Geoff Percival
Paddy Power-Betfair shares tumbled by more than 7%, knocking over €500m from the company’s market value, after the betting giant lowered its expectations for its full-year earnings based on a muted second-half outlook.
The group reported strong figures for the first half of the year, including 5% year-on-year growth in revenue to £867m (€963m) and a 4% pre-tax profit boost to £106m. It said it now expects earnings, on an Ebitda basis, to come in at between £460m and £480m for 2018 as a whole.
That is down from full-year earnings guidance of £470m-£495m communicated as recently as May. Underlying Ebitda fell 1%, year on year, in the first half to £217m. That figure was more than £10m below analyst expectations and revenue for the first six months lagged market forecasts by 5%.
An earlier-than-expected introduction of betting taxes in Australia is set to hit group earnings while higher costs, coupled with losses from its growing US fantasy sports betting business, will slow growth.
Management said while the second half of the year has started “in line” with expectations, recent trading momentum — buoyed by the World Cup and a better-than-expected performance in gaming — has been offset by “continued weakness” in horse-racing revenues from its online betting exchange division.
“Growing concerns about Betfair profitability would be a significant headwind. We prefer to sit on the sidelines until we see a return to operating profit growth,” said Merrion analyst Darren McKinley.
Group chief executive Peter Jackson said management now has “much better visibility” of the regulatory and fiscal changes in the UK, Australia, and US, and is “well-positioned” to generate long-term sustainable shareholder returns.
Mr Jackson said earlier this year that Paddy Power-Betfair would be keen on growing its Australian business through the addition of bolt-on acquisitions. Yesterday, he suggested growth there would be more organically driven, but did not totally rule out purchases.
“If anyone wants to raise the white flag we’d look at something, but we’re very focused on organic opportunities [in Australia],” he said.
Mr Jackson suggested high valuations linked to a number of possible recent takeover opportunities — including William Hill’s former Australian operations, which sold for around $244m — have put Paddy Power-Betfair off M&A activity Down Under. However, he said the company’s current share buyback programme is not hampering management’s ability to spend. It will ultimately return £500m to shareholders, he said.
“After a disappointing first-quarter trading update which saw Paddy Power-Betfair report a 2% fall in revenue and an 8% drop in Ebitda, investors could have been fooled to think that a better second-quarter revenue result would have helped sentiment toward the stock,” said Mr McKinley.
“Instead investors looked through the revenue growth and focused on the lacklustre Ebitda growth of -1% and margin pressure at Betfair Exchange.
Higher taxes in Australia and higher marketing costs across the board are seeing costs grow faster than revenue.
Betfair Exchange is being challenged by increased competition from smaller peers. Maybe Broen Corcoran sold Paddy Power a pup when they merged with Betfair for a valuation of £2.5bn.”
