Gambling powerhouse Paddy Power Betfair’s (PPB) annual earnings came in ahead of expectations. Yet the shares cheapen 3% to £79.60.
News that 2018 so far has seen reduced ‘re-cycling’ of customer winnings into new wagers, with recent sporting results favouring the bookies. Investors are also unnerved as the gaming giant needs to spend more on marketing to entice customers.
Results for the 2017 calendar year reveal sales up 13% to £1,745m, driven by growth in sports revenue and with Paddy Power Betfair's Australian and retail operations (shops) delivering strong performances.
Encouragingly, underlying EBITDA is up 18% at £473m, north of management’s previous £450m-to-£465m guidance thanks to favourable fourth quarter sports results (particularly football scores).
Yet as the current trading and outlook statement outlines: ‘The new financial year has started as 2017 ended, with sporting results favouring bookmakers. This sustained period of bookmaker friendly results has, however, significantly affected customer activity, including reduced re-cycling of customer winnings.'
ONLINE DISAPPOINTS
Also weighing on sentiment this morning is a drop in online gaming to £58m in the final quarter, with annual growth a muted 5% to £898m, metrics which pale in comparison to the significant gaming growth being delivered by peers.
‘Following the successful completion of our European technology integration, Paddy Power customers are now enjoying the fastest sports book app in the market,’ enthuses CEO Peter Jackson. 'Our considerable development resources will now be focused on bringing more new products to customers, some of which will be delivered ahead of the World Cup.'
Jackson also insists ‘our scale, leading customer propositions and strong balance sheet mean we are well positioned ahead of the regulatory and fiscal changes expected in the UK, Australia and the USA.’
SPENDING STEPS-UP
While the performance of the Betfair brand has been good, Paddy Power has lost market share and marketing investment behind the brand is being stepped up and the Paddy’s Rewards loyalty scheme is being expanded, to reverse this trend.
As AJ Bell Investment Director Russ Mould explains: ‘An extra £20m investment in marketing and ‘customer proposition’ implies the gambling company will have to spend more money to make money. Increased investment will focus on pushing the Betfair brand internationally while re-invigorating the Paddy Power brand in the UK.
The stock market often gives the thumbs up to cost cutting and the thumbs down to increased investment. In reality, spending more on keeping your business relevant has to be a good move if the money is spent well.
Paddy Power has a very good track record of being innovative with its marketing and branding, so its rivals may actually be shivering in their boots that it is splashing some serious cash on getting its name right in front of gamblers once again.’
FANTASTIC FREE CASH FLOW
Nevertheless, the betting behemoth, formed through the 2016 merger of Paddy Power and Betfair, further enhances its credentials as an income favourite by raising total dividends for the year by 21% to 200p, underpinned by a 57% surge in underlying free cash flow to £395m.
Investec Securities, a buyer with an £88.50 sum-of-the-parts (SOTP)-based price target, writes: ‘With the Football World Cup starting on the 8th June, weak comps for Q1/Q1/Q3 due to punter friendly sports results in the prior year, and the possible US repeal of PASPA (we see this as 70% likely), we see further catalysts for Paddy Power between now and September.'
Forecasting a surge in normalised profit before tax from £392.6m to £428.2m for the current year, ahead of £479.7m in 2019, the broker also highlights the news that Paddy Power Betfair is now targeting a medium term leverage target of net debt-to-EBITDA of between one and two times, in order to run a more efficient balance sheet. Investec believes this points to either a share buyback coming down the track, or mergers and acquisitions (M&A) spend of circa £950m.
