Numis upgrades Betfair and Paddy Power ahead of 'Betty' merger

Despite their high valuation, the pair have a history of outperforming market expectations and the broker believes their share prices will rise as investors to revisit the merger case as documentation is published.

Lifting its target price to to 4,000p for Betfair and €135 for Paddy Power, Numis also foresees a relatively low-risk integration and "rich mix of revenue synergy opportunities" and the new Paddy Power Betfair, nicknamed 'Betty', ascends to the FTSE 100 index.

"We acknowledge that there are uncertainties, but we would invest ahead of this newsflow," the broker said, reversing its 'reduce' recommendation on Betfair and 'hold' on its Irish peer.

Betty will, analysts forecast, gain economies of scale from total revenues of £1.2bn and online revenues of over £1bn, investing in innovation and harvesting the rewards across the enlarged customer base.

Other benefits will come from geographical diversity, being online leader or thereabout in the UK, Australia and US, while the two complementary brands have limited overlap of only around 3% in terms of regular UK bettors.

"With the brands combined Betty management will be able to optimise a larger budget to acquire players and then cross-sell different products."

Consensus estimates puts Betfair shares on a punchy 2017 p/e ratio of 23.7 times, however, "if the revenue opportunities discussed above result in 15% revenue growth the P/E would fall to 20.9x; at 20% revenue growth it would fall to 19.0x".