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Betfair's strategy gets cautious welcome

TIP UPDATE: Betfair's new chief executive has a lot to prove in turning the company around but at least his strategic review was a positive start
December 13, 2012

Betfair's (BET) chronically mis-priced initial public offering two years ago means investors who bought into the company's promises of rapid growth will be sitting on a paper loss of about 50 per cent. However, in his first public outing since assuming the reins in August, new chief executive Breon Corcoran laid out a strategy that aims to claw back the company's position in the UK, keep out of non-regulated markets and reorganise the business to broaden its appeal to more casual punters. It is clear from management's sober tone that this will all take time and that investors should probably expect more impairments such as the £80.6m seen in these results before the process is completed. But at least the company now has a clear sense of direction - even if it's shy about talking to the press.

IC TIP: Buy at 773p

Mr Corcoran's strategic review went to the heart of Betfair's problems. By chasing growth in international markets that are now subject to extra regulatory costs, Betfair lost market share in the UK. To correct this, marketing will be scaled back in markets where there is considerable doubt about future regulation, such as Greece, France and Cyprus, and focused instead on regaining its previous position in its home market. That process includes broadening what Betfair offers. For example, Mr Corcoran said the company will start offering odds on a risk basis - ie, to add elements of traditional bookmaking in order to attract punters who are put off by the complexities of the exchange system. This approach also promises to address the problem of betting in markets that currently have no liquidity.

Regarding the impairment bill, £34.6m was related to goodwill write-downs on four acquisitions from the past decade, with the remainder issuing from capitalised development costs such as a website that has since been replaced.

There was a more downbeat outlook for the rest of the year, with forecasts cut to between £370m and £385m in sales (from £390m in 2012) and £65m-£70m of cash profits. But management reckons this effect will gradually reverse as more revenues are generated by regulated markets. Management also expects to achieve annual savings of £20m by cutting costs next year.

Broker Investec Securities expects adjusted pre-tax profits for 2013 of £32.4m, giving EPS of 26p (from £44.1m and 34.1p in 2012).

BETFAIR (BET)

ORD PRICE:774pMARKET VALUE:£797m
TOUCH:773-775p12-MONTH HIGH:905pLOW: 688p
DIVIDEND YIELD:1.4%PE RATIO:na
NET ASSET VALUE:130p*NET CASH:£118m

Half-year to 31 OctTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201119127.523.43.20
2012201-64.0-58.94.00
% change+5--+25

Ex-div: 19 Dec

Payment: 25 Jan

*Includes intangible assets of £46.9m, or 46p a share