Another stellar performance by internet betting exchange Betfair (BET) isn’t enough to justify the group’s high valuation. Investors would appear to agree, with shares in the £2.3 billion cap down 3% to £24.35 this morning.

Betfair posted a better-than-expected 66% rise in pre-tax profit for the year to 30 April, driven by a 21% increase in revenue and a 65% surge in new customers.

The group says current trading is good, but analysts have warned of tough comparisons in the year ahead. Last year benefitted from the World Cup and some strong sporting results, whereas this year sees the first full period of Point of Consumption tax in the UK and a new duty regime in Ireland which, in aggregate, would have increased costs by £28 million in FY2015.

BET - Comparison Line Chart (Rebased to first)

Betfair’s share price has risen by 142% over the last year, but Numis analyst Ivor Jones believes it could start to deflate once the market focuses on some of the challenges in FY2016.

The shares are trading on a forward price to earnings ratio of 35.5 times, which looks too high despite the strength of the business. The average PE ratio for its peer group is 16.4.

Betfair operates in an extremely competitive market and a significant proportion of its growth is driven by its fixed odds sportsbook, which carries more risk.

Numis has a ‘reduce’ rating with a target price of £21.00.

Issue Date: 17 Jun 2015