Paddy Power Betfair stumbles in disappointing start to 2018

Paddy Power Betfair revealed a disappointing first quarter on Wednesday, with revenue flat at constant currency and adjusted operating profits down 8% due to adverse sports results.

The FTSE 100 bookmaker said customer activity in the UK and Ireland in the three months to 31 March was adversely affected by a sustained period of bookmaker friendly sports results from November to February, and a high level of racing fixture cancellations.

It reported “good” underlying growth in Australia, though that was partially offset by adverse sports results.

First quarter revenue was down 2% on an actual basis to £408m and underlying EBITDA was down 6% in constant currency and 8% in actual terms to £102m, which the board said was due to the annualisation of new betting taxes and levies, as well as start-up losses in its US businesses.

Excluding those items, underlying EBITDA was said to have been flat.

Full-year underlying EBITDA was currently expected to be between £470m and £495m.

At period end, Paddy Power Betfair had net cash of £330m, with the board adding that it was planning to return £500m of cash to shareholders over the next 12 to 18 months, as a share buyback programme was set to be initiated shortly.

“We have made good progress against our strategic priorities,” said chief executive Peter Jackson.

“In Europe, the successful completion of our platform integration has resulted in a meaningful improvement to the Paddy Power product.

“This has seen the brand's gaming revenue returning to growth from February and a significant uplift in cash out usage and in-running betting during the Cheltenham Festival.”

Jackson said that in Australia, the Sportsbet brand continued to perform well and was targeting further market share growth, with additional investment planned to take advantage of any disruption arising from market consolidation and the introduction of increased taxes.

“In the US, TVG and Betfaircasino.com have good momentum and we are continuing to make preparations for any positive regulatory changes.

“Notwithstanding lower profits in the first quarter, we expect full year underlying EBITDA of between £470m and £495m.

“We are today announcing that we intend to return £500m of cash to shareholders, representing a step towards a more efficient capital structure, whilst retaining substantial strategic flexibility,” Jackson added.

Shares fell 6% to 6,820p in the first couple of hours trading.

Analysts at Shore Capital downgraded its rating on the shares after a Q1 update it said was "disappointing", with expected £43m of headwinds in the current year that "could be as high as £130m" if gross profits tax is rolled out across Australia at 15% and a £2 stake limit is introduced in the UK.

With the group continuing to lose share in the UK, the betting exchange "ex-growth" and limited international exposure outside of Australia before any potential US expansion post the Professional And Amateur Sports Protection Act, the group "appears unlikely to offset such potential risk through organic growth", ShoreCap said.

On a 2018 full year price/earnings ratio of 17.5x "we do not believe that this slower growth/potential headwinds are fully factored into the price", reducing the broker's recommendation to 'sell' from 'hold'.