Over the last 12 months, shares in Betfair (BET) have had a great run. But it looks like the good times might be coming to an end as quarter-on-quarter growth slows (see chart). The news comes amidst an increasingly punitive regulatory environment for gaming companies, which translates into escalating tax costs, and exits from multiple markets. We think this makes the sharp re-rating of the shares over the last year (see graph) look unsustainable.
- Strong full-year performance
- US foothold
- Slowing growth
- Increasing regulation
- Tough comparatives ahead
- Expensive rating
Slowing growth
| Year to end-Apr 2015 | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| Revenue growth | 30% | 23% | 20% | 13% |
| Date announced | 4 Sep 2014 | 4 Dec 2014 | 5 Mar 2015 | 17 Jul 2015 |
Source: Company
There are grounds for the market's enthusiasm about Betfair. The group reported a 32 per cent increase in cash profit last year to £120m after a 52 per cent rise in active customer numbers pushed revenue up by more than a fifth. And Betfair has a foothold in the potentially lucrative US market. But the group faces a number of issues, too.
The recently introduced Point of Consumption (PoC) tax, for one, is bearing down on the group. Excluding the impact of PoC, Betfair's cash profit would have grown 53 per cent, and last year's figures only included four months worth of the new tax costs (the new regime having applied since December 2014). Suspicion is mounting that Ireland will introduce similar legislation this year.
Betfair reckons that had both tax regimes been in place for the entirety of the last financial year, it would have cost £47m - close to 10 per cent of total turnover. Where the regulatory future is unclear, Betfair is planning various exit strategies. Last year it pulled out of Singapore and took some of its product off the market in Austria. It admits more market exists are likely this year, too.
Betfair is also up against some tough comparative figures this year. That's particularly true of the first quarter, given the timing of last year's World Cup and other bookie-friendly sporting results. And, interestingly, during a flurry of merger and acquisition rumours at the beginning of 2015, Betfair was conspicuously left out of proceedings. Maybe Betfair's shares, which trade at 34 times 2016 earnings, dropping to 28 times in 2017, are simply too expensive to tempt a suitor.
| BETFAIR (BET) | ||||
|---|---|---|---|---|
| ORD PRICE: | 2,413p | MARKET VALUE: | £2.2bn | |
| TOUCH: | 2,410-2,413p | 12-MONTH HIGH: | 2,724p | LOW: 955p |
| FORWARD DIVIDEND YIELD: | 1.6% | FORWARD PE RATIO: | 28 | |
| NET ASSET VALUE: | 53p* | NET CASH: | £105m | |
| Year to 30 Apr | Turnover (£m) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p) |
|---|---|---|---|---|
| 2013 | 387 | 47.6 | 38.3 | 13.0 |
| 2014 | 394 | 77.1 | 60.7 | 20.0 |
| 2015 | 477 | 93.5 | 79.5 | 34.0 |
| 2016** | 515 | 80.0 | 70.8 | 33.6 |
| 2017** | 557 | 98.1 | 86.0 | 38.6 |
| % change | +8 | +23 | +21 | +15 |
Normal market size: 1,500 Matched bargain trading Beta: 0.36 *Includes intangible assets of £83.2m, or 90p a share **Numis forecasts, adjusted PTP and EPS figures | ||||
