Soon-to-be-combined bookies Paddy Power (LON:PAP) and Betfair (LON:BET) will be number one in the online gambling market in the UK, says Nomura analyst Richard Stuber.
The analyst has put the merger, expected to close in the first quarter of 2016, under the spotlight this morning, following results from Betfair at the end of last month.
“We think the combination is a good fit, with Paddy Power’s distinctive brand targeting the recreational customer and Betfair attractive to the more sophisticated, price-sensitive customer,”
“Scale is increasingly important and we expect the combined entity to be the UK market leader in online betting and gaming.”
Stuber estimates the combined business would have an 18% share of the online market, slightly more than current leader William Hill (LON:WMH) which has about 15%, and he believes this leading position to improve to about 20% by 2020.
The analyst also highlighted what he sees as the “consistently and materially underestimated” impact of operating leverage for the online elements of the businesses. He forecasts Paddy Power-Betfair will generate an earnings margin of 35% by 2019 widening to 40% by 2024 (he says peers see between 20-25% for 2015).
“If we are correct on margins, the current share price suggests revenue growth (possible revenue synergies) above 7% pa. This upside potential is finely balanced from the risk of increasing cost of sales (taxes),” he added.
Nomura currently rates Paddy Power as ‘neutral’ and today upgraded Betfair to ‘neutral’ from ‘reduce’.
Looking at Betfair’s results, Stuber highlighted that the top-line momentum continued for the business through the second quarter.
Betfair reported £274.4mln of revenue, up 16%, compared with 15% revenue growth in the preceding quarter. “This is consistent with its four-year record for revenue growth from sustainable markets of c16%, Stuber highlighted.
Earnings (EBITDA) increased 9% to £80.5mln and operating profit rose 12% to £67.2mln.