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Rugby World Cup…. More than one winner?

Is the Rugby World Cup anything like the Olympics?

Sporting events tend to have uncertain sporting outcomes. They have uncertain financial outcomes as well! One thinks of the Olympic Games as a good proxy. The Seoul games in 1988 (Ben Johnson/ Carl Lewis 100m remember!) caused the Won to move up sharply in the run-up. The World Cup in 1994 in the USA was overshadowed by the OJ Simpson car chase leading to many disappointed sponsors!

The Olympic Games has been a poisoned chalice for some of its city hosts:-

  1. 2004 Athens Olympics – true to form the Greek government spent $15bn on an event that contributed to its ballooning deficits. This chicken came home to roost in 2010.
  2. 1976 Montreal Olympics – The Olympic Stadium was known locally as the “Big Owe” almost bankrupted the city costing $1.48bn in 1976 dollars! It took 30 years to pay off.
  3. 1996 Atlanta Olympics – eked out a $10m profit after spending $1.8bn. I suppose that is a risk adjusted return.
  4. 2014 Sochi Winter Games costing $51bn! Part of this budget included housing, airports etc. that will have a long life. Justification of the budget still seems hard.

Global sponsors identify with large sporting events as brand marketing opportunities primarily for their ability to reach a global audience in one hit. Large sponsors such as Adidas, Coca-Cola, Sony and VISA have kept FIFA in business for years. However measuring results from sponsorship for a specific event can be difficult. A large sponsor often has to make a significant long term commitment with the advertising benefits accruing and brand enhancing over a number of years and via a spread of events.

Media companies have direct exposure to sports via the purchase of rights followed by the forward distribution of sporting event coverage. The media company needs to be able to distribute the event after winning a successful bidding round.

Retailers benefit from the merchandising side, the event usually generates significant new retail sales if it is specific enough.

Gaming companies also benefit if their betting operations include an events specialisation and usually there is a significant benefit the longer the event lasts with the right contender mix.

Hoteliers can benefit if the event is big enough, such as the London Olympics. We would not expect the Rugby World Cup to generate substantial new arrivals in London though.

Rugby World Cup

As the summer draws to a close, rather quickly it seems – the Rugby World Cup should be at least a good event for sponsors and broadcasters. In respect of the hotel trade, we are concerned at recent international events and substantial evidence of a slowdown in a number of countries that will impact consumer willingness to travel.

Whilst usually in the heat of summer, it is usually safe to say publicans will benefit from a large sporting event, we expect recent weather trends are bad for UK publicans like JD Weatherspoon, Greene King and Mitchells & Butlers. Indeed Mitchells has today warned of profits at the bottom end of expectations “due to wet weather conditions…a subdued eating and drinking market over the summer months”.

ITV….. BUY

ITV was formed via the merger of Granada and Carlton Communications in 2004. It owns 12 of the 15 regional TV licences that make up the ITV network. As a result of the 2010 Transformation Plan the board improved working capital and cost management. ITV cut net debt from £730m during the 2008 crisis to net cash of £16m by end Q1 2012. In the last 24 months, ITV has generated substantial free cash flow and significant profit growth – helped by ITV Studios and growth in Online, Pay and Interactive revenues. However the proliferation of digital media, social media, internet TV, cable TV as alternative platforms drawing away audiences from terrestrial TV, represents a challenge for the core ITV franchise.

Company ITV
 Share Price (p) 241
Target Price (p) 300
52 Wk Hi/Low (p) 280/194
Shares O/S 4.03bn
Market Capitalisation £9.75bn
Avg Daily Volume 11.4m
Dividend Yield 2.09%

Source; Fidessa plc

Key Risks to Price Target

i) ITV’s progress increasing margins might not be sustainable.

ii) Sensitive to advertising revenues from key TV shows including X-Factor, Coronation St, Emmerdale and reception to the Rugby World Cup

iii) Proliferation of terrestrial TV, digital media and cable TV, social media amounts to rapidly changing media industry that will challenge incumbents’ revenue streams.

Key Catalysts

ITV has been making the case for charging retransmission fees, meaning the pay TV providers would need to pay ITV for carrying ITV1. Recent reports have suggested the UK government is considering the repeal of a section of the copyright laws that exempts Virgin Media and Sky from paying for the public service channels. If allowed this could generate significant new revenues for ITV with 100% margin (i.e. pure fee income).

William Hill….. BUY

William Hill is the UK’s largest bookmaker, with 2,360 betting offices providing betting odds on sporting and non-sporting events, games machines and lotteries. Its online business www.williamhill.com provides access to gaming products online, via mobile or tablet. William Hill is expanding in Italy, USA and Australia, all regulated gaming markets via both organic growth of existing operations and acquisition. William Hill acquired 29.4% of NeoGames a leading online lottery software provider for $25m with an option to acquire NeoGames from 2018. William Hill is progressing its international business at a time of change in its core UK business. William Hill is managing this transition by focusing on core technology investment.

Company William Hill
 Share Price (p) 350
Target Price (p) 400
52 Wk Hi/Low (p) 425/335
Shares O/S 883.83m
Market Capitalisation £3.09bn
Avg Daily Volume 1.2m
Dividend Yield 3.51%

Source; Fidessa plc

Key Risks to Price Target

i) William Hill is investing heavily in its US platform and in IT via Project Trafalgar.

ii) Interim PBT £78.7m fell 35% / EPS fell to 7.9p -30% due to Point of Consumption Tax and Machine Games Duty. William Hill might struggle to catch up in the second half of 2015.

iii) The UK gaming industry is a competitive industry with significant regulation and taxation. Recent mergers involving Ladbroke/ Coral and Paddy Power/ Betfair will change the UK competitive landscape.

Key Catalysts

2015 interims were hit by new taxes, the closure of 108 shops in response to the machine games duty rate change, and a 10% revenue decline in Australian operations. For FY15 EPS should come in around 23p. Recent initiatives aimed at boosting returns via an improved shop estate, an easier Nevada regulatory environment, and the Rugby World Cup should help the business recover its poise.

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