Analysis: High street bookies safer bet than dotcom rivals

By Simon Falush and Atul Prakash

LONDON (BestGrowthStock) – Traditional bookmakers should outshine online gambling outfits which are betting on optimistic growth projections and assumptions about favorable regulatory changes that are unlikely to come about.

Gambling activity tends to grow in times of economic hardship, so bookmakers are well set to benefit as consumers tighten their belts in the face of austerity.

But it is traditional bookmakers that should have the edge as they are cheaper on a valuation basis and know what regulatory regime they will face.

Internet-based firms are assuming decent growth in low tax, light touch markets that are due to open up, but analysts say such an outcome is unlikely as governments look to squeeze as much as they can out of the sector to raise all-important tax revenues.

It is traditional players who have both a high street presence as well as a website that now have very low valuations that stand the best chance of steady growth into 2011.

“I see shorting online and buying land based bookmakers as a clear winning strategy,” said Paul Leyland, analyst at Investec.

“There should be increases in football betting and (gaming) machines in shops providing some growth while the P/Es are priced for an earnings decline.”

Bookmakers offer strong cashflow and capital expenditure requirements are relatively low, while traditional players also offer decent dividends, Leyland added.

The fortunes of online gambling firms like PartyGaming and 888 Holdings and betting exchanges like Betfair, which aggregate odds from a variety of providers and take a cut, will depend to a very large degree on how governments regulate and tax their operations.

Though online gaming is often seen as a sector that is growing rapidly, it has failed to overtake traditional betting and remains at about 30 percent of the total trade volume, according to Leyland at Investec.

Online betting in countries such as Germany, Greece and Spain is still unregulated. Any transactions from these countries, which are expected to implement regulation next year, are on the “grey market” which still makes up the vast majority of online firms’ revenues.

This is untaxed and unregulated business, but when authorities do regulate, they will aim to maximize the tax take.

The regulatory regime introduced by Italy enabled a sharp growth in the market and healthy profits and this prompted hopes that other markets could open up in a similar way.

But it is the French approach to regulation that may in fact be more pertinent to these operators as they look to drive new business around Europe.

FRENCH APPROACH

French authorities imposed high taxes and strict regulation on online gambling, forcing online operators to shun the country because they did not see operating there as profitable.

“There’s no reason to suggest that the growth in Italy will be seen in other markets,” Ed Birkin, analyst at Barclays Capital said, adding that the strong growth seen was from a low base in an immature market.

“(Online players) are hoping for the perfect scenario where it opens up and there’s low tax, but that’s not going to happen.”

And even if other countries also adopt rules that are seen as helpful, stiff competition and razor-thin margins mean established players with betting shops and a presence on race courses are better placed, Birkin said.

Bookmakers with a big high street footprint such as William Hill, Paddy Power and Ladbrokes have wide margins and predictable regulatory and tax regimes.

They have also been upbeat about trading, with William Hill and Ladbrokes on track for the full year and Paddy Power recruiting more staff and forecasting 40 percent earnings growth.

Valuations for traditional bookmakers are low, making them attractive relative to online players which are factoring in growth based on expansion into new markets.

The gap between the price-to-earnings (P/E) ratio of online bookmakers relative to traditional betting companies is at its highest in 12 months, according to Thomson Reuters Datastream.

“A lot of these online gambling stocks have reasonably high valuations. If regulation is tougher than expected, then they might underperform,” Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels said.

The 12-month forward P/E ratio for online operators such as PartyGaming and 888 Holdings were at 14.7 times and 13.9 times respectively, compared with 9.4 times and 8.9 times respectively for Ladbrokes and William Hill. (Graphics by Vincent Flasseur; Editing by Jon Loades-Carter)

Analysis: High street bookies safer bet than dotcom rivals