Full steam ahead at Paddy Power Betfair

Full steam ahead at Paddy Power Betfair

Tuesday, March 7, 2017
PPB powers on with integration plans

The words leverage, scale and investment dominated Paddy Power Betfair’s analyst conference call as the company revealed its first annual results as a combined entity and mapped out a plan to dominate the European gambling space for years to come.

The figures somewhat spoke for themselves. Revenues were up 18 percent across the group’s online and retail operations across three continents. Underlying EBITDA rose a whopping 35 percent to £400m while EBITDA margin was up by four percentage points to 26 percent.

The integration of the two businesses remains very much on track with all total implementation costs of £66m incurred in 2016 and the full benefit of £65m annual savings to begin this year.

In terms of divisional performance, online saw revenues rise 11 percent to £835m, Australia was up 18 percent on a constant currency basis to £312m, retail revenues from the UK and Ireland nudged up 6 percent to £295m and the US rose 13 percent to £91m. The company pointed out that in terms of scale, it now had an annual marketing spend of £300m and had circa 1,000 staff working on product development.

The only negative in the statement came with the online gaming operations where the already flagged weakness in the fourth quarter has continued. But despite chief executive Breon Corcoran implying that the continued integration work would necessarily slow the pace of the introduction of new product over the next 12 months, some analysts remained hopeful that it wouldn’t bring a halt to the earnings growth.

“Ultimately, we continue to see good scope for earnings upgrades over the next two years, driven by overly conservative Australian forecasts and ongoing positive operational gearing in online,” said David Jennings, analyst at Davy Stockbrokers in Dublin. “While online growth will inevitably slow, we feel that this is already baked into our numbers. Use of the balance sheet to further strengthen the group strategically remains a valuable option.”

There was similar optimism from Paul Leyland, partner at Regulus Partners, who suggested the company has the brands and in-house capabilities to “transform” the regulated betting markets in Europe and Australia. Noting that the integration process had stymied growth in 2016 and that 2017 carried similar risks with regard to the internal platform migration, he suggested that should Paddy Power Betfair sustain its double-digit growth “it will be in a very strong position to begin rewriting the game.”

The platform integration is ongoing and will see the Paddy Power brand and customers migrate to the Betfair platform later this year. The risk trading element of the integration is already complete. This includes the release of the next generation football betting model in January. That comes with more accurate pricing, reduced in-play suspension and a greater range of markets.

Though the backend for the two major brands are now intertwined, the brand strategy remains in place to have two distinct customer-facing businesses aimed at discrete audiences in the UK and Ireland.

Another note of caution was struck by Corcoran when it comes to Italy where the company said the migration to the single ex-UK and Ireland brand of Betfair was behind schedule due to regulatory hold-ups.

Regulatory clouds were the reason behind the negative comment from Simon French, analyst at Cenkos, who noted that the current valuation of the Paddy Power Betfair shares was way ahead of its peer group. “We do not think (the share premium) can be justified by the forecast earnings growth and regulatory headwinds,” he said. “Furthermore we think the group will have to take an increasingly lenient view to unregulated/other markets over the medium-term to sustain the forecast level of earnings growth which will likely lead to a de-rating.”

Totally Gaming says: Some analysts may cavil at the premium that shareholders have to pay for Paddy Power Betfair shares, but there can be no doubting the strength of the company’s offer or what appears to be the success of the integration to date. The job of integration might not yet be complete, but it looks likely that in the coming years the company will be a shining example of how M&A should be done in the gambling sector.

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