Broker Citigroup backs UK bookmakers to grow

Broker Citigroup backs UK bookmakers to grow amid news of a downturn in retail sales.

William Hill (LON:WMH) is its top pick with a 'buy' recommendation and a price target of 260 pence (up from 230 pence).

It comes as figures out today show retail sales in May this year were down 2.1 percent on a like-for-like basis compared to the same month last year.

In a research note, analyst Tej Randhawa said bookmakers have outperformed the FTSE All Share by 21 percent on average since the start of 2011 - driven by stabilising retail revenues and strong online growth. Poor performance in the first quarter had failed to materialise, it said.

"Recent trading updates reinforce our view that the "over-the-counter" (OTC) retail declines seen over the last few years are cyclical rather than structural in nature," he said.

Citi said it preferred William Hill over Ladbrokes (LON:LAD) (recommends 'hold' with target price of 160 pence - up from 140pence) where the gap in performance between the two continued to grow and it was awaiting a better entry point for Paddy Power (LON:PAP).

It maintained a 'hold" recommendation for Paddy with a price target increase from €28.50 to €37.00.

Citing reasons why it has turned more upbeat on retail bookmakers, citi highlighted that underlying over-the-counter retail volumes were stabilising and UK unemployment was easing, while there were market share gains from branded operators.

The recent consumer confidence index by Nationwide had shown confidence and spending still at near all-time lows, said Randhawa.

"However, it's worth remembering" he said. "... that betting within a shop is typically a low ticket item with median bet stakes of £2- £3 and hence a low-cost form of entertainment for its customers.

"Also, with forecasts for two of the main lead indicators expected to improve going forward - discretionary spend increases and unemployment declines - we remain confident on the outlook for retail bookmaking."

For William Hill, the broker said the company had "risen over 20 percent year-to-date as the company is starting to demonstrate stabilisation in OTC retail revenues.

"If the company can navigate tricky Q2/Q3 quarters, where it is up against a continued weak consumer and tough comps, we expect further tangible upside, combined with strong online growth."

Moving on to Ladbrokes, it said: "As growth in its UK retail estate slows, Ladbrokes is looking to drive growth through investment in online and international retail operations. However success is not guaranteed given strong competition and execution risk. We believe its core UK LBO business will continue to suffer from cost pressures as well as competition from the internet."

But the analyst added that there was "turnaround" potential if the company can close the 'machines gap' with William Hill.

The firm Paddy Power has focused over them last few years on the fast-growing online betting space to drive growth, said citi. "We do not forecast this growth to slow down," said the broker.

"We expect the company to leverage its strong balance sheet to participate in online M&A to further drive EPS growth. Failing any opportunities we would expect a return of capital to shareholders."