Paddy Power share price recovery ‘to take time’

By Geoff Percival

Any meaningful recovery in Paddy Power-Betfair’s share price is going to take time, analysts have warned, after shares in the betting services group fell further on a 12% slump in first-quarter profit.

Underlying operating profit, for the first three months of the year, came in at £80m (€91m), £11m down on the same period last year, while revenue was 2% down year-on-year at £408m.

Driving the earnings decline was a slowdown in customer activity, following a sustained period of bookmaker-friendly sporting results, and an increased level of cancelled horseracing fixtures. In all, the prolonged severe winter weather led to 14% of scheduled Irish and UK racing fixtures being cancelled, compared to just 4% during the first quarter of 2017.

The group’s shares closed down over 5.5% yesterday after having fallen as much as 8% at one stage. The stock has dropped by more than 22% in the past 12 months. Yesterday’s movement was despite it also announcing a share buyback programme, which will return £500m of cash to shareholders over the next 12-18 months.

The first-quarter figures included a 2% year-on-year fall in online revenue and a 4% drop in both retail and gaming revenues.

Davy Stockbrokers said Paddy Power’s first-quarter revenue was 5% below its forecast and a sustained share price recovery will be reliant on the recovery of its European online business.

“At present, we believe the most important driver of share price performance for Paddy Power-Betfair is momentum in its European online business,” said Davy’s David Jennings. “There are three parts to this business — sportsbook, exchange and gaming. The first quarter revenue growth of each was sportsbook down 3%, exchange down 7% and gaming down 4%. As such, total [European online] revenues were down 2% versus our forecast of +2%.

Overall, we believe that the update re-emphasises what many holders already knew; returning [the European online unit] to double-digit growth is going to take time,” he added.

Paddy Power generated a 5% rise in annual online revenues to just over €1bn last year. However, investors have expressed concern that an expected long-term surge in online revenues may not materialise.

Analysts also see the recently-agreed €4bn takeover of Sky Betting and Gaming by Canada’s Stars Group as upping the competitive pressure on the likes of Paddy Power. A likely imposition of the maximum restrictions to betting on gaming machines in UK shops is also likely to deliver a 3% to 6% hit to Paddy Power’s annual earnings, according to analysts.

Paddy Power-Betfair boss Peter Jackson said the group had made “good progress against our strategic priorities”. He also noted an increase in market share in Australia, an improved Paddy Power product in Europe and “good momentum” in the US where the business continues to “make preparations for any positive regulatory changes.”

“Notwithstanding lower profits in the first quarter, we expect full-year underlying EBITDA of between £470m and £495m,” Mr Jackson said.

Last month, Paddy Power-Betfair posted an 18% rise in full-year EBITDA for 2017 to £473m. Shore Capital cut its recommendation on the stock from hold to sell, saying the group is unlikely to offset potential risks through organic growth.

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