Political and regulatory risk
As I’ve been saying for some time now, the UK economy has suffered in recent times from political risk – the election, Brexit. These are now past, and we can assume a relaxation of such political risk in our investing, right?
Well, yes, to an extent, but not entirely. Think of the deeper levels of government, the regulators. That section of politics is still dominated by the censorious who would insist that people should not just be allowed to get on with things. OK, yes, I’m biased, I’ve just done a think tank report on the point. The election hasn’t changed this.
It’s still true that the public health crowd is trying to cut back on and tax sugar in everything, they intensely dislike vaping, and so on. And, to the point here, the gambling regulator really doesn’t like people gambling for significant stakes. So much so that there is a serious thought about limiting online bets in casino-style games to £2 only.
This would have a significant effect upon the finances of the British online gaming companies.
I mentioned this before in November
Back last year, the All Parliamentary Group on Gambling muttered something to the effect that since allowable stakes had been cut inside bookies’ shops, then, therefore, perhaps, online casinos should face the same limitations.
Even the mere mentioning of it by an entirely unofficial body (an All Parliamentary Group is just whichever members of the Commons and Lords wish to issue a press release, no more) led to an immediate slump in the share prices of those online gambling companies.
We’ve, therefore, got more than a little political risk associated with such companies.
The muttering that something should be done has moved on a little bit:
Investors cashed out of betting stocks yesterday amid worries that the UK’s gambling regulator could bring in online stake limits within a matter of months.
After changes to the law last year, punters can only wager a maximum of £2 per spin on in-store machines and there have been calls for similar restrictions to be brought in for online casino games.
Neil McArthur, chief executive of the Gambling Commission, told MPs at a meeting on Wednesday that he and his team were looking at online stake limits and that a decision would be made “in the next six months”.
Shares in gambling companies have plunged in value by hundreds of millions of pounds after the industry regulator said it would consider slashing the maximum allowable stake on online casino games to £2.
The Gambling Commission’s chief executive, Neil McArthur, told a cross-parliamentary group of MPs (APPG) investigating the harm caused by betting that it would consider their proposal to cut stakes over the next six months.
The thing is, there’s a concerted campaign to reduce the amount that people can bet. It might be sensible, might be proper, might not be, but the campaign is ongoing. It would be libelous for me to say who I think is running it and why, but it is there, and it has had at least some effect so far – that cutting of the possible stake to £2 inside bookies on a fixed odds betting terminal.
Of course, as soon as this was said, the stock prices wilted again:
William Hill (OTCPK:WIMHY)
(William Hill share price from Google)
Flutter Entertainment (OTC:PDYPF)
I regard this as the main risk
There is this insistence that people should be prevented from gambling as they wish. Well, OK, maybe that’s right, and maybe that’s wrong. But it is a political campaign being undertaken. It has already worked on the FOBT systems, and the aim is obviously to make it so for the online casino games.
Don’t forget, they entirely regulated the payday lenders like Wonga out of business. I don’t say, by the way, that the lowering of stakes will drive any of the companies out of business, but it will impact upon revenues and profits. Thus, the swoons in the stock prices whenever the idea is mentioned.
Now, we might think that, with a Tory government newly installed in power, such things won’t happen. To which my response is that you’ve not really been paying attention. The Tories are just as – if not more so – censorious as anyone else. The regulation of Wonga happened under the Tories too.
I don’t think the providers of online gambling are going to be regulated out of business, not at all. But I do think that we’re going to see increasing regulation. Most importantly, this idea of cutting the allowable stakes. This will have significant effects upon profits – reducing them that is.
I also know more about UK politics than I perhaps should (I’ve been a press officer for a major party over an election season, stood as an MEP, am a Fellow at a significant think tank, have even managed to get one of my pet policies enshrined into law and so on), and I can see that this campaign is highly likely to succeed. It’s got the wind in its sails.
I am, therefore, just bearish on the sector. And I’ll remain so until either the idea is implemented, and stocks have fallen to account for that, or, possibly, the idea is properly and finally ruled out.
I’m thus on the sidelines in this sector for at least 6 months until we hear the decision of the Gambling Commission.
The investor view
We all thought that political risk would be reduced, given the Conservative election victory. But politics is a many-stranded thing. The reduction of permissible stakes is a significant – although not fatal – risk to the online gambling companies. Best avoid the sector until the matter is settled.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.