Stock of the day: Paddy Power Betfair sellers double down

Paddy Power Betfair investors doubled down on punishing the stock on Monday after the group's CEO unexpectedly stepped down

Paddy Power Betfair investors have doubled down on punishing the stock after the group was bounced into announcing the departure of its CEO.


It’s a cliché that shareholders don’t like surprises, though true. Particularly when succession doesn’t look as well-planned as it ought to be. The UK’s largest-listed gambling company by revenues did announce that it had already appointed the UK CEO of Worldpay, Peter Jackson, as a replacement. But it didn’t give a date as to when he would take over from Breon Corcoran, who has been in the top seat since completion of the merger between Paddy Power and Betfair in February 2016.  Corcoran will "complete the integration of the Paddy Power and Betfair businesses and ensure the delivery of an orderly transition", is all the group has said so far.

Investors on board since completion have seen the stock lose some 50 percentage points, leaving it down 15% this year, including Monday’s slide. Corcoran attributed the drop to "pretty extreme" competition in core European markets. The impact on PPB’s stock has been exacerbated by long-standing regulatory pressures, particularly in the UK. The Department for Culture Media and Sport (DCMS) will release findings of a long-awaited review into fixed-odds betting terminals, dubbed ‘crack cocaine betting machines’, in the autumn. FOBT are the biggest revenue earner for the industry, generating more than half its revenue.

Tough comparison

Brexit uncertainties have also upended UK betting industry shares, though the impact on most has moderated quite a bit this year. Only shares of PPB and purer-play bookie William Hill are in the red for the year. The former also faces a tough comparable performance this year after Euro2016 boosted revenues. Paddy Power Betfair’s acquisition of fantasy sports operator DRAFT, owner of the website, announced in May, will also drag on its top line. PBB envisages a core earnings hit of $20m due to “substantial marketing investment”, on top of the $10m initial cash consideration and an additional $29m performance-related sum over the next four years.

What PPB stock does not seem to be reflecting is that the U.S. fantasy sports market, which was worth some $15bn (according to Forbes) in 2013 represents most of DRAFT’s exposure. Paddy Power Betfair, which made most of its revenues online in 2016, already owns similar assets in the states.

Against this backdrop, it helps that PPB’s H1 results, out on Monday, looked fair. Revenues rose 9 percent, underlying EBITDA was up 21 percent and trading was in line. Underlying EBITDA guidance for this year is between £445m and £465m, whilst the average of analyst forecasts is £459m, according to Thomson Reuters, slightly above the midpoint of guidance. This means the group remains largely on track to meet expectations. And with the stock sharply lower since the tie-up, valuation is now less demanding across a range of metrics.

It may therefore be that most of the share price downside for the year has already been seen. Still, all-encompassing and long-standing challenges to PPB’s traditional betting revenues from web-focused operators will remain. (The same applies to close peers like William Hill, of course). Playtech, 888 and GVC shares are up between 18%-27% this year.

Fundamentals now priced in, mostly

Paddy Power Betfair’s technical price chart reflects its most pressing challenges quite well. It shows recurrent failures on each of the three occasions buyers have attempted to take the stock above a declining trend line since February, though continuing support at 6962p-7212.5p, including on Monday, is also clear. Upside has been increasingly restricted, and will remain so long as the down trend remains valid. Any breakout, which seems quite a way off, will reveal the ‘strongest hands’ and would probably clarify the stock’s direction for the medium term amid enhanced short-term momentum.


Source: Thomson Reuters and City Index

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.