European bookmaker Ladbrokes (LSE: LAD) just announced that it intends to begin repurchasing its own shares, according to an interesting report published by David Stevenson of the Motley Fool UK, reproduced here in its entirety:
"When all else fails, announce a share buy-back programme.
Leading European bookmaker Ladbrokes (LSE: LAD) has just said it intends to start repurchasing its own shares.
Why? 'In order to move, over time, towards the stated target gearing range of 3.5 to 3.75 times historic EBITDA' [the gross profits earned by the company before taking account of interest, tax, depreciation and amortization], according to the bookie.
Moving from 'City speak' into slightly plainer language, this means Ladbrokes will be swapping more of its funding from equity to debt.
That's not automatically a bad thing, particularly if a company is paying high dividends and interest rates are low. Though if borrowing costs rise, it's less of a good idea.
But more fundamentally, and as a cynic, I believe that firms often make announcements about share buy-back programmes as smoke screens, to deflect attention from other, less favourable issues.
And in Ladbrokes' case, the overall business isn't really quickening up at the moment. Despite a strong jump in revenues from telephone betting "high rollers" and from in-shop gambling machines, first half pre-tax profits have fallen to GBP 156m from GBP 158.6m a year ago.
OK, business was boosted a year ago by the World Cup. But companies always find an excuse for their problems.
There's no specific word from the bookie about the effects of the large number of weather-related race cancellations during the first half of 2007. The rest of the business is continuing to trade 'in line with management expectations.'
As for gaming industry deregulation, Ladbrokes merely admits to be 'actively interested in the proposed 17 new UK casinos and continues to monitor the progress of this regulation.' The e-Gaming poker scene remains competitive with lower revenues. So not a huge number of positives there.
And here's why I'm even more concerned about the future.
Irish punt?
Whilst Ladbrokes makes great play of its international expansion, particularly in the Republic of Ireland, 90% of the business is still based in the UK. Betting shop half year profits fell here by nearly 12% and the company is just as vulnerable to the current squeeze on discretionary spending as any high street retailer.
And the 'Magic Sign' admits that while the recently installed fixed odds betting terminals, which offer roulette and bingo, are popular with customers, they are hitting traditional over the counter betting.
Though all-year evening opening starting in September is seen by the company as positive, it's an unknown. And considerably more costly. Also, betting shops have traditionally been refuges for tobacco lovers. The full effects of the national smoking ban have yet to be seen or reflected in turnover at the company's 2130 UK outlets.
Further, the 'high roller' business is volatile. Note that first half telephone betting net revenue excluding high rollers dropped nearly 20% on lower margins.
If the weather's equally changeable, it's bad for horse racing. Normally the worst period for race meeting cancellations is during the winter months. And that's without any potential fallout on British racing from the recent foot and mouth outbreak.
Ladbrokes shares have recently been backed on takeover speculation that private equity groups were chasing the company. But this may well have fallen away following recent credit market woes.
On a prospective price to earnings ratio (PER) of over 13 times for the current year the shares do not look particularly cheap, despite the 3.5% yield. With consensus forecasts of next year's net profits indicating a 9% fall, that PER rises to 14.2 times. Doesn't get my pulses racing.
At 410p, the shares have fallen over 10% from their highs of two months ago.
A short term rally is possible on the buy-back news, but if I were a Ladbrokes shareholder, I'd be booking my profits, assuming I had any."
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Ladbrokes To Repurchase its Own Poker & Gambling Shares: Going Flat?
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