Paddy Power shares fall as profits miss target

Shares in betting services group Paddy Power-Betfair dropped a further 4% yesterday after it posted first-half earnings which fell short of analyst expectations.

The movement followed Monday’s 5% drop in share value on the news that chief executive Breon Corcoran was leaving the company.

Strong growth in the amount of money bet by punters and favourable currency movements helped raise Paddy Power-Betfair’s first-half revenue by 9%, year-on-year, to £827m (€912m). Operating profit grew by 22% to £180m and earnings per share rose 23% to 181.1p.

However, while earnings on an EBITDA basis were 21% up at £220m they were 10% short of analyst targets, due to net revenue margins (NRM) coming in below market expectations.

“At some point it stops being unlucky outcomes and instead comes down to our NRM assumptions just being too optimistic. Over the past 10 quarters the average NRM has come in 40-50 basis points below expectations across the group’s three main divisions. It may be time for us to reassess what a realistic margin expectation is,” said David Jennings and Joseph Quinn of Davy Stockbrokers.

Around €650m has been wiped from the group’s market value this week (it has shrunk by around €1.6bn in the past year to sit at €6.75bn) and the stock is down nearly 20% since the turn of the year. However, some analysts still see there being upside potential for investors.

“Once platform migration is complete we are confident product will follow. Outside of European online, the other three divisions continue to perform impressively.

The exit of influential chief executive Breon Corcoran has understandably raised concerns, but the CEO designate [Peter Jackson] looks like a candidate that ticks all the right boxes to take advantage of the arsenal this group will possess in 2018. Patience is required in the short-term but the long-term investment case remains intact,” according to Goodbody Stockbrokers’ Gavin Kelleher.

Paddy Power’s first-half revenues were helped by a good Cheltenham Festival in March, but the lack of a major summer international football tournament and some adverse sporting results hampered growth to some extent. Revenue was up in the UK and Ireland retail division, in Australia and the US, but flat across the key online platform as a whole.

Outlook for the full year is for underlying EBITDA — factoring in a £15m loss from the takeover of specialist US betting firm Draft — of between £445m and £465m. Next year is expected to see the benefit from new product lines, full merger integration, further technology investment and the football World Cup.But doubt remains.

“Despite the integration of Betfair being on track, investors have, at this stage, discounted that the Betfair deal has been of no value-add to shareholders. That, or else investors feel that the regulation headwinds are just too onerous to sustain profit growth well into the future for any of the bookmakers. The departure of the chief executive is certainly going to raise similar questions,” said Darren McKinley, equity analyst at Merrion Private.

Outgoing boss Breon Corcoran said “substantial investments” are being aimed at positioning the group “as a structural winner in a dynamic and highly-competitive market”.


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