William Hill: Should You Overlook Profit Warning?

William Hill Plc (LON:WMH) (OTCBB:WIMHY) (OTCBB:WIMHF) is one of the largest gambling companies in the world, with a market value of nearly GBP 3 billion. However, the company has been under intense pressure over the last few quarters following the introduction of the new tax laws on gambling companies in the UK. The new laws will see gambling companies pay 15% income tax on revenue generated from gambling activity in the UK, as compared to the past when gambling companies could only pay taxes in countries where their operations/headquarters were based.

For instance, most companies with registered headquarters in Isle of Man, or the British Virgin Islands and Gibraltar were paying about 1% taxes on income reported according to the tax laws of the various countries. However, that has now changed and William Hill already reported tax costs of about GBP 23 million in the most recent quarter. The company has since issued a profit warning for the current quarter citing the impact of the new tax laws on its bottom line.

In addition, the year 2015 also lacked the busy sporting season witnessed last year as there was no world cup. As such, it is pretty obvious why investors should have expected a decline in profits and revenues this year. This fact also highlights the cyclical nature of revenues for gambling companies, especially those involved in sport betting. You can learn more about sports betting here.

Why you don’t need to get worried by WMH’s recent profit warning

When a company issues a profit warning, this triggers a genuine cause for concern amongst investors, especially with regard to incremental growth.

However, William Hill along with many gambling companies with operations in the UK is currently experiencing a unique situation in their lifetime. The fact that gambling companies started paying the 15% tax this year will definitely affect the financials in the current campaign.

However, this should not come as a surprise because the changes were announced late last year, and thus investors should have been prepared for a significant slowdown in profitability. In addition, last year was also one of the busiest in terms of sports betting following the 2014 world cup event in Brazil.

Again, investors already knew that this year there was not going to be a world cup event and thus the company’s top line was going to suffer, yet the shares of William Hill did hit a multi-year high of about 430p in May this year.

Therefore, if investors already expected taxes to hit William Hill’s bottom line this year and were also well aware of the fact that this year did lack enough sporting events as compared to last year, why then did they maintain optimism up to as late as May 28 this year, when the company’s shares hit a multi-year high? William Hill is a financially stable company offering its shareholders a dividend yield of up to 4%. The company continues to generate healthy operating cash flows which should help it to weather the current storm of increased taxation and slowdown in top line.

Why next financial year will be exciting

The current financial year will no doubt disappoint some investors as already highlighted by the company’s recent profit warning and a decline in stock price.

However, next year will be different in a lot of ways including more sporting events as the world tunes to the UEFA Euro 2016 finals in France. The competition has also been extended to 24 teams up from 16 teams in the previous campaigns, and this means more matches.

Furthermore, investors will be comparing results of next year with those of the current campaign. Given the expected increase in top line, the company’s results are likely to be much better than this year thereby attracting more interest from investors. In addition, by then many will have already come to terms with the current tax laws, so they will be looking more on the positive side than the increased burden on EBITDA.

Conclusion

The bottom line is that William Hill’s current revenue and profit situation did not come as an accident. The company knew that this was going to happen a couple of quarters ago, and investors were well aware of the potential impact on stock price.

Therefore, there is no need to panic with regard to recent profit warning. From a positive point of view, the current drop in price has created an interesting opportunity for patient investors, and they can also wait for things to be better while receiving dividend payments.