New Ladbrokes chief executive Jim Mullen is being encouraged to make bold decisions with regard to the company’s dividend and should reinvest the cash it has in a marketing push to reinvigorate its online operations, according to a recent spate of analyst notes.
Vaughan Lewis, analyst at Morgan Stanley, is the latest City analyst to join the chorus calling for Mullen and departing chairman Peter Erskine’s replacement to take the opportunity to cut the dividend.
In a note published Tuesday morning, Lewis noted that with the changes at board level Ladbrokes had the opportunity to re-base the dividend which as it stands is barely covered by cash on the balance sheet.
Should Ladbrokes cut the dividend in half, Morgan Stanley’s note suggested, it would still leave the company with a yield of 3.8%.
Lewis added: “In our view, a dividend cut would give Ladbrokes more flexibility to invest in the business, reposition the digital division (and) continue to look for opportunities for bolt-on deals such as those in Australia.”
Earlier this month analysts at Barclays and Peel Hunt made similar arguments. In a note raising Ladbrokes from a hold to a buy, Nick Batram at Peel Hunt noted at the start of this month that at current levels the dividend remains uncovered by cash at least until 2017.
He suggested he would like to see Mullen pursue a “more aggressive strategy” that would involve a substantial increase in marketing spend. “Re-basing the dividend looks to be the sensible course of action,” he added.
Patrick Coffey at Barclays said last Friday that a cut in the dividend now looked “inevitable”. The sustainability of the Ladbrokes dividend has been the subject of analyst conjecture for some time.
At the time of the publication of its 2014 annual results in February, Erskine came under sustained questioning from the analysts about whether the dividend should be cut in order to reinvest in digital marketing.
Erskine dismissed such notions at the time, suggesting that Mullen (in his then role as head of online) was “happy” with the projected marketing spend for 2015 of circa £60m.
At the time of the update, Ivor Jones, analyst at Numis, said that the company’s comments with regard to building scale suggested a review of the board’s commitment to the dividend would be in order.
The title of Jones’s note – ‘Turnaround or dividend, is it even a choice?’ – indicated how he believed this question should be resolved.
Back In February before Mullen’s appointment was announced, Coffey at Barclays said the reaction to a cut by the new chief executive “could” be positive if the new person in charge conveyed a “clear message that this £40m would be reinvested as capex or marketing to generate a quantifiably strong (return on investment)”.
Playtech impact
But with Playtech already installed as the company’s major software partner, Batram commented that Mullen should display greater ambitions as chief executive.
“A tentative approach to supporting the new technology platform and suite of products is like buying a prize stallion and immediately gelding it.”
Batram called for an extra £80m of marketing spend over the next three years, suggesting it could drive an extra 60% uplift to digital EBITDA in the next two years.
Ladbrokes has “little option” but to spend more on marketing if it is to grab back any substantial market share. “It has to increase marketing substantially,” he added.
Lewis at Morgan Stanley said there is already evidence of a recovery at the digital division and that the strong customer and staking growth in the past six months are “both good lead indicators” for increased revenues.
In the first quarter this year, Ladbrokes reported that net revenues were down 8% year-on-year, but Lewis suggested this “masks a significant improvement in underlying dynamics”.
For the three months to March, Ladbrokes said that staking levels at the sportsbook were up 29% year-on-year, with actives up 18.5%.
In gaming actives rose 34.5%, helping to push gaming net revenue up 13% for the quarter, whereas as sportsbook net revenue was hit by a 2.5% basis point fall in gross win margin to 4%, causing a 31.5% fall in net revenue.
Both the Morgan Stanley and Peel Hunt notes pointed to comparisons with other recent turnarounds in the online gaming space, particularly the results achieved at Gala Coral.
As iGaming Business noted earlier this month (paywall), it has seen a revival in fortunes to the extent that digital gross win in the second quarter rose 39% to £75.9m while actives at coral.co.uk rose 45% and Gala website actives rose 20%, although the impact of Point of Consumption in the UK was making life difficult for even the bigger operators.
Batram suggested that Playtech could take a slice of the credit for Gala Coral’s revival in fortunes.
“At the back end of 2011 and throughout 2012, the Playtech suite of products was rolled out across the group. With the platform in place, marketing spend more than doubled in 2013 and rose by a further 35% in 2014. While profits declined in 2013, Gala Coral achieved a record online EBITDA of £49.5m in 2014.”
source : www.igamingbusiness.com
