Paddy Power wobbles on broker fears

Paddy Power wobbles on broker fears

Paddy Power-Betfair shares fell by over 2%, before recovering, on analyst concerns that an expected surge in online revenue may not materialise and that competitors may outpace its growth, writes Geoff Percival.

Morgan Stanley has forecast that the Dublin-based betting and gaming group’s share price could fall by around 14% this year and has cut its recommendation on the stock to ‘underweight’. In a research note, Morgan Stanley analyst Ed Young offered £75 as a 12-month share price target for Paddy Power-Betfair. The company’s shares are currently trading at around £87.95 in London and just under €100 in Dublin.

On the day that Peter Jackson took over as Paddy Power-Betfair chief executive Mr Young said the company “needs to address some major strategic issues” and that industry consolidation may erode its scale advantage, which hasn’t seen it generate market share gains.

“We are now seeing signs that the industry may consolidate around it, forming combinations with similar revenues and competitive technology. We do not see obvious acquisitions for Paddy Power-Betfair that would not either reinforce concentration in relatively more mature markets like the UK or dilute the very high regulated mix that has been central to the company’s strategic decision making,” he said.

On the strategic questions facing the group’s new boss, Mr Young offered: “Will the company maintain its focus on regulated markets and what does that mean for revenue growth prospects? Will the company focus operationally on one brand or the other, or is the current dual brand model working? Is another brand needed to boost gaming growth and how much of a short-term hit to earnings could launching a new brand be?”

He added he sees no silver lining from regulation changes in Australia, one of Paddy Power-Betfair’s key markets, and that expectations for online revenue growth are too high.

In its most recent trading update, published in November, Paddy Power said third quarter online sales fell 3%, year-on-year, but it expects online revenues to surge after migrating its Paddy Power customers onto a new group betting platform from next month.

Mr Young also downgraded Ladbrokes-Coral, despite saying a merger with online gaming group GVC is “attractive”.

“The merger of the businesses presents an opportunity for material synergies, a group with greater diversification of geographies and product, a strong management team and scale providing further optionality in new markets and for further deals,” he said.

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