Paddy Power Betfair swings to profit but notes hit to customer activity

In the year to the end of December 2017, the company - formed by the merger of Paddy Power and Betfair in February 2016 - said it swung to a net profit of £217.7m from a loss of £5.7m the year before, as revenue rose 13% to £1.7bn, driven by 16% growth in sports revenue.

Operating profit increased 19% to £392m, while underlying earnings before interest, tax, depreciation and amortisation rose to £473m from £400m in 2016, coming in ahead of the bookie's guidance range of £450m to £465m thanks to favourable fourth-quarter sports results.

Earnings per share were up 20% to 398p and the group declared an interim dividend of 135p per share, taking the total dividend for the year up 21% to 200p per share.

Chief executive Peter Jackson said: "We saw the benefits of investing in our customer propositions in 2017, with Sportsbet launching a number of product features that give extra value to customers and Betfair moving to a clear market leadership position in its football pricing. Now the Paddy Power brand is operating with an improved product, we will increase marketing spend to align with its mass market positioning and step up the retention-focused investment that we started in 2017. At the same time, we also plan to increase our investment in international markets.

"Our scale, leading customer propositions and strong balance sheet mean we are well positioned ahead of the regulatory and fiscal changes expected in the UK, Australia and the USA. Our strengths in operating efficiently and responsibly will enable us to build a business that can sustainably generate shareholder returns over the long term."

Paddy Power said the new financial year has started as the last one ended, with sporting results favouring bookmakers.

"This sustained period of bookmaker friendly results has, however, significantly affected customer activity, including reduced re-cycling of customer winnings," it said.

Also on Wednesday, the company said it was boosting its £300m advertising budget with an additional investment of around £20m in its marketing and customer proposition this year, ahead of the regulatory and fiscal changes expected in the UK, Australia and the US.

At 1250 GMT, the shares were down 3% to 7,970p.

Henry Croft, research analyst at Accendo Markets, said the drop in the share price "either reflects that the advertising push won’t be enough to stymie slowing growth, or that it won’t be able plug the impact of aforementioned Australian law changes and a potential £150m black hole from a cap on UK fixed-odd betting terminals".

"Furthermore, with bookie-friendly results already seeing punters shy away from betting, typical strategies such as placing attractive pay out offers on more predictable outcomes of this year’s major sporting events (including Cheltenham races, Grand National, Champions League final, FA Cup final, FIFA World Cup, Ryder Cup) may attract further business, however could still work against gambling houses; when the punters win, bookies lose, and when the bookies win, punters lose interest."

Numis, which rates the stock at 'hold', said visibility for 2018 remains low with the conclusion of the UK triennial review, potential Australian point of consumption tax and an uncertain recovery profile for gaming. The brokerage said management's additional £20m investment across marketing and retention activities this year is not in its forecasts of FY18 EBITDA of £524m or consensus of £518m, implying a downgrade of at least 5%.