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Paddy Power Betfair likely to find the going heavy in 2018

The shares were very slow out of the traps as the market focused on management's plans to invest heavily to improve online performance but then some analysts speculated that new leverage targets could lead to more money being returned to shareholders
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Numis thinks visibility for 2018 remains low with the conclusion of the UK triennial review

Shares in bookmaker Paddy Power Betfair plc (LON:PPB) were recovering lost ground down the back straight as market pundits weighed in on its prospects.

The shares fell as low as 7,680p before recovering to 7,950p – down 3.3% on the day – as the market digested a set of full-year results made just that bit more difficult to interpret by exceptional costs related to the merger of Paddy Power and Betfair, which operates an online betting exchange.

READ: Paddy Power slides as punters become wary of frittering away their winnings

The general view seems to be that, while the going was good in 2017, it is likely to turn heavy in 2018.

Spread betting firm Accendo Markets drew attention to proposed regulatory changes in both the UK and Australia that threaten to temper growth, which the group has pledged to overcome by an almost 7% increase to its vast £300m advertising budget.

“A quick trawl of Paddy Power’s Twitter account suggests that what customers would rather see is free bets to get them ticking over; however, in Australia – one of the best performing divisions for the group (revenues +29%) – ‘credit betting’ is set to be outlawed in the next three months,” Accendo's Henry Croft observed.

“While peer William Hill has already exited the market down under in anticipation of the law change, Paddy Power Betfair is sticking to its guns and hoping an increased advertising drive can compensate, and with a jam-packed summer of sporting events to get customers going, perhaps targeting a wider audience that saves money for top tier tournaments is a wiser strategy,” suggests Croft.

“With that said, shareholders don’t appear too hopeful about prospects, seeing shares fall the best part of 7% at this morning’s lows. This either reflects that the advertising push won’t be enough to stymie slowing growth, or that it won’t be able plug the impact of aforementioned Australian law changes and a potential £150m black hole from a cap on UK fixed-odd betting terminals,” he added.

Russ Mould, the investment director of AJ Bell, noted that “the stock market often gives the thumbs up to cost cutting and the thumbs down to increased investment”.

“In reality, spending more on keeping your business relevant has to be a good move if the money is spent well.

“Paddy Power has a very good track record of being innovative with its marketing and branding, so its rivals may actually be shivering in their boots that it is splashing some serious cash on getting its name right in front of gamblers once again,” Mould opined.

UBS noted that the company has stated it will target keeping net debt at somewhere between one and two times annual Ebitda to improve balance sheet efficiency, and said it expected the market to “take the leverage commentary in particular positively”.

The Swiss bank remains a seller of the stock with a 12-month price target of 6,900p.

Numis Securities, which rates the shares a 'hold', said the bookie had reported a solid end to 2017 but the outlook for 2018 is mixed as management is set to invest an additional £20mln in its online offering.

On the plus side, its new net debt/Ebitda target implies around £1bn may be returned to shareholders.

“With £244mln of net cash as at December 2017, this would imply returning £950mln to shareholders at the midpoint of this [debt/Ebitda] range,” Numis said.

“We think visibility for 2018 remains low with the conclusion of the UK triennial review, potential Australian POC [point of consumption] tax and an uncertain recovery profile for gaming. In order to improve online performance, management intends to invest an additional £20m across marketing and retention activities in 2018, which is not in our forecast (FY18 EBITDA of £524m) or consensus (£518mln) implying at least c.5% downgrade,” Numis observed.

“However, the platform migration is now complete and, in Australia, we think competition may continue to suffer distractions from consolidation,” it added.

Numis has a target price of 8,000p for the stock.

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