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

It's a funny old world in which a bookie complains about results that have been too kind to the bookmaker
The bookie complained that not enough favourites are winning ... they should only take bets on Man City matches, then

Shareholders at Paddy Power Betfair plc (LON:PPB) can now empathise with the bookie's punters as the bets-taker produced disappointing results.

The shares were slow out of the traps, shedding 4.1% at 7.880p, after the bookmaker grumbled that “sporting results favouring bookmakers” had significantly affected customer activity, including a “reduced recycling of customer winnings”.

READ: Morgan Stanley downgrades “high quality” Paddy Power Betfair, questions whether online growth can meet market expectations

Revenue in 2017 was up 13% at £1.75bn from £1.55bn the year before, while underlying earnings (Ebitda) improved 18% to £473mln from £400mln in 2016 and was £10mln higher than the median forecast among analysts who follow the stock. Adjusted earnings per share of 398p were 10p higher than the market had expected.

Underlying profit before tax rose to £388.5mln in 2017 from £315.6mln the previous year, but exceptional costs related to the merger of Paddy Power and Betfair reduced this to £246.6mln (2016: £11.9mln).

Year-end net cash was £244mln, versus UBS's prediction of £182mln.

The board recommended a final dividend of 135p, which means the full-year dividend has been whacked up to 200p from 165p in 2016, 10p more than UBS had forecast.

“The business saw continued good growth in 2017, with operating profits increasing by 19%. Our Australian and Retail operations performed particularly well, growing profits by over 40%,” said Peter Jackson, the chief executive officer of Paddy Power Betfair.

“Our considerable development resources will now be focused on bringing more new products to customers, some of which will be delivered ahead of the World Cup,” Jackson pledged.

Richard Hunter, the head of markets at interactive investor, said the bookie faced some challenges and that the general consensus is that the share price is currently up with events. 

“Particular challenges come in the form of competition in the sector and regulation in PPB’s key geographies, both of which will require careful navigation. In addition, the gaming space has seen under-performance versus the market in both brands, whilst the start to the new year has been hampered by results going against the customer, who does not then recycle any winnings. Whilst earnings and revenue are in line, the profit figure is shy of estimates, which has put pressure on the stock based on its fairly rich valuation,” Hunter observed.

“More positively, the earnings per share metric has shown healthy growth of 20%, whilst investment in product development such as PPB’s apps should continue to reap rewards. The company’s marketing campaign is well known and well received, with the upcoming World Cup presenting another obvious opportunity for revenues. The current dividend yield of around 2.5% is not especially generous, but the 21% increase announced shows an element of management confidence in prospects,” he added.

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