Paddy Power Betfair on the up but Australia falls behind

Paddy Power Betfair on the up but Australia falls behind

Wednesday, August 24, 2016 Posted by Andy McCarron
Problems in Australia the only blip as merged entity strides on

Paddy Power Betfair’s debut results since it completed the merger earlier this year demonstrated how far the company has progressed in achieving its integration targets, but problems in Australia loom large after divisional operating profits fell ahead of the incoming click-to-call ban and the introduction of a point of consumption (PoC) tax in South Australia.

Compared to previous estimates for cost synergies in the £50m range, the company said today that it was raising the figure for the expected benefits to £65m and also said the full benefit would now be felt in 2017, a year earlier than expected.

Among the integration procedures already completed are a rationalisation of duplicate roles across the company, a shift in technology resources to existing development centres across Europe, the closure of five offices and a consolidation of its data centres.

On top of this, it has also seen the benefit from procurement savings, particularly in marketing, payment providers and data, and is enjoying the benefits of a reduced reliance across the group on third-party suppliers in terms of gaming content, product development and trading.

Speaking to analysts, chief executive Breon Corcoran said all these benefits and contributed to the company’s competitive positioning. “You compete by the aggregation of small advantages,” he told his audience. “Every part of the customer proposition is critical. But the unifying theme is technology. Having the resource and the capability to ever improve it. That will matter all the more in the future.”

The speeded-up synergy benefits were applauded by the analysts. David Jennings at Davy Stockbrokers in Dublin said it was noteworthy that in the results and the accompanying presentation the company identified at least 20 separate areas where the company would be able to drive revenue. “Some are big, some are small but between them, we believe that a road-map for future market-share gains has now been laid out,” he added.

Over at Goodbody, analyst Gavin Kelleher was similarly enthused about the changes that had been wrought by the merged management team. “The detail given in the document on the merger’s strategic benefits should reassure investors that the opportunities are significant,” he said in a note to clients.

The headline figures from the first half – the first results published from the joint entity – were impressive enough. Total revenue rose 18% across the business with Paddy Power Betfair keen to emphasise the growth across all four divisions of online, retail, Australia and the US. The company was helped by a strong performance during the Euros in the second quarter with revenue up 20% compared to the pro-forma figure from last year and underlying EBITDA up 33% to £122m. However, the one-off costs of the merger tipped the company into a pre-tax loss of £47.5m.

The company said revenues from regulated markets rose grew 25% while unregulated revenue fell 13% largely because of the exit from Portugal ahead of the introduction of a regulated online market in the country. Regulated revenues now account for 95% of total revenues.

One division likely to come under further pressure in the months to come is the Australian Sportsbet business where regulatory issues – notably the banning of in-running click-to-call services, the introduction of a 15% point of consumption (PoC) tax in South Australia and the ban on greyhound racing in new South Wales – will provide significant further roadblocks to a business which has already seen underlying operating profits fall back 12% in the first half.

The company said click-to-call contributed circa 15% of stakes and around 8% of revenues in the period (representing a doubling from last year) while the PoC in South Australia would affect circa 7% of total revenues and greyhound racing betting contributes approximately 4% of total revenues.

Despite these combined hits, Corcoran was insistent that the company has the scale to overcome these challenges. “We take considerable comfort from the scale we have there and the investment we have made over the years,” he said. “We’re cognisant that operating profit went backwards in the first half.”

Much as most analysts were upbeat about the company’s prospects, there were notes of caution among some. Simon French, analyst at Cenkos, pointed out that though it was undoubtedly a strong set of results, the current EBITDA multiple for the share price of over 18 times – representing an 80% premium to its peer group – was not warranted by the results to date.”

Totally Gaming says: The current PE ratio for Betfair makes the company’s shares an expensive punt, albeit one with a premier position in many key markets and with two of the biggest brands in online betting under its umbrella. But Australia remains a key worry, and one where regulatory events are outside of the company’s control.

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