James Moore: Betfair's worth a punt as online gambling grows
Corcoran, poached from Paddy Power, was a smart hire by Betfair but now he has to deliver
James Moore is the Independent's Associate Business Editor and writes the Outlook City comment column from Tuesday to Friday. He also has a keen interest in disability issues and when not attempting to further injure himself playing wheelchair basketball.
Tuesday 04 September 2012
Time to start betting on Betfair? The online betting exchange remains the most intriguing company in the gambling sector and the one that polarises opinion the most. Fans brook no criticism of the company, citing its record of innovation and the potential for overseas expansion. Critics fret about "issues" with regulators and argue that growth prospects have been over-stated. The occasionally hyper-sensitive way it responds to some critics does it no favours.
Still, it's worth taking a fresh look at the group, which is due to update the market on 11 September.
Betfair now sits on a multiple of about 18 times forecast earnings for the year ending 30 April 2013 (interims are due in December) falling to a more modest 14 times for the year to 2014. The prospective yield is a modest 1.5 per cent, rising to 1.8 per cent, but this is a young company.
That's quite a bit lower than the rating of more than 20 times when I updated last year.
The recent figures from Paddy Power suggest online gambling is still growing quickly and if that feeds through to Betfair then there are grounds for optimism.
Breon Corcoran, poached from Paddy Power, was a smart hire by Betfair but now he has to deliver. I'd count on him to do so.
Paddy Power's fondness for stunts and blarney are well known. But the punters' pal is a ruthlessly successful commercial organisation. If Mr Corcoran can translate the success he enjoyed at Paddy Power to Betfair then the company may start to justify its rating, and its bloated cost base.
Am I changing my view? Not entirely. I still think the shares – which may take years to regain the £15 mark they smashed through shortly after its over-hyped flotation – are still pricey.
But it's worth noting that since the float, nearly two years ago, they have only once been this low. That was after last year's August wobble, which was a market-wide event rather than any Betfair specific news.
The shares have started to tick up recently, and I'd now be inclined to take a speculative interest. So buy but think about taking profits if they start to challenge the 900p barrier.
Talking of Paddy Power, its online division turned in a 7 per cent rise in operating profits to €48.5m (£38.5m) in the first half. Overall group pre-tax profit came in at €68.7m, up by a fifth, while the gross win from punters jumped 29 per cent to €311.2m, stripping out currency fluctuations.
Growth eased off a bit in May because the operation paid out on various money-back specials (when losing bets are refunded under certain conditions). Paddy Power will have e-mailed all its customers who benefited to tell them how much they saved as a result. In fact it sends regular e-mails detailing how much customers (I am one) have made from its offers – which keeps those customers very happy.
At 21 times forecast earnings, yielding 2.2 per cent, the shares are anything but cheap, but they are well ahead of the €40.39 we tipped them at in December, fully justifying our hold recommendation. I'd be a long-term holder, Paddy Power reeks of quality. But I wouldn't blame anyone for taking profits.
As for Ladbrokes and William Hill, I've long viewed both as undervalued. Hill's is one of The Independent's 10 to follow for the year and the company has richly rewarded my faith (they were at 202.8p when the article was published). On 11 times this year's forecast earnings, yielding 3.7 per cent, they are now looking fairly valued but I'd still hold.
The same goes for Ladbrokes, which has proved to be a bumpier ride. At 10 times full-year forecast earnings, yielding an impressive 4.8 per cent, I'd also rate it a hold. This column's last in-depth overview of the gambling sector said buy at 122.3p.
Probability, the mobile phone gaming company, is up by nearly a third since then. William Hill has already made an attempt at it, someone else eventually will. Keep buying.
Sportingbet has been the subject of takeover speculation. At 10.7 times 2012 forecast earnings, yielding 4.2 per cent, it looks fully priced to me. Outside of a nice Aussie business it has none of the attractions of its bigger rivals and has been the subject of failed deals in the past. Avoid.
The same goes for bwin.party which is on nine times forecast 2012, yielding 3.4 per cent. The shares have been on the slide, but not enough to tweak my interest. Sell. I feel these pure, online operations will struggle against bigger rivals.
What about 32Red? At 11 times forecast earnings, yielding 3 per cent, it also looks fully valued. But here's something to watch. The group sponsors Swansea City who have enjoyed a remarkably good start to the season despite losing their manager to Liverpool in the summer.
When teams it sponsors are in high-profile, televised matches the company enjoys a surge in new customer sign ups. If Swansea keep it up, steal a march on the market by buying in.
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