Fobt21 Jan 2014 12:29
LONDON (ShareCast) - JPMorgan Cazenove has maintained its 'underweight' position on High Street bookies Ladbrokes and William Hill on the back of concerns about gaming machine restrictions.
"Prior to the House of Commons debate on regulatory restrictions on gaming machines on January 8th, our initial analysis suggested significant risk to forecasts. After the debate, we think that some restrictions are likely," the US bank said.
JPMorgan said that the UK government is likely to restrict gaming machines in the autumn of this year, though they could take action as soon as this spring.
"If the opposition continues to focus on the issue, political considerations could override the previous plan to wait for the outcome of the Responsible Gambling Trust's study (due autumn 2014) before taking a decision.
"A reduction in stakes and/or prizes is the most likely outcome, in our view, which could be achieved within existing legislation."
These restrictions could include a reduction in the maximum game stake from £100 to £20, which would reduce machine revenues by 15%, JPMorgan estimates.
The bank said that even modest restrictions could drive "material downgrades and significant shop closures", which poses a big risk to Ladbrokes in particular with 39% possible downside seen to earnings forecasts for 2015. 13% downside is possible at William Hill.
The potential change could make the bottom 20% of Ladbrokes' and William Hill's shops loss-making, with a further 20% only marginally profitable.
The companies would both "require significant restructuring to close shops in order to cut costs", JPMorgan said.
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