View the article online at http://citywire.co.uk/money/article/a884482
AA-rated Margaret Lawson bets on gambling stocks
SVM UK Growth manager is backing gambling stocks, where she has identified strong international growth opportunities.
Citywire AA-rated fund manager Margaret Lawson is backing gambling stocks, where she has identified strong international growth opportunities.
Mergers and acquisitions (M&A) activity in the gambling sector picked up last year, including the £5 billion merger of Paddy Power and Betfair to create the world’s largest listed online betting and gaming company.
Lawson, who runs the SVM UK Growth fund, owned both stocks prior to the merger, which has sent Paddy Power Betfair (PPB) towards the top of her holdings, with 3.4% of the fund invested.
‘It looks like we’re really into betting and online gambling but it is just the way things are going right now,’ said Lawson.
‘You have got to tick as many boxes as you can in this difficult environment, so businesses that can do M&A and pay down debt are strong companies to have in your portfolio.’
Lawson’s focus on these types of companies has served her investors well. Over the three years to the end of January, the SVM UK Growth fund is up 41.98%, more than double the peer group average of 20.57%.
Lawson believes Paddy Power and Betfair are a good fit and the transition will be smooth.
‘It’s not like Shell (RDSb) taking over BG because the management of Betfair came from Paddy Power, so the cultures are very much aligned,’ she said.
‘Given the nature of the prodigious cashflow the business generates, it’s not as if you have to worry about them needing a significant amount of capital expenditure to put these companies together.’
The merger also fits with the structural change happening in the gambling sector, Lawson believes. There is now less need to spend money on high street branches, as Paddy Power has already invested heavily in its website.
Another advantage of the online model is that it offers international growth prospects, without the firm having to set aside significant amounts of capital expenditure.
‘I’m not saying it is going to be an international business as such, but it has tremendous upside and a clean balance sheet with no gearing. Its prodigious cashflow can support its growth, as well as paying progressive dividends and making special capital payments to investors,’ Lawson said.
‘It has very conservative management and I think they will probably come out with the next couple of results and exceed what people have expected.’
Change ahead at Ladbrokes
Elsewhere in the industry, Lawson believes Ladbrokes could be another beneficiary of consolidation. The firm is in the midst of a £2.3 billion merger with Gala Coral Group, the betting shop, bingo and casino operator.
Lawson points out Ladbrokes had a strong brand name but has been badly managed and suffered at the hands of underinvestment for a number of years, falling behind in the online stakes.
Gala Coral Group, on the other hand, has a strong online presence which could bolster Ladbrokes’ offering.
‘People don’t hold Ladbrokes because it’s really been a big let-down, so if Gala Coral Group starts getting things right, we’re going to see a new constituent of shareholders coming into Ladbrokes,’ she said.
‘Even with all this bad stuff about Ladbrokes, it has still retained a reasonable brand name and obviously it is going to have to sell off lots of shops [to satisfy the UK’s competition regulator], but the management of Gala Coral Group is really going to shake up Ladbrokes.’
Meanwhile, GVC’s (GVC) acquisition of Bwin for £1.1 billion offers a lot of synergy benefits, despite GVC’s share price falling considerably when the bid was announced last September.
‘GVC has got tremendous cashflow, and was yielding 10%. GVC stopped the dividend because they’ve got to pay down the debt from having bought Bwin, but the dividend will be restored once the merger comes together and it will be a much stronger player.’
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- Paddy Power Betfair PLC (PPB.L)
- Royal Dutch Shell PLC (RDSb.L)
- William Hill PLC (WMH.L)
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- GVC Holdings PLC (GVC.L)
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by Gavin Lumsden on Jul 22, 2016 at 16:24