Scaling the heights with Paddy Power Betfair

Scaling the heights with Paddy Power Betfair

Friday, November 4, 2016 Posted by Andy McCarron
Company ups 2016 profit guidance

With revenues pushing ahead at 15% growth on a constant currency basis for the third quarter and synergy targets cost cutting ahead of schedule, Paddy Power Betfair is proving the supposition that scale counts in the online gambling industry.

Overall revenues were up 15% in the three months to September to £404m, with sports-betting revenues for the group up by the same percentage to £316m while gaming was up 14% to £88m. The revenue rise fed through to a 49% rise in underlying EBITDA to £113m, and with synergies achieved this year likely to come in at £35m (or £5m ahead of target) and with costs contained (up 3% of the quarter) the company increased its EBITDA expectations for the year to between £390m and £405m.

The results do come with some caveats. Though the Australian operation continues to do well with revenue rising 21% in local currency terms, much of this was driven by the contribution form the now discontinued in-play product which the company withdrew after period close at the behest of the Northern Territories’ regulatory authority. In-play was worth 15% of total Australian revenues, up from 3% in the same period last year.

As with the rest of the UK industry, it is yet to be seen how Paddy Power Betfair will be affected by the Triennial Review announced by the UK government last month. However, with circa 400 UK shops it is less exposed to machine revenues that other UK high street rivals, despite the 10% growth it saw across its estate in the third quarter.

The analysts were still generally appreciative of the company’s efforts. David Jennings at Davy Stockbrokers in Dublin said the figures were “not too shabby” considering the ongoing integration work could have been expected to be more of a distraction on a day-to-day basis.

He added that the adverse regulatory changes in Australia and the general sector sell-off in reaction to the likelihood of a tougher UK regulatory climate have obscured the potential for the merged entity to truly leverage its operational scale advantages.

“The fact of the matter is that our top-of-the-range forecasts already build in substantial buffers for adverse regulatory and tax changes while underestimating the scope for future profit margin expansion,” he added.

Over at Goodbody Stockbrokers analyst Gavin Kelleher was similarly enthusiastic about the results which he said “should be well received.” “Reading too much into individual quarters can be misleading given sporting results volatility and seasonality of marketing spend,” he told his clients in note. “However, the performance of the enlarged group thus far gives us renewed confidence in our positive investment case.”

Elsewhere, though, there was more scepticism. Simon French at Cenkos said that other headwinds, including the likely introduction of a horseracing levy replacement and the move to a net gaming revenue tax calculation for point of consumption (PoC) tax next year will account for a combined annualised hit of circa £14m. Alongside the Australian in-play ban and the potential Review hit it means that French sees “more moderate growth” in 2017, making it hard to justify the company’s current multiple of around 15 times its enterprise value to EBITDA ratio.

More pessimism came from the analysts at Liberum who suggested that though the “credentials” of the Paddy Power Betfair business model, the fact was that in a clearly very competitive UK market, there was “virtually zero room for error.”

Totally Gaming says: Paddy Power Betfair is forging into new territory for the online gambling sector. The company has genuine scale and would appear to be leveraging it to great effect. The regulatory challenges the company faces are all well-flagged and, the company would argue persuasively, easily surmountable given the momentum, particularly in online sports-betting. Competition is tough in the UK – marketing spend rose by a quarter over the quarter – but Paddy Power Betfair is a heavy hitter in the market and the odds are that it will one of the long-term winners, albeit with bumps in the road ahead.

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