Investors give Flutter another spin after pleasing interims

Russ Mould
7 August 2019


“Sailors always believe that it is tempting fate to change the name of a ship as it can bring bad luck, but so far Flutter Entertainment seems to revelling in its change of moniker from Paddy Power Betfair,” says Russ Mould, AJ Bell Investment Director. “The shares are up by 12% since the switch in May, partly due to unsubstantiated chatter about acquisition activity and partly due to today’s solid interim results, which beat forecasts.

“Admittedly that says as much about how low expectations had fallen, thanks to the pressure brought to bear on the betting industry by stricter legislation, a crackdown on advertising, higher taxes and increased customer acquisition costs thanks to political pressure for improved protection of vulnerable customers.

“Flutter’s preferred profit metric of underlying EBITDA (earnings before interest, tax, depreciation and amortisation) still showed a drop of 10% year-on-year to £196 million, although this easily beat the consensus forecast of some £172 million.

“Shareholders will be encouraged by increased revenues, as the Australian market grew more strongly than analysts had thought, despite increased taxation, the recently-acquired US operation FanDuel performed strongly and even the UK retail market did better than expected as sports betting volumes helped to limit the loss of business caused by the enforced cut in maximum stakes on Fixed Odds Betting Terminals from £100 to £2. 

“Meanwhile online’s 8% increase in sales showed the ongoing allure for customers of online betting, where the Betfair operation was an earlier pioneer and the Paddy Power business an equally rapid adopter. 

“Making the most of this shift means that Flutter is now firmly established as one of the Big Four in the UK betting industry, alongside GVC, Stars and Bet365. This is all a huge change from 20 or 30 year ago, when William Hill, Mecca, Coral and Ladbrokes were kings of both the High Street and the betting ring at the track.

“The next big challenge – and opportunity – for the bookies is to make the most of the opening up of American sports betting markets.

“All four of Flutter, 888, GVC and William Hill are expected to show falling profits in 2019, thanks to pressure on the core UK operations, increased global taxes and their desire to invest in the early-stage US market. The question then is who can position themselves most effectively and turn the US start-up costs into profits, a development which could conceivably draw the attentions of a predator as the global gambling industry continues to consolidate.

 

2019E

2019E

2020E

2019E

2019E

 

PE (x)

EPS Growth

EPS Growth

Dividend yield

Dividend cover

Flutter

20.9 x

(19.7%)

14.0%

3.0%

1.60 x

William Hill

14.0 x

(51.9%)

33.2%

6.0%

1.18 x

888

12.3 x

(19.9%)

11.3%

5.8%

1.41 x

GVC

9.3 x

(21.5%)

23.6%

6.3%

1.71 x

Sector

13.9x

(26.5%)

20.8%

4.6%

1.57x

Source: Refinitiv data, company accounts, Sharecast, consensus analysts’ forecasts

•    William Hill has a good early position here, thanks to its established operations in Nevada and New Jersey, which include a relationship with Monmouth Park racetrack, and its link-up with casino chain Eldorado Resorts, which is now posed to take over the rival Caesar’s Entertainment group.

•    Flutter is coming fast up the rails, however, and it is now the largest US operator thanks to its acquisition of the fantasy sports businesses FanDuel and Draft. The technological edge and ability to scale offered by both FanDuel and Betfair’s online betting and casino services may give Flutter the edge right now, which is one reason why its shares trade on a premium valuation relative to the other quoted British bookies.

•    GVC has a joint venture with MGM, through which it is targeting a leading position in the American market although, like Hills, it still must address the possible drag on financial performance from the Ladbrokes and Coral brands in the UK.  

•    888 has also been active in the US for several years, although its focus is less on sports betting and more on online poker and casinos, as well as state lotteries.
 

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