Fears betting bubble could burst after huge growth
PADDY Power's plan to create 610 jobs at its Dublin base was greeted with almost universal applause yesterday, but the huge growth in the gambling company in recent years has raised questions about how sustainable is the expansion.
The company has moved far beyond the merger of three small bookies in 1998, and has gone into overdrive in the past three years.
The numbers are stark. By the end of 2008 Paddy Power had annual profits of €66m and a market capitalisation of €639m.
Fast-forward to today and, during an era when practically every other sector is hanging on for dear life, the business has mushroomed to having a market cap of €2.8bn and profits of almost €123m.
The share price has reflected the huge growth in profit. As recently as January 2009, the stock was trading at a little more than €10. Yesterday it closed at €57.21.
Much of the growth has been driven by an expansion into online betting, which has much higher margins than the traditional way of punting in a corner bookies.
Paddy Power moved successfully into Australia and that has provided a huge boost to the bottom line.
At its half-year results, chief executive Patrick Kennedy revealed that about €760m emanated from gambling on Australian computers.
Overall, two-thirds of money staked with the company comes online, dwarfing the retail shops and phone betting. But is that sustainable? Could this even be a sign of a gambling "bubble"? After all, people always bet more during a downturn and may not keep punting once the economy looks up.
Ian Hunter, of Dolmen Securities, has a "neutral" rating on the company. He believes that while it has performed very well, it will be difficult to maintain the supersonic growth rate.
"The company has performed extraordinarily well, and it is valued at a higher multiple than peers such as William Hill.
"The issue the company now faces is whether it can maintain that growth and with it its credit rating.
"Italy is the next target for it but that is a relatively mature market and it is arriving relatively late to that party. There are already a number of established players in the country.
"In any case, it is not going to provide the boost to its numbers that Australia has done."
Mr Hunter also sees the possibility of legislation regarding gaming machines in its shops in the UK. These are notoriously popular there, where most bookies have them, but there are growing calls to rein them in over addiction concerns.
"These machines have been around for a while but there is a growing feeling the UK government will legislate. That may also slow things down for it," Mr Hunter said.