Paddy Power extends losing streak

Even with the promise of a £500 million share buyback, Paddy Power Betfair (PPB) still managed to unseat a few investors today as the gloomy mood surrounding the betting and gaming sector continued.

Shares in the FTSE 100 (UKX) company stumbled 6% to maintain the trend seen since the end of February, when the stock stood at 8500p. Since then, speculation has intensified that the UK government’s review into fixed-odds betting terminals will impose the worst possible outcome for the industry of a £2 maximum stake.

Not that Paddy Power’s own performance has helped matters in recent weeks, with the company today revealing that underlying earnings for 2018 will be between £470 million and £495 million. UBS, which has a sell recommendation, said the mid-point of this range was 3% below the consensus.

In keeping with the unpredictable nature of bookmaking, the business said it had been impacted by one-off factors during a first quarter in which earnings dropped 8% to £102 million. The operating margin was 1.7 percentage points weaker at 24.9%.

As well as a high level of horse racing cancellations caused by the weather, a string of bookmaker-friendly results between November and February helped put off punters from placing bets during the quarter – rubbishing the theory that the “bookmaker always wins”.

New chief executive Peter Jackson is much happier with progress on the strategic front, with the successful integration of a new technology platform resulting in a “meaningful improvement” for the Paddy Power product.

This was reflected in the brand’s gaming revenues returning to growth from February onwards and a significant uplift in cash out usage and in-running betting during the Cheltenham Festival in March.

Jackson also announced the intention to return £500 million of cash to shareholders over the next 12 to 18 months, most likely through a share buyback programme.

This is in line with the board’s medium-term leverage target of between 1x and 2x net debt to underlying earnings. The business had £330 million of cash at the end of March.

Source: interactive investor      Past performance is not a guide to future performance

Jackson, who took over from Breon Corcoran at the start of this year, said the move was a “step towards a more efficient capital structure”, whilst still retaining substantial strategic flexibility.

The company’s existing dividend payout policy amounting to 50% of profit after tax is unchanged. UBS reports a projected dividend yield of 2.8% for 2018, rising to 3.1% the following year.

Meanwhile, the group’s performance in Australia continues to offer encouragement, with the Sportsbet brand on track for further market share growth.

Ahead of the expected introduction of new taxes in the country, Jackson sees an opportunity to compete more aggressively to take advantage of the potential disruption to competitors. He pledged to increase investment in “promotional generosity and marketing activity.”

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