Ladbrokes – the eyes of the cobra

It was a mere fifty days or so ago – yes, as little time as that – when I last looked, mesmerised, into the captivating gaze of pure speculation; the eyes of the cobra. I refer of course to my late February views on Ladbrokes (LAD), the once proud owners of Hilton Hotels, now reduced to scrape a life off mere betting and gaming. Here I am again in the grip of the strange hypnotic spell of those serpentine ‘mince pies.’

I call Ladbrokes a speculation because its shares have no tangible attributable assets backing up the share price and because of the large goodwill item in the balance sheet. Moreover, it has an attractive annual dividend yield but one made suspect by its size – 8.2% historic – indicating the markets expects a cut or dilution. Looking at the situation, it seems it is likely to be dilution since the company shows no sign of wanting to cut the annual amount it puts aside for dividends each year but is in no position to increase it. Consequently, no doubt due to creeping share issuance, the market consensus is currently estimating a prospective dividend yield of 7% for this current year.

The share price was 119p. Part of that 11p share price decline may with reason be attributed to the shares going ex-dividend following a chunky final dividend of 5.6p on 26th March. The share price, which had fallen to about 101p, started to regain ascendancy after that, to 108p. “Technically” speaking, the shares had broken out of a previous downtrend in January, rose to 123p (or close to it) before falling again. The share price now appears to be in a sideways moving trading range of 101 to about 123p. If that is so, there is an implied upside trade of around an estimated 13% if the share price does trade up to 123p and eventually more in due course if management manages to turn the business around.

The bullish news this month was that Jim Mullen has taken up the position of CEO. He seems to have been with the company for about a year and a half and more importantly, came from William Hill where he was in charge of digitalisation; so he understands both the business and the technology. His looks a significant appointment for getting Ladbrokes’ technology back up to speed; of that, there was some evidence in the last annual results when digital sales were reported 22% up.

But last month there was a mystery. Mr. I Bull the company Finance Director (a bear in Bull’s clothing?) sold a reported 13,859 shares on 2nd March at 116p, not even waiting for them to go XD. It does not represent a lot of money and we do not know what prompted this sale. Delving through the announcements I see that it is deferred bonus, rather than capital. Presumably he had a use for it and may even have spent it in advance. Consequently, I do not attach too much significance to the sale.

The Q1 trading statement showed trading profits (they call them EBIT) down 22% on the year before. It seems that in Q1 the punters did rather too well. Sometimes they do! It encourages gambling!

I like these shares as a speculation, now that they have reached the 103p share price, with a potential support level and into a sideways trading range. However, there is market risk as we go into the uncertainty of the UK election. A Labour led government is going to give powers to local authorities to cut the number of gaming machines on High Streets. Online tax is already here diminishing cash flow. The market says that it is not inclined to take the dividend payout for granted, despite management promises, by valuing the shares on an 8% dividend yield. So that is discounted.

The share price seems to have found support around 101p and is moving sideways, although it has not gone far enough to form a breakout from the previous down trend. It is, meanwhile, potentially and arguably, in a decent trading range of between 101p and 124p. A good bit of news could see the share trading to make a tidy profit. My instinct, is that the share is a speculative buy at this point, despite reported short selling.