Paddy still powering

Fortune continues to favour Irish bookmaker Paddy Power (PAP) after a trading update for the period from 1 July to 14 November revealed 23 per cent growth in net revenues. That came despite issues such as the wet summer having forced the cancellation of several major sporting events and was helped by a better-than-expected gross win margin. It also emphasised how the group has come to rely on excellent growth in Australia, and in mobile betting, to maintain its premium share price rating compared with other bookmakers.

The structural shift in the market towards betting on mobile phones is proving especially significant for the company. Mobile revenues as a percentage of Paddy's online sales rose ahead of the trend in October to 45 per cent, compared with 41 per cent in June. Meanwhile, Paddy Power's network of shops performed roughly in-line with the market, with like-for-like sales growth of 5 per cent. The only downside was a surprising slide in machine gaming revenue which fell 4 per cent on a like-for-like basis - in contrast, rivals have seen strong machine gaming growth.

Investors will also take comfort from Paddy's chunky cash pile of approximately €169m (£136m), which now looks secure after management ruled out a bid for Sportingbet's (SBT) Australian arm. There had been speculation that Paddy Power may challenge William Hill (WMH) for control of the company.

Citigroup says...

Buy. Overall, group net revenue growth was broadly in line with expectations with a strong performance in Australia offsetting a slightly disappointing performance in the European business. Based on our 2012 forecasts - of pre-tax profit of €136.9m and EPS of 242¢ - the shares trade on 22 time expected earnings. This is a substantial premium to its peers, reflecting the fact that almost 70 per cent of cash profits will come from the fast-growing online operations. Nevertheless, we think this premium is justified by continued strong momentum and reiterate our buy recommendation. Our discounted cashflow valuation yields a €64 price target.

Davy Stockbrokers says...

Outperform. The UK over-the-counter performance was strong, although machine gaming fell below expectations as competitors closed the gap in terms of their the product offering. The group is currently launching a loyalty programme in its UK shops and it will be interesting to see what impact this has, both in terms of revenue growth and free bet proliferation, over the coming months. Forty five shops will now be opened in the UK this year versus previous guidance of 40. Management remains comfortable with market expectations for this year and we do not envisage material changes to our earnings growth estimate of 18 per cent for 2012, which equates to EPS of 251.6¢.