888 Holdings LON:888 the online gambling group is due to publish its end of year results on Friday (14th April) and is expecting to post numbers in line with its forecasts of GBP1.85bn and adjusted pre-tax earnings of GBP310m.
It’s not been a year without controversy for the betting company, which last month saw its subsidiary William Hill slapped with a record-breaking GBP19.2m fine by the Gambling Commission, the UK’s betting watchdog for having poor customer protection and weak anti-money laundering protocols.
It could have been worse; the Gambling Commission was thinking of properly dropping the hammer and suspending William Hill’s bookmaking licence, as the violations were so bad that it thought the strongest possible sanction was warranted.
CEO resignation
Instead, the Gambling Commission accepted the head of CEO, Itai Pazner, on a platter, who had been at the company for 20 years and in the top job for four, and had masterminded the acquisition of William Hill from Las Vegas-based Caesars Entertainment [NASDAQ:CZR ] last year, purchasing all its non-US assets from its William Hill subsidiary for USD2.35bn.
Also purged was CFO, Yariv Dafna, who was set to leave at the end of last month, but with no replacement in the wings, much like Frank Lampard, was offered his job back until the end of the year. The company was also forced to suspend VIP accounts in the Middle East, albeit analysts believe that these VIP accounts only contribute 3% to group revenues.
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Atop of its issues with the Gambling Commission, 888 also temporarily lost its Dutch gambling licence as the Netherland’s version of the Gambling Commission decided to undertake an industry-wide review of gambling practices to protect consumers better, knocking USD10m off its profits.
888 opened trading today (12th April), at 59.6p, and has offered a -32.2% year-to-date return and a -70.7% one-year return, with its shares ranging between 50.5p and 222p over a 52-week period. The company has a market capitalisation of GBP262.9m.
Despite the fine, for which 888 had already set aside GBP15m, the Gibraltar-based betting company still is set to increase its year-on-year revenues by 88% and year-on-year earnings by 87% as its customers can’t seem to break their addictions to a bit of a flutter – this despite the significant acquisition of William Hill in July.
Dafna was under pressure before the Gambling Commission’s fine only two-and-a-half years into the job as digital sales had fallen by 15%. However, as Covid-19 restrictions receded, retail customers began to return to betting shops on the high street and the company announced in January that brick-and-mortar retail revenues were up by 54% to GBP519m.
Changing behaviours
As the Gambling Commission announced its investigation, 888’s shares took a nosedive, falling some 70%. That said, offering up Pazner and looking for a replacement for Dafna shows willing from the board to remedy its behaviours.
The sector as a whole has blossomed over the past few years, as shown by Flutter Entertainment’s [LON:FLTR] recent strong results, notwithstanding gambling coming increasingly coming under the spotlight of government and regulators and the Gambling Commission wanting to be seen to be flexing its muscles as the cost-of-living crisis exacerbates ‘problem gambling’ as a recent report from gambling addiction charity GamCare and YouGov highlights.
Debt burden
That said, 888 had borrowed a lot of money to buy William Hill, issuing GBP1bn of notes (a US dollar term loan B facility maturing in 2028, euro-denominated senior secured fixed rate notes due in 2027 and euro-denominated senior secured floating rate notes due in 2028) and raising a further GBP900m in loans to complete the transaction. The debt on its balance sheet has, by the company’s own admission, hampered its growth – especially given that about 65% of its debt is in floating rate securities, which became increasingly expensive last year as global interest rates were hiked to deal with overheated inflation.
The debt burden is a ongoing concern for the company and its shareholders, and in November 2022 management announced that slashing the debt pile down to manageable proportion had been pushed up to the top of its priority list. At the time, 888 said it would take an “extremely disciplined approach” to capital allocation and set a target of cutting net debt from about 5.7x earnings to 3.5x earnings by the end of 2025 and at the same time set a revenue target of GBP2bn by 2025.
888 was established in 1997 by the Israeli Shaked and Ben-Yitzhak brothers, who were joined by Ronan Burtchaell, and Shai Morgenstern and was first known as Virtual Holdings offering casino games and poker online. The company grew by acquisition, diversifying into bingo and sports betting. The company listed on the London Stock Exchange in 2006.
The company’s shares have had a rough ride over the last year, but given the changes afoot in senior management and the firm’s tacit commitment to change and continued strong revenue streams, despite taking on a lot of debt, might spark a recovery.
Bridgewise rates 888 as a ‘Hold’ with a fundamental rating of 70/100 citing the company’s Asset Turnover and Total Assets as positive strengths but highlighting 888’s Free Cash Flow and Total Liabilities as areas for concern.
