Davy reduces gaming sector earnings forecasts to reflect weaker UK economy outlook

Davy Stockbrokers have re examined their forecasts for listed UK gaming companies in the wake of Brexit.

In a note, Davy said the outlook for the UK economy has deteriorated sharply following the Brexit referendum outcome and that the consequent uncertainty will be sufficient to push the UK into a recession through the turn of the year.

Davy have revised down their UK GDP forecast to just 0.2 per cent in 2017 with two consecutive quarters of negative growth now expected in Q4 2016 and Q1 2017 respectively.

In this context, Davy have re-examined their forecasts for the listed UK-facing gaming companies and that downward adjustments are now merited across retail and online.

"From an operational gearing perspective, William Hill and Ladbrokes are both more exposed given the scale of their retail operations. That said, we believe recent share price declines broadly capture the adjustments being put through for both. In the case of Paddy Power Betfair, the share price correction has arguably been over-done given its lower UK retail exposure. It remains our top pick," the note said.

Davy have revised forecasts for UK facing listed bookmakers Paddy Power, William Hill and Ladbrokes.

Davy are now forecasting EBITDA of £466.8 million for 2017 (EPS 388p), a 4.4 per cent reduction on the previous forecast to reflect Brexit impact and a higher probability of gaming tax increases in Australia in the coming years.

For William Hill, Davy are forecasting EBITA in 2017 of £271 million versus the previous forecast of £308 million, a net adjustment of £37 million or 12 per cent.

Davy said Ladbrokes suffers from having a higher exposure to UK retail and a lower operating profit base .

They are now forecasting EBIT in 2017 of £92.6 million versus a previous forecast of £111.3 million, a net adjustment of £18.7 million or 16.8 per cent.