Tuesday 27 September 2016

Paddy Power Betfair net revenue will jump - Davy

Published 20/04/2016 | 02:30

Betfair merged with rival Paddy Power this year. Photo: Bloomberg
Betfair merged with rival Paddy Power this year. Photo: Bloomberg

Paddy Power Betfair is likely to grow net revenues 16pc this year to £867m (€1.09bn), and by 10pc in 2017 and 8pc in 2018, according to a new report from Davy Stockbrokers.

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The broker noted that the group is also about to become debt free, paving the way for possible cash returns to shareholders if it cannot identify acquisition targets.

Davy noted that Paddy Power Betfair - created earlier this year following the €10bn merger between the two companies - will "imminently" be debt free.

"We forecast that it will have over £550m in cash on its balance sheet by the end of 2018," said Davy. "Therefore there would clearly be scope for additional cash returns over time, particularly if the group adopts a target leverage ratio of one times net debt to EBITDA - as was deemed appropriate by Paddy Power previously."

Davy added: "Cash returns will occur only if the group cannot find other businesses to buy. Should certain markets put in place regulatory frameworks that make sustainable commercial sense, we think that management will be happy to deploy capital in these markets."

Paddy Power Betfair is headed by former Betfair chief executive Breon Corcoran, who was also once a senior executive with Paddy Power.

Just recently, former Paddy Power boss Andy McCue, who was chief operating officer of the enlarged group, announced that he's leaving the company.

Paddy Power Betfair has targeted cost savings of £50m (€62m) within three years of the merger.

Earlier this month, it confirmed plans to cut up to 650 jobs from the combined group's 7,200 workforce. Most of the duplication of costs emanates from online operations and central administration.

But Davy reckons that the cost base of those two areas is £404m, implying that the cost savings equate to 12.4pc of the addressable cost base.

The broker reckons that savings of £60m should now be achievable.

"Nearly one-third of the entire operating cost base of this business is currently being spent on sales and marketing," Davy also noted. "If a successful strategy can be devised that leads to marketing cost savings or simply more efficient allocation of future marketing spend, the potential returns could be substantial."

In terms of group revenue forecasts, Davy said there is upside potential to its predictions for Australia.

"Online growth above and beyond our expected rate will likely depend on just how successful the integration of the two businesses is and the group's ability to develop complementary brands to carve up the market," it added, noting that the retail arm is "most at risk", principally due to the regulatory uncertainty relating to betting machines in the United Kingdom.

Irish Independent

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