Investec downgrades Paddy Power on worsening regulatory outlook

Paddy Power Betfair lost ground on Friday as Investec downgraded its stance on the stock to ‘sell’ from ‘buy’ and cut the price target to 6,970p from 10,000p on the back of lower forecasts and a deteriorating regulatory outlook in the UK and Australia.

The brokerage said it was taking a closer look at the shares following a lacklustre performance over the past six months which saw the stock drop 10%, recently reaching an all-time post-merger low.

“We expect the market to be surprised by what we expect will be a disappointing Q217 and H117 (we forecast Q217/H117 growth of 4%/6.5% in revenue and -9.8%/22.1% in EBITDA),” it said.

In the long run, it argued that Paddy Power Betfair is well positioned given its exposure to online sports betting, listed market dominance in the UK and Australia, competitive advantages, operational gearing and a strong balance sheet. However, in the shorter term, Investec sees downside with tough comps given the Euros, consensus still absorbing punter-friendly sports results and the Draft acquisition as well as a worsening regulatory outlook.

The brokerage noted the shares currently trade on a consensus EV/EBITDA of 11.4x, which is a 44% premium, while it values them at an adjusted EV/EBITDA of 11.0x for FY18E.

At 0905 BST, the shares were down 0.7% to 7,530p.