and PPB to 8,700p from 8,900p.
With the government’s FOBT investigation due to conclude in before June, any cut to maximum stakes, as seems likely after it was suggested by the parliamentary committee investigating the industry, this would lead to cuts to the company's forecast.
HSBC analysts estimated that share prices are building in a cut to a maximum limit of £10-£20 from the current £50 “soft” threshold, "but it’s the risks beyond this that might not be priced in".