Fitch Maintains Ladbrokes on Rating Watch Negative
The ratings are supported by Ladbrokes' position as one of the leading UK betting shop estates, the group's strong brand awareness and stabilising UK retail operating performance, underpinned by relatively stable overall staking amounts.
Factors constraining the ratings are intense competition leading to continuing challenges in Ladbrokes' digital division, changing consumer habits, ongoing structural change in the sector, and increasing regulation and taxes. Although the group's 2015 credit metrics are not fully aligned with a 'BB' rating we assume Ladbrokes will start reaping the benefits from substantial investments, leading to improving profits and a clearer deleveraging path.
Fitch aims to resolve the RWN once the merger is completed - expected 4Q16 - and once there is greater clarity with regard to Ladbrokes' post-merger strategy and potential synergies. Fitch notes that the CMA has given clearance to the merger subject to the disposal of between 350 and 400 shops. At present we estimate that the combined entity's IDR would probably be no more than one notch below Ladbrokes's current 'BB' rating, subject to the final capital structure at completion.
KEY RATING DRIVERS
2015 Results Impacted by Taxes
We conservatively expect Ladbrokes' group EBIT margin to remain subdued at around 6% in 2016, before improving to around 7% by 2017 as the rise in gaming taxes stabilises and Ladbrokes benefits from growth in its digital capabilities. EBIT has been falling y-o-y due to intense competition from the incumbents as well as from online-only competitors. In 2015, EBIT fell 43% to GBP80m, largely due to the introduction of point-of - consumption (POC) tax, which together with an increase in marketing spending, wiped out the digital business's profits for the year.
UK Retail Margins Stabilising
We expect Ladbrokes' UK retail net revenue to remain fairly stable as subdued over-the-counter (OTC) staking is offset by improved gross win margins. The group's operating margin should stabilise in 2016, after having borne the full-year effect of machine games duty taxes in 2015, and also due to increased visibility on costs. Our forecasts exclude any high roller contribution to operating profit, which was GBP3m in 2015 (2014: GBP14m). Profitability in Ladbrokes' UK retail has been declining y-o-y due to falling OTC amounts staked, higher taxes and increased regulation partially offset by growing machines game revenue.
Digital to only Break Even
We expect Ladbrokes' digital division to remain challenged and to only just breakeven at the operating level over the next two years, due to heavy competition. Despite increased net revenue driven by higher sportsbook staking (up 29%) and favourable football results in 4Q, the division was lossmaking due to the full-year effect of the new POC tax and higher marketing costs in 2H15. Overall operating loss was GBP23.8m, worse than 2014's operating profit of GBP14m.
European Retail Remains Challenged
We expect Ladbrokes' European retail division to see steadily improving performance with its operating margin remaining challenged, but stable, over our two-year rating horizon. After years of declining contribution from European retail, operating profit has stabilised following a restructure of its Irish operations. However, its Belgian business, which contributes 9% of group profit, is facing potential disruption because of a review of virtual games by the Belgian government as well as the possible reduction of VAT exemption amounts for games of chance.
Increased Taxes Erodes Margins
We expect the government's focus on regulation and tax increases in the gaming industry to continue, albeit on a manageable basis and in consultation with key operators. However, following the UK's vote to leave the EU, discussion on further taxation may be delayed. Tax changes have negatively impacted operators, with the increase of machine games duty and the new POC tax denting profits over the last few years for all operators.
Improving Cashflow, Deleveraging Capacity
On a standalone basis, we would expect Ladbrokes' funds from operations (FFO) net leverage to fall by around 0.7x by 2018, which would lead to a Stable Outlook. However, the merged group will inherit net debt of around GBP865m from Gala Coral's business. We therefore expect FFO adjusted net leverage of around 4.5x for 2016 (pro forma for the merger), which could decline to around 4.0x by 2017 if management is able to extract some cost savings and if free cash flow (FCF) remains positive (3%-5% of sales). If achieved, such cash flow generation and leverage would remain compatible with a 'BB' rating.
Strengthened Business Risk Profile
The business profile of the enlarged group will be supported by a combination of Gala's strong online presence, where Ladbrokes has underperformed, Gala's Italian operations, Ladbrokes' and Coral's large UK shop portfolios, well-known brands and long UK track records. Ladbrokes' Australian presence would strengthen the combined group's international diversification. Following the announcement by the Competition and Markets Authority (CMA) that the merger can proceed subject to the disposal of between 350-400 shops, the merged entity should therefore be better able to compete in a now rapidly consolidating market.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Top line growth of around 4% in 2016; 2% thereafter driven by improved gross win margin as a result of favourable sporting results as well fairly stable overall staking amounts and improvements in the international and digital businesses following increased marketing efforts and capex.
- EBITDA margin to decline slightly in 2016 as a result of large increases in marketing spending, but to improve in the following years as higher revenues more than offset cost increases.
- Higher capex at about 7.5% of revenues in 2016, before reducing towards 6% in the following years.
- Dividend cash outflow of about GBP30m in 2016, and increasing slightly in the following years. This is lower than previous years following management's decision last year to rebase dividend payments to 3p per share from 8.9p per share.
RATING SENSITIVITIES
Future developments that could lead to a negative rating action for Ladbrokes plc ahead of the merger completion include:
- Evidence of further deterioration in UK retail operating profits, adverse regulatory developments and no significant improvement in digital operating profits.
- Declining profitability or high capex resulting in neutral-to-negative FCF
- FFO adjusted net leverage above 4.0x (2015: 4.5x) on a sustained basis
- FFO fixed charge cover below 2.5x (2015: 2.0x)
The completion of the merger resulting in a weakened financial risk profile could result in a rating that we currently estimate to be no more than one notch below Ladbrokes' current 'BB' IDR, subject to the final capital structure at completion.
Future developments that could lead to a Stable Outlook on a standalone basis include:
- Stable UK operating profits, stable or growing digital profits and no change in regulation or tax environment leading to sustained positive FCF of at least 2%-3% of sales (post dividends)
- FFO adjusted net leverage below 4.0x on a sustained basis
- FFO fixed charge cover above 2.5x
LIQUIDITY
At end-2015 Ladbrokes had access to GBP28m of cash which Fitch considers readily available, as well as undrawn facilities of GBP350m under the group's bilateral facilities expiring in 2019. This is sufficient as Ladbrokes does not face any meaningful debt redemptions in 2016. The next major debt maturity is a GBP225m bond due in March 2017, which Ladbrokes may cover with its available revolving credit facility. This would reduce the group's liquidity, which however should remain adequate.
Комментарии