Analysis: Is Paddy Power Betfair in trouble?
The firm has seen its share price dip to new lows, but is the market’s bearishness justified?
Paddy Power Betfair (PPB) yesterday saw its share price plunge to its lowest level since the merger, with valuations down almost 30% from its post-combination peak.
The catalyst was another poor set of results that saw online revenues fall 2% and group EBITDA drop 6%cc.
Analyst firm Shore Capital was one of the bears, downgrading PPB’s rating to Sell, and noting: “With the group continuing to lose share in the UK, the exchange ex-growth and limited international exposure outside of Australia (before any potential US expansion post PASPA) the group appears unlikely to offset such potential risk through organic growth.”
But is the pessimism justified?
Perhaps in the case of the exchange, where revenues were down 7% – the worst result since the merger. PPB attributed the downturn to cancelled race meets, and a drop in revenues from high-value customers who made less profit during the quarter. Horseracing is indeed vital to the exchange, accounting for 45-50% of revenues, but it’s interesting that PPB maintained long-term expectations at 2% growth, and refused to mention increased competition.
Matchbook for instance has been charging zero commission on racing for much of the quarter and reporting significant increases in liquidity, while Smarkets and Betdaq are also growing. It’s unlikely these three firms are simply creating thousands of new exchange punters, so Betfair’s revenue downturn does indeed look significant.
Sportsbook
The sportsbook division is also a cause of concern, with revenues up just 3% year-on-year, suggesting a loss of market share. Irish brokerage Davy noted it was “striking that sportsbook lagged by a couple of percentage points despite the fact that net revenue margins came in at 7.6% — 90 basis points better than Q1”. Sportsbook stakes were also down 10%, although some of that can be attributed to the extended run of bookmaker friendly results from November to February.
Down Under
There is more optimism over in Australia, despite the headline revenue increase of just 6%cc. The firm blamed adverse sports results and investments during the quarter, and indeed staking actually grew 21%cc. “The quarterly revenue performance is all bad luck and no bad judgement, in our view,” said Regulus Partners.
PPB subsequently pledged to invest a further £10m in the market and “compete aggressively” in Australia this year in an effort to take advantage of “distracted” merging rivals.
CrownBet/William Hill Australia and Tatts/Tabcorp will all be occupied with migrations and integrations this year, and PPB knows all too well the detrimental impact that can have.
Gaming
There are also signs of green shoots in gaming despite a poor headline figure – Q1 revenues were down 4%. However the firm said revenues were actually up 4% in February and March, as its recent changes started to take effect.
These included combined pools Betfair and Paddy Power for jackpot prizes, improved customer journeys and an improved games lobby on PP.
“This is a great example of the benefits of scale and the single platform,” Jackson said.
He added: “Everyone is looking to us for the next big product announcement, but it will be the small improvements that really make the difference”.
Taken as a whole then, PPB is showing signs of having fixed its long-running gaming issues, and it’s reasonable to expect sports revenues to rebound in Q2 with more “normal” results and a full racing fixture list. The recent share price blip may turn out to be just that – a blip.