Betting on the winners in online gambling is complicated by the fact that operators are so reliant on regulators to install a stable regime that will allow them to make a decent profit. This is especially true for betting exchange operator Betfair (BET), whose lack of growth has left its share price languishing, underperforming both its rivals and the London equity market by some distance. Against that background, new chief executive Breon Corcoran, who finally joined from Paddy Power (PAP) in August, must explain his plans when Betfair announces its first-half profits on 13 December. If he makes a convincing case for a turnaround, the share price could get a much needed boost.
- Better advertising strategy
- Important move into fixed-odds betting
- Set to exit loss-making ventures
- Capital spending should fall
- Regulatory head winds
- A lot rests on the new boss
City analysts agree about what Betfair needs to do to get back to growth, and there is evidence that the company is already changing. For starters, its advertising strategy has been overhauled and its brand is now widely seen on the internet and terrestrial television. This is credited with driving both a 13 per cent rise in customer sign-ups in the first quarter of 2012-13 to 485,000 and a near-doubling of mobile betting revenue to £8.2m in the same period.
Attracting casual punters is also key to generating the sales growth that Betfair needs. Mr Corcoran will have to use his experience gained at Paddy Power to beef up Betfair's sports betting, especially its 'fixed-odds' markets. Fixed odds only accounts for 5 per cent of Betfair's sports income, according to broker Peel Hunt, yet it's an attractive proposition because it opens up opportunities for 'in-play' betting where, for example, gamblers bet during a football match. Betfair has to catch up with its rivals by offering up to a third more matches as in-play betting opportunities, say analysts.
BETFAIR | ||||
|---|---|---|---|---|
| ORD PRICE: | 752p | MARKET VALUE: | £772m | |
| TOUCH: | 750-752p | 12M HIGH: | 905p | LOW:688p |
| DIVIDEND YIELD: | 1.5% | PE RATIO: | 33 | |
| NET ASSET VALUE: | 191p | NET CASH: | £135m | |
| Year to 30 Apr | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 341 | 17.8 | 14.4 | nil |
| 2011 | 393 | 26.6 | 22.6 | 5.9 |
| 2012 | 390 | 41.6 | 33.1 | 10.2 |
| 2013* | 410 | 21.8 | 17.3 | 11.0 |
| 2014* | 428 | 28.6 | 22.8 | 11.2 |
| % change | +5 | +31 | +32 | +2 |
Normal market size: 2,000 Matched bargain trading Beta: 0.8 *Peel Hunt forecasts (profits and earnings not comparable with historic figures) | ||||
Betfair's big mistake in its early days as a public company was to regard itself mainly as a technology-services provider rather than a bookie. Mr Corcoran has a to make a quick decision on exiting the disastrous LMAX forex trading platform, which has cost the company £35m so far for no tangible return. Analysts also say that Betair's IT side needs to improve. Projects take too long to complete and cost more than those of rivals. Quite likely, Betfair will outsource more IT functions to third-party suppliers.
Betfair's high capital spending also hits its reported profits. In 2011-12 Betfair charged £41m against profits for amortisation and depreciation, cutting its cash profits in half. According to Peel Hunt, Betfair's latest amortisation charges are higher than any other quoted gambling company and 10 times more than its 2008-09 figure. Happily, that figure should start to fall from 2015 as Betfair's capital spending tails off. There are also regulatory headwinds - particularly in Germany - to challenge Mr Corcoran.
