Stock of the day Paddy Power Betfair sellers double down

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

Uncertainty

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 www.playdraft.com, 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.

DAILY CHART: PADDY POWER BETFAIR

Source: Thomson Reuters and City Index