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Citi downgrades Paddy Power Betfair to ‘sell’ on weak exchange growth and Australian headwinds

The investment bank also said that the bookmaker's entry into the newly expanded US market could lead to start-up losses and “downwards earnings revisions”

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The worse than expected results from Australia led to analysts cutting margin forecasts by 3 percentage points

Analysts at investment bank Citi have downgraded Paddy Power Betfair PLC (LON:PPB) to ‘sell’ from ‘neutral’ due to weaker than expected growth in its online business and a poor showing from its Australian division.

The bank cut its exchange revenue growth forecasts for the FTSE 100 bookmaker to -1% per annum from +2% previously as it reduced its forecasts for the online business to reflect “operational deleverage in PPB’s online business from declining exchange revenues, given limited variable costs associated with the exchange”.

READ: Paddy Power Betfair cuts 2018 profit forecast as first-half earnings edge up

The bank also said worse than expected gross profits from the group’s Australian division, in addition to online revenue taxes and higher bank charges had led to a lowering of its forecast gross profit margin by 3 percentage points.

Citi’s analysts also cut their target price for the group to 6,900p from 7,700p, adding that an entry into the newly-opened US market could lead to start-up losses and “downwards earnings revisions”.

In its results for the first half of the year, Paddy Power said its profit rose marginally due to favourable sporting results and the football World Cup but cut its full-year earnings forecast due to the expected headwinds during the remainder of 2018.

The company now expects its 2018 underlying earnings, pre-US sports betting, to be between £460mln - £480mln, down from its previous forecast of £470mln - £490mln, reflecting recent trading momentum, the introduction of additional taxes in Australia and the inclusion of losses from the FanDuel business.

In mid-morning trading Monday, Paddy Power Betfair shares were down 3.1% at 7,025p.

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