One of the hard-won lessons I have learned about investing is that I do better on trades when the fundamentals of a business are strong, and both the chart pattern and the market sentiment supports that trade.
From a low of 31p on Thursday 19 March, William Hill (LSE:WMH) has been flying back to prominence.
On Monday 23 March, with the stock turning upwards, non-exec director Gordon Wilson bought 25,000 shares at 39p for a layout of £9,699.50 and chief executive Ulrik Bengtsson invested £5,814 in 15,000 shares at the same price.
Director deals are not always a sign of ultimate optimism. Companies have certainly folded just after directors have made large share buys.
However, I do not think that’s happening here.
William Hill’s shares ended Tuesday 36.6% higher and were up another 18% to 65.5p as of early afternoon on Wednesday 25 March.
Gaming psychology
With the UK lockdown now in full force, people are running the gamut of emotions. With more time on their hands, the fact is that more people will gamble. And with manufacturing and service sector PMI data pointing to an all-but-certain UK recession in 2020, as money starts to get thin on the ground, people will look to gambling as a way to suppress boredom and as a way out of stringent financial circumstances.
Frequent gamblers will gamble more, and new players will enter the market to have a dabble. Most of these new players will be doing it online – a bonus for William Hill as its revenue weighting continues to move away from physical stores and towards the internet.
Reasons to be cheerful
Elsewhere, the news earlier this month that William Hill would suspend its full -year dividend has proven a sensible decision.
In the aftermath of an unprecedented market crash and with recession looming, losing a dividend is no longer a sign of a business going up in smoke and driving investors away. Quite the opposite, in fact. When preserving cash is foremost on everyone’s mind, paying a dividend seems like poor decision making. That Shell and others are still considering making billions in dividend payments even while they slash opex and capex spend now seems rather foolish.
Debt-heavy businesses, or those without adequate lines of credit, will go under in the coming UK recession.
This will not be the case for William Hill.
Chief executive Bengtsson said the business has “an undrawn committed revolving credit facility of £425 million” with a ”robust financial position” and the “appropriate liquidity to absorb the impact of the [coronavirus pandemic].”
That being said, it is not entirely plain sailing for William Hill. T
here will be a “material impact” on revenue and earnings in 2020 due to the closure of US casinos and the mass cancellation of sporting events. 53% of earnings in 2019 were generated through the brand’s sports book business. The Tokyo Olympics is the latest of these major events to suffer, with the once-every-four-year games now being postponed 2021.
Meanwhile, the majority of William Hill’s revenue still comes from horse racing, which is now suspended until the end of April after attempting to soldier on as the likes of Premier League football and the UEFA league were shut down.
William Hill has modelled these changes and says the postponements will cost around £100 million, with every additional month of stores remaining closed costing them between £25 million and £30 million in earnings.
However, Bengtsson recently helped to mitigate these concerns recently when he commented: “These are truly unprecedented times but William Hill has been around for 86 years and over that time we have gained huge experience and understanding of our customers. Large parts of the business continue to operate on a ‘business as usual’ basis. People want to place sports bets and they will continue to do so where possible.”
Results for the quarter were already ahead of expectations and when the inevitable lift in UK lockdown comes, mass liquidity will hit the markets like a tsunami and William Hill’s share price will surge.
