Scott Longley – City eyes ‘machine mitigation’ for Ladbrokes Coral

Awaiting the outcome of the UK government’s triennial review on maximum stakes on gaming machines, analysts at Morgan Stanley see light at the end of the tunnel for Ladbrokes Coral

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To accompany the incendiary comments from Paddy Power Betfair on fixed odds betting terminals (FOBTs) in a letter to the government’s triennial review last week, the company gave a presentation last week that included its own best estimates on the impact of various stakes cuts on net gaming revenue.

According to a brief note form Simon French, an analyst at Cenkos, when the impact of cuts to £30, £20, £10 and £2 are applied across each of the listed high-street operators, the potential loss in terms of earnings per share is profound for both Ladbrokes Coral and William Hill at up to 60 percent.

For Paddy Power Betfair itself, the numbers are far less severe, which at a maximum of 7 percent degradation in EPS gives a hint as to why the company can be so forthright in its new view that a stake cut would be beneficial.

Also weighing into the discussion of impact is the analyst team at Morgan Stanley (MS) which said in a note to clients on Monday that the share of Ladbrokes Coral are oversold on the fears of what the triennial review might yet mean.

Partly, the MS team are wary of the timings of any actual legislation suggesting that even if the review reports in October (by no means certain), any firm proposals would get pushed into the new year which would also leave more room for a potential compromise over the rumoured range of stake cuts being considered.

Delving into the figures, the MS team also make the point that despite worries over the headline revenues being at risk from the likely new maximum staking levels, the potential for mitigating factors has been downplayed.

The worst-case scenarios suggest, for instance, that cuts to £30, £20 and £10 would lead to staking drop-offs for between 55 percent at the higher level to around 85 percent at the lower end of the scale.

Pointing to the introduction of the £50 ‘customer journey’ limit of £50 introduced in 2015, the MS say that there was a “marked shift” in player staking habits and a slight increase in session time.

“While this is hard to model as stakes become compressed towards lower limits, the utilisation of machines does suggest there is some scope to solve for lower stakes by increasing session time, as higher average total session stakes are in morning and evening periods when total sessions are lowest.”

Recycling time

Turning to the potential for further mitigation via other forms of recycling, the Morgan Stanley team suggest that there will be a degree of displacement from the higher-staking B3 machines to higher margin B2 machines.

This might also be the case for OTC betting with some of the previous B3 activity potentially switching to horseracing, greyhounds and other forms of sports-betting available in the shops, particularly self-service betting terminals (SSBTs).

Lastly, multi-channel operations could also provide a further angle of mitigation. Looking specifically at Ladbrokes Coral – which is arguably further down the road on multi-channel compared with William Hill – Morgan Stanley says that the company’s machine-playing customers were early adopters of multichannel and the ability to cash in and out in shops but play on mobile presents another way for customers to shift playing behaviour but maintain overall spending patterns.

All of these scenarios remain largely issues of conjecture and the Morgan Stanley team notes that there has been “next to no public guidance on recycling levels”. “Management teams told us they had planned off a range of recycling assumptions from 10 percent to 75 percent,” they noted.

The Morgan Stanley also predicts that shop closures could provide further mitigation. Using historical data from William Hill, they note that perhaps 20 percent of shops within the estate are currently loss-making, kept open due to “industry posturing” over being the ‘last man standing’ in any given location and uncertainty over the gains to be made by recycling from shop closures elsewhere.

One minor aspect of the Morgan Stanley analysis which would have s substantial impact on the shape of the UK high-street betting shop estate in total would be the impact on the independent bookmakers. Presently, there are around 800 independents but Morgan Stanley suggests that a bearish scenario on maximum stakes would see many of these “close quickly.”

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