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William Hill worth a punt after recent underperformance

Betting shop habitues are familiar with the concept of backing something, not because they think it will win, but because it has been mispriced
William Hill betting slip
Shares in William Hill rose 1.3% to 273.4p following the upgrades

Two big City names have taken note of the recent underperformance of William Hill PLC (LON:WMH) shares and have upgraded the stock.

Goldman Sachs (GS) remains more sceptical than Barclays; the former has upgraded to ‘neutral’ from ‘sell’, whereas Barclays has moved to ‘overweight’ from ‘neutral’.

GS said challenges still remain for the bookie but they are now reflected in the share price, which has fallen to around 273p from 292.3p on Thursday night – the day before the company issued a profit warning.

READ: William Hill takes huge betting shop write-down as fixed odds crackdown prompts 'cultural change'

“Over the past six months, WMH’s share price is down 14.7%, underperforming gaming peers by 23.5% and [the] FTSE World Europe [index] by 15.6%” GS noted.

“While we still expect higher marketing expense and slower market share re-gains for WMH in the UK, we now think it’s largely reflected in the share price given the company continues to be a potential M&A candidate, in our view, and will benefit from [a] rapidly expanding US sports betting market,” the US investment bank added.

Goldman’s target price has been raised to 286p from 268p after the company factored in last Friday’s half-year trading update into its valuation model, although it said about 30% of that price target is accounted for by the possibility of a bid emerging.

On average, its earnings estimates have been shaved by 18%, largely reflecting the government’s surprisingly tough stance on gaming machines – fixed odds betting terminals, or FOBTS – and the group’s US investments, where it is set to benefit from the decision by the US Supreme Court to allow states to decide whether to allow betting on sporting events, counteracting the Professional and Amateur Sports Protection Act (PASPA) of 1992.

READ: William Hill raises jobs fears over gaming machines decision

Barclays observed that since the initial euphoria of PASPA being repealed, the William Hill share price has underperformed Paddy Power by 6% and GVC by 24%, both of which have announced ‘blockbuster’ US deals.

William Hill has yet to announce a US deal but it has provided cost guidance related to the US expansion opportunity, Barclays noted.

Having preferred GVC and Paddy Power all year to William Hill, Barclays now thinks the latter is worth a punt at this price, although it has cut its target price to 320p from 350p.

It sees five possible catalysts for a share price re-rating, including the company’s autumn capital markets day.

A ‘blockbuster’ partnership with a US multi-state casino operator remains an option, while the bookie has said it is exploring overseas acquisition opportunities.

The potential loss of income from addicted FOBT punters in the high street and back street shops will hit the bottom line but the company’s guidance on the size of the hit does not factor in the possibility of FOBT junkies moving online to get their fix.

Finally, and in line with Goldman Sachs’s thinking, William Hill could find itself the subject of a takeover bid.

READ: US gambling shake-up stakes: the runners and riders

On the other hand, Barclays concedes the UK retail market is very soft and it is also worried that the online offering is losing market share.

Investment in the US opportunity could restrict free cash flow “and there are so many unknowns that accurate forecasting of US growth (and therefore valuation) is impossible”.

All of which makes the shares sound about as big a “certainty” as the typical favourite in a novices hurdle race at Hexham.

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