Flutter Entertainment Plc’s (LON:FLTR) latest trading update was ‘very encouraging” according to a note from stockbroker Peel Hunt which is looking ahead to upcoming periods as lockdowns are lifted and sports events resume.
The Paddy Power parent’s trading update, on Thursday, came alongside news of a £813mln share placing, with pricing confirmed at 10,100p per share on Friday morning.
The group, which is now one of the 30 largest companies in the FTSE 100 after the £10bn Stars deal, said it wanted the new cash to reduce debt in what remains an uncertain economic environment as well as invest in retaining online clients.
Also, it anticipates that one consequence of the coronavirus pandemic will be that more US states will open up the gambling market to raise tax receipts, so aims to invest in additional ‘market access deals’ in individual US states and potentially in customer acquisition.
After the first few weeks of April saw a 32% slump in revenues from the cancellation of sporting events due to the coronavirus lockdown, Flutter said the improved growth in the second quarter to 17 May reflects its wider geographic diversification since the Stars deal completed earlier this month, with the Canada-based business growing revenue 92% year-on-year, while US and Australia sales were up 61% and 56% respectively thanks to the continuation of horse racing behind closed doors.
This offset a 54% revenue decline for the Paddy Power Betfair business, where online was down 41% and betting shops made zero contribution, compared to 13% of group revenue last year.
Peel Hunt highlighted that the placing reduces the risk to Flutter from excessive debt and opens more strategic options for the company.
In a note, the stockbroker said: “We believe that shareholders were supportive of the group reducing the debt pile inherited with Stars and making sure that it had the resources to exploit opportunities as they arise in the US.
“US states are probably opening up to online betting and gaming more quickly than previously expected and revenues per customer are higher.
“There is also a risk in the US that, when major sports resume, competitors see an opportunity to grab share from market-leading FanDuel (Flutter) so capital is needed to invest in marketing defensively.”
The stockbroker, meanwhile, noted that spike in poker play across the Stars business and suggested that as lockdown eases and “poker fatigue” sets in, it will make sense for Flutter to invest aggressively in marketing in order to cross-sell other products to those customers.
It added: “Overall, we find it a very encouraging trading period, but is hard to unpick how these trends will reverse as lockdowns end around the world.
“Despite the eye-catching headline figures, consensus forecasts are unlikely to change following this announcement.”
Peel Hunt rates Flutter as a ‘hold’, up from ‘reduce’ and it has revised its forecasts and targets to account for the Stars acquisition. Its new price target is set to 10,600p, up from 8,040p.
“We recognise the US growth opportunity but are cautious that there are several well-financed, and not necessarily rational, competitors for market share,” the broker said.