Broker Numis has raised growth questions over Paddy Power Betfair (PPB). The broker has flagged increased competition and regulatory pressures in the UK and Australia as dangers to earnings progess.
Regulatory changes include marketing scrutiny, stake limits and point of consumption tax.
According to Numis analyst Richard Stuber’s calculation, the betting group's earnings before interest, tax, depreciation and amortisation (EBITDA) face a 4% decline in the second half of 2017, to £209m.
Stubers says revenue and EBITDA growth have both slowed over the last year, and the analyst believes that this trend will continue. He expects EBITDA growth to fall from 35% in 2016 to 14% this year to 31 December 2017. The brakes will has be applied on revenue, with growth anticipated to decline from 18% to 11%.
There is also scepticism concerning whether Paddy Power Betfair can continue to outgrow the market. To do so the company will need to expand its geographic reach.
‘With nearly 63% of its revenue from UK and Ireland, and 20% from Australia, we think its geographical concentration puts earnings at risk from changes in regulation at a country level,’ Stuber says.
He flags the best opportunity for expansion is Italy. Paddy Power Betfair currently has a 6% market share, from which it generates approximately 3% of group revenue, demonstrating scope for growth.
Paddy’s competitors, both on the stock market and privately owned, do not have this level on concentration and, by and large, continue to grow, with the exception of William Hill (WMH).
Earlier this year, William Hill suffered a £20m profit hit after customer-friendly sports and horse racing results over the Christmas period worked in favour of gamblers and squeezed margins.
INVESTORS LOSING THE FAITH
Shares in the gambling company are currently trading on 20.8-times the 374p per share of earnings Numis forecasts for this year. That price to earnings (PE) multiple would fall to 17.5 on 2018's 444p of earnings per share (EPS).
The share price had been trading as high as £88.90 as recently as the start of March. This shows how investors have started to lower their growth and returns expectations from the company and its share price.
NOT EVERYONE IS PESSIMISTIC
Investec analyst Alistair Ross remains an optimist regarding Paddy Power Betfair. He believes that there could be upside to EBITDA forecasts; his is pitched at £471.8m for 2017, which remains below the £473m consensus.
He also flagged a 13% rise in average stakes during the last quarter of 2016, which he anticipates will continue throughout the year.
Online gaming growth has been slower at Paddy Power Betfair from a peak of 21% in the second quarter of 2016 to a mere 2% in the first quarter of 2017, according to Numis.
A weak product offering, poor cross-selling and more competition were behind the underperformance.
This is not the only area for concern for Stuber. He also says growth in Australia is not sustainable thanks to the banning of online in-play sports betting in the country in October 2016, acting as a 6% headwind to the amount that can be wagered.
A potential federal point of consumption tax and prohibition of credit betting may also drag on performance in Australia.
Shares in Paddy Power Betfair on Friday dipped modestly (0.4%) to £77.80.