Thursday 20 September 2018

Richard Curran: Paddy Power Betfair hoping odds in its favour for two big bets

Paddy Power Betfair has taken a punt on boosting its marketing spend and on securing a long-term future in a tough Australian market Photo: Bloomberg
Paddy Power Betfair has taken a punt on boosting its marketing spend and on securing a long-term future in a tough Australian market Photo: Bloomberg
Richard Curran

Richard Curran

Betting giant Paddy Power Betfair is coming under pressure on several fronts. Greater gambling regulation and tax in Australia and the UK, combined with savage competition in Britain and Europe, are conspiring to slow down growth.

But, in the finest gambling traditions, it is going to take a punt on these challenges by increasing its marketing spend. The group said this week it would increase its £300m (€336m) marketing budget by around £20m.

Group chief executive Peter Jackson has these and other issues, such as high-profile executive departures, to contend with.

Yet he was able to bring out a very solid set of results this week. Revenues increased by 13pc to £1.7bn. Ebitda was up 18pc to £473m, which was higher than the company had guided in a November trading update.

Questions remain about the growth trajectory and the company admitted that its Paddy Power brand is losing market share through an advertising war with rivals like Bet365 and Ladbrokes.

Investors might also be worried about British government proposals to clamp down on fixed odds betting terminals as an issue. However, the group will not be significantly affected by proposed changes there compared to some of its rivals.

When it comes to regulatory change, the bigger challenge is likely to be in Australia. Despite pumping out very solid growth in Australia, a new betting tax is on the way.

Point-of-Consumption Tax (POC) has been introduced by the South Australian Government at a rate of 15pc. Together with Western Australia, these are the only two regions to implement the tax.

But every Australian state is considering bringing it in. Bookies Down Under have a reasonable gripe that they already pay a GST winnings tax and race field fees, so the new POC charge is technically a third tax they face. Sportsbet paid A$90m in product fees and GST on revenues of $330m in the financial year 2015-2016.

The changes to the market prompted William Hill to sell its Australian business after taking a massive write-down.

Gambling has been huge in Australia, with £13.4bn spent in 2015-16. That is an average of around A$1,273 per adult. However, things are getting much tougher, not only with proposed taxes but also harsher advertising rules, and a ban on borrowing money to place bets.

Paddy Power Betfair's thinking seems to be that while this will make it a tougher market, it will weed out smaller players which should bring acquisition opportunities and a very large solid business in the long run.

But the betting giant is facing challenges on several fronts. These include savage competition closer to home and questions about how its two pre-merger businesses are integrating. The group's shares are down 25pc from their high of £107.70 just two years ago, and they are off 11pc so far this year.

Sometimes bookies say their results have been badly affected by race or football outcomes which led to big payouts - just bad luck for them in other words.

But this week Paddy Power warned that a series of "bookmaker-friendly" sporting results this year has "significantly affected customer activity".

So they actually seem to be suggesting its bad news when punters win and bad news when punters lose. Whoever said the bookie always wins?

Dividends keep ICG steady as she goes through Brexit waters

The Brexit referendum should have spelled very bad news for ferry and freight group ICG. A passenger and freight shipping company going over and back between Ireland and the UK, taking in revenue in sterling, as well as euro, and facing who knows what kind of checks, stoppages and additional costs, in the future.

The market seemed to think so when the referendum result was announced in June 2016 as ICG shares fell from €5.72 to €4.20 on July 1that year.

Roll on 20 months and ICG shares are right back at pre-referendum levels. In fact by last Thursday they were higher at €5.89. The group announced results this week which were held back by a 25pc increase in fuel costs. They also reported some growth in passenger numbers of just 1.7pc but 6pc growth in container freight. Seen in the context of Brexit and where people thought the impact might be, this all marks a solid performance. But then again, Brexit hasn't happened yet.

Back in 2016 ICG boasted that shareholders had increased the value of their investment in the company between 1988 and 2016 by 97-fold, compared to 11-fold increases for the ISEQ and FTSE during the period.

But if an investor jumped into the stock in the summer of 2016, they would have paid €5.72, equal to the price of the shares today. But the shares have climbed in the last year.

ICG chief executive Eamonn Rothwell knows the business inside out - after all he has tried to buy it twice. Maintenance of a strong dividend will keep investors happy and the group announced a full year dividend of 12.1c a share. This amounts to a dividend cost of €22m on after-tax profits of €83m. Rothwell's 14.8pc share in the company will see him receive €3.4m in dividends. On top of the €15.4m he has made from share sales in the last five years, he continues to do very well. His shareholding in ICG is worth €166m, up €8m in a week.

ICG is lowly leveraged and has advanced plans for new vessels, including what will be the biggest cruise ferry in the world in terms of vehicle capacity. If some Brexit uncertainty or assumptions about a hard Brexit are built into the share price, ICG could get a real boost if the final deal is a lot softer.

Credit where SME credit is due

We keep hearing about how Ireland remains the fastest-growing economy in the EU, but sometimes it doesn't feel like it. Take the SME Credit Demand Survey conducted for the Department of Finance.

It found that in the six months to October 2017 just 23pc of SMEs requested credit. Most said they didn't need it and the vast majority that applied got it. Many were approved and didn't draw down the money.

Such a lack of credit appetite doesn't look good for banks hoping to build loan books in the SME sector. This figure is improving but remains very low when you take credit as a barometer of confidence and expansion plans. Equally, the survey said that just 59pc of SMEs surveyed reported making a profit during the six months to October.

That suggests that four of every 10 SMEs are losing money. The findings are positive in relation to availability of credit and the willingness of the banks to lend, but the profitability figure should be a lot higher in an economy that is supposed to be growing at our pace.

The most significant increase in the credit demand was from the hotel and restaurant sector - yes, those of the special 9pc Vat rate - while, worryingly, the biggest decline in credit demand came from the construction sector, especially given questions around Ireland's capacity to build the number of houses that are needed.

The overall picture is that credit exists for good SMEs who want it but not enough of them are planning to expand and too many are not turning a profit.

Of course, this assumes SMEs are telling the truth in the survey about their profitability. It wouldn't be like a business sector in Ireland to put on the poor mouth or see the glass half empty, would it?

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