Weak Exchange Revenue a Worry for Paddy Power Betfair: Analysts

(Bloomberg) -- While a cut to Paddy Power Betfair’s earnings guidance made headlines, analysts were more concerned by the bookmaker’s reference to continued weakness in horse racing revenue on the Betfair exchange.

The exchange, a “material source” of profit, is feeling the effects of competition, according to Peel Hunt’s Ivor Jones, a nod to the likes of Matchbook.com and Smarkets. The shares, which have been boosted by the potential for growth resulting from the deregulation of U.S. sports betting, fell as much as 4.9 percent in London.

Elsewhere, the news was better. Gaming revenue showed “a particularly strong improvement,” growing 14 percent in the second quarter after a 4 percent drop in the first three months of the year, Davy analyst Joseph Quinn said.

Here’s a round-up of what analysts are saying:

Ivor Jones, Peel Hunt (Reduce, PT 7,500p)

• Revenue from the exchange continues to disappoint
• While in 1Q, exchange weakness could be blamed on racing cancellations, management is clear that it is now suffering from price competition, a problem which may be expensive to address
• Gaming continues to perform ahead of expectations, and there was a solid end to the World Cup
• Outstanding performance of the Australian business being undermined by fees and taxes
• More delivery at the bottom line is needed to get the share price moving

Joseph Quinn, Davy (Neutral)

• While Ebitda guidance was lowered, underlying Ebitda remains in line as most of the impact relates to earlier Australian taxes and the inclusion of losses from the recently acquired U.S. business FanDuel
• Exchange performance will disappoint, as competition seems to be increasing

Gavin Kelleher, Goodbody (Buy)

• 2Q saw positive top-line momentum in every division and the strategy to return the Paddy Power brand to growth appears to be working
• Key stand-out is the better performance at PaddyPower.com, while Australia and the U.S. remain in very good shape
• Exchange performance slightly weaker than anticipated, but growth elsewhere in online more than offsetting this
• Retail slightly weaker, but continues to like co.’s competitive positioning relative to peers in advance of machines changes

Jarrod Castle, UBS (Sell)

• Business saw a recovery in 2Q, as expected
• While guidance has been cut, consensus is already broadly in the middle of the new Ebitda guidance range at GBP472m

--With assistance from James Cone and Peter Flanagan.

To contact the reporter on this story: Paul Jarvis in London at pjarvis@bloomberg.net

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, John Viljoen

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