“Shares in bookmaker Paddy Power Betfair are trailing the FTSE 100 field this morning after a solid set of full-year results and outlook statement just lacked the gallop needed to carry the stock over the winning line,” comments Russ Mould, investment director at AJ Bell.
“Shares in the Irish-domiciled firm slipped 4% in early trading, to leave it dead last in the UK’s elite index, even as chief executive Breon Corcoran announced strong increases in stakes, revenues and earnings on an underlying basis for 2016.
“The cool response may owe something to the £6 million in incremental costs associated with the Government’s Point of Consumption tax on online betting and the £10 million hit from the new horserace levy, as well as the ongoing review of Fixed Odds Betting Terminals.
“Paddy Power Betfair’s exposure to UK betting shops is fairly limited, at around 10% of sales (much lower than Hills or Ladbrokes Coral), and a more pressing issue for the shares may simply be their valuation.
“Paddy Power Betfair already trades at a big premium on earnings and a discount on yield compared to its FTSE 250 rivals Hills and Ladbrokes Coral, so the valuation may already largely reflect its superior recent history of earnings and dividend growth as well as its role as a key online disruptor of what is a highly competitive industry and lower risks, given its lower exposure to the UK High Street:
Price/earnings ratio (x)
Dividend yield (%)
Paddy Power Betfair
Source: Digital Look, analysts’ consensus forecasts
“For the shares to make further progress, Paddy Power Betfair will therefore need to offer proof of revenue as well as cost benefits from the merger, after a big marketing push in December and further technological development of its platform.
“Short-term sentiment may also be driven by results at next week’s Cheltenham Festival. Jump racing’s Olympics cleaned out the bookies’ satchels in 2016, as 11 of 28 favourites bolted up, although the early omens suggest that punters may find it tougher this time around.
“All five of the defending champions in the key Grade 1 races from 2016 – Champion Hurdle, Champion Chase, World Hurdle, Ryanair Chase and Gold Cup – are absent owing to misfortune and injury across no fewer than four different stables, giving an open look to the Festival’s flagship events (even allowing for Douvan’s status as red-hot favourite for the Champion Chase).
“At the previous four Cheltenham Festivals, favourites obliged in 9, 9, 6 and 7 races respectively, dating from 2012-15.”