Analysts admit concern over 888’s debt position as Q3 online revenue plummets 10%
888 has reported a 7% dip in revenue to £449m for Q3 2022, primarily driven by the cost of UK safer gambling measures and withdrawal from the Netherlands.
Online revenue was hit hardest by these two factors, falling 10% year-on-year to £325m.
The introduction of stricter UK player safety measures contributed to a 13% annual decline in UK online revenue, primarily due to a 14% reduction in average player spend.
888 CEO Itai Pazner said: “Revenues during the third quarter continued the trends we have seen in recent quarters, with relatively resilient trading across our main international markets and in our retail estate, but continued pressure on our UK online revenues in light of the ongoing impact of the enhanced player safety measures.
“We are changing the mix of our business to a lower spending, more recreational player base that gives us confidence in the long-term potential for our UK business,” he added.
Retail revenue from the acquired William Hill business remained stable year-over-year at £124m despite three days of closures following the death of Queen Elizabeth II.
Touching on the William Hill acquisition, which completed on 1 July 2022, 888 said it has made strong progress with its integration plans, with synergies and cost savings already being delivered.
However, the London-listed operator built up a precarious debt position to finance the acquisition, which has become increasingly expensive due to macroeconomic conditions and the cost of borrowing.
To reassure concerned analysts, the company will provide further detail on the integration, its operating model and its evolving strategy at a Capital Markets Day event in November.
888 said: “The group is cognisant of the increased cost of debt, together with the impact on industry trading conditions in the UK and is taking steps to ensure the operating model of the enlarged business is appropriate to address these near-term headwinds, whilst also being able to deliver on the strong potential of the enlarged business.”
London-based brokerage Peel Hunt has more than halved its target price for 888’s share price, lowering the stock to 210p from 500p per share.
The investment bank, which has reiterated its Buy rating, said the operator’s £1.8bn in gross debt currently “overshadows” the business.
“The increase in debt and debt service cost, coupled with the de-rating in the market, results in a sharp change to our target price,” wrote Peel Hunt analyst Ivor Jones.
“We see upside potential from a good showing at the November CMD and from further fixing of the debt costs.
Regulus Partners analyst Paul Leyland: “888 has gone long on UK macro, UK policy retail and debt risk at a time when each has soured beyond anyone’s expectations.”
“Once 888 has proven it has William Hill under control it should be able to refinance at lower cost even if current tough debt market conditions were to continue.
“888 is priced for failure, watch out for whiplash,” he concluded.
Regulus Partners analyst Paul Leyland has also provided commentary on the stock following today’s Q3 trading update.
“888 has gone long on UK macro, UK policy retail and debt risk at a time when each has soured beyond anyone’s expectations,” said Leyland. “All 888’s significantly improved operational skills will be needed to combat these headwinds.
“However, the recent history of global gambling has demonstrated that it is very difficult to buy or operate a business out of strategic trouble.
“We believe the two most important strategic moves from a defensive standpoint are to make UK online a sustainable level playing field in terms of customer interactions and unlock the customer interaction rather than the diminishing legacy cash flow value of retail.
“These strategic levers will decide whether 888 can grow the key UK market or see it sink the ship, in our view,” he added.