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Rules and write-offs hand Flutter record loss

Paddy Power owner's shares dive on results that promise growth, higher debt and continue uncertainty over the return of dividends
Rules and write-offs hand Flutter record loss
  • Impairment of intangibles, Kentucky payout and punter wins knock-off earnings
  • Debt set to climb from Italian acquisition

Flutter (FLTR) used its much higher sales last year to grow, plunging cash into acquisitions and increasing net debt. The gambling giant completed two significant buyouts last year and has either spent, or is about to spend, another £2bn on Tombola (deal completed at around £400mn last month) and Italian gambling company Sisal. 

This expansion comes as new rules in the UK knock revenue in the Paddy Power owner’s largest market, with a £90mn hit from “safer gambling measures”. Far more important for the top line was an estimated £232mn drop in revenue because of a “run of customer-friendly” sports results. 

The UK and Ireland adjusted operating profit was down 4 per cent on 2020 at £490mn. Tighter rules in Germany and the Netherlands hit revenues, while online poker playing dropped compared with 2020 when there were more people sitting at home in lockdown. 

Australians almost made up the difference, with a 42 per cent increase in adjusted operating profit on a constant currency basis, to £411mn.

Despite its constantly growing market size, and significantly higher revenue in 2021, the US division is not yet contributing to Flutter’s bottom line, as the marketing spend is so high: it doubled on 2020 to £663mn. Handing £234mn to the state of Kentucky to settle a legacy legal case didn’t help either, while amortisation of intangible assets resulted in a non-cash hit of £543mn. 

Chief executive Peter Jackson said there had been “progress on the path to profitability” in the US, as the FanDuel brand made a “positive contribution” for the first time. At 31 December, net debt was £2.6bn, down from £2.8bn a year earlier.

The Sisal acquisition will see debt surge in the June quarter, however, and move Flutter further from its one to two times net debt-to-adjusted cash profits goal. The 2021 results triggered a 14 per cent drop in the company’s share price, pushing it to a new 12-month low of 9,220p. 

The new additions to the portfolio will answer questions about where future growth will come from now that the market has settled post 2020’s gambling-from-home craze, although investors are left waiting again for the return of dividends. Despite high costs hitting hip pockets, analysts are bullish about 2022. Consensus estimates compiled by FactSet see free cash flow climbing in 2022 compared with last year, to £645mn, but this is still well below the £826mn seen in 2020, and from a much-expanded business. 

There are further headwinds potentially on the way. In Italy, for example, the government is keen to cut down on problematic gambling and optimise taxation from licensed operators, according to a trade publication. 

The debt coupled with the macroeconomic environment makes us sceptical that more growth is on the table. Hold. 

Last IC View: Hold, 11,690p, 23 Dec 2021

FLUTTER ENTERTAINMENT (FLTR)  
ORD PRICE:9,318pMARKET VALUE:£ 16.3bn
TOUCH:9,310-9,318p12-MONTH HIGH:10,155pLOW: 9,318p
DIVIDEND YIELD:NILPE RATIO:NA
NET ASSET VALUE:5,861pNET DEBT:28%
Year to 31 DecTurnover (£bn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
20171.75247258200.0
20181.87219242200.0
20192.14136180200.0
20204.411.129.3nil
20216.04-288-236.5nil
% change+37---
Ex-div:NA   
Payment:NA   
*Includes intangible assets of £14.3bn, or 8,132p per share