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Ladbrokes less a dotcom bargain, more a value trap

Who wants a hot tip on a dotcom stock? It’s a website with a million paying customers, the user base having doubled in a year and unlike most tech-sector darlings it is solidly profitable. Online earnings before interest, tax, depreciation and amortisation for 2016 were £112.8m, up 68 per cent from 2015, as net revenues jumped by a third to £666m. Analysts expect ebitda to more than double again by the end of 2018.

The stock might not look particularly cheap, but growth never is. A current £3.5bn enterprise value is equivalent to around 16 times 2018 ebitda, making it approximately half as expensive as online peers doing similar numbers. Consensus forecasts bake in more pedestrian growth rates at Asos and Boohoo, the internet frock shops, yet their long-term enterprise values are multiples of ebitda in the upper 30s.

Yes, there is a catch. The website comes with 3,500 betting shops.

Ladbrokes Coral, the stock referred to above, is symptomatic of the bookmaking industry’s current bind. While digital growth has been explosive, it has been in direct proportion to the wagers lost from high-street stores that still account for more than 70 per cent of its group ebitda before central costs. Ladbrokes counter staff get a bonus for every punter they convert to phone gambling — a strategy that suggests acquiescence from management that the traditional business is in terminal decline. Better to cannibalise its own customers than risk them defecting to a competitor’s website.

And with no sign of competition abating among the online bookies, how long will customers stay loyal? Who knows.

Looming on the horizon is the UK government’s gambling review, expected within the next month. Industry types expect a cut to stake limits for the fixed-odds betting terminals that provide around half of shop revenue. A worst-case scenario of a £2 cap, down from £100, has the potential to obliterate Ladbrokes’ high-street profits and nudge it uncomfortably close to breaching its debt covenants.

The sector bulls see the world slightly differently. Once the gambling review is out of the way, they argue, Ladbrokes and its peers can defend profitability by cutting more aggressively at the tail of unprofitable shops. Consolidation could help ease online competition, meanwhile, with the likes of GVC expected use its highly rated shares as an acquisition currency. (GVC has been linked of late with a carve-up of William Hill, having last year failed to engineer a reverse takeover of Ladbrokes.)

But with the top five UK cyber-bookies estimated to control little more than half the market, and smaller players expected to lead the consolidation push, it’s not obvious how mergers lessen competition. Moreover, turf accountancy takes few of the scale benefits from online expansion that apply to frock retailing. What remains for investors is managed decline of a shop count approximately equal to Tesco’s UK estate.

On that basis, Ladbrokes’ valuation of around 11 times 2017 earnings might start to look less of a dotcom bargain and more like an old-fashioned value trap.

FTSE something

At the time of writing, the FTSE 100 is on course for its worst week since November, having erased its 2017 gain, reflecting a double hit from slumping metals prices and a resurgent pound. Or to put that in dollar terms, the index is on course for its worst week in a fortnight having hit a level last seen on Tuesday.

It has long been accepted that the FTSE 100 is an odd, lumpy index that represents very little about its host nation. Around three-quarters of FTSE members’ revenues come from outside the UK and four of its top-five stocks by weight use dollars as their reporting currency. Emerging markets account for an estimated 17 per cent of total sales, with about the same again coming from dollar-reliant resources sectors. Local currency performance can rarely tell the whole story.

Nevertheless, a flat performance this year makes the FTSE a global laggard. Among the large equity benchmarks only the Nikkei 225 and Canada’s S&P/TSX Composite indices have been weaker, whether measured in dollar or sterling terms. It would appear that, while the FTSE is undoubtedly a blunt measure of political and economic uncertainties, neither is it entirely blind to them.