Paddy Power Betfair shares fell in Q1 2018

Paddy Power Betfair said profit growth could stall this year after earnings fell in the first quarter on higher taxes and a subdued performance in its main European online business.

Betting exchange Betfair’s tie-up with Paddy Power, which runs high street betting shops as well as an online business, was hailed by both in 2016 as a merger that would allow the two brands to better compete through increased scale.

However their full integration was completed only this year and the combined group acknowledged that left the Paddy Power brand, in particular, suffering from a lack of product investment in the fiercely competitive British market.

The bookmaker’s first-quarter earnings fell 6 percent on a constant currency basis, putting its shares on course for their worst day in almost two years, down 5.8 percent at USD 106 by 1005 GMT. This was despite the confirmation of plans to return 684 million pounds to investors over the next 12 to 18 months in a share buyback programme.

The shares traded at around USD 191 shortly after the deal was finalised in February 2016.

“While this Q1 performance is disappointing, we have made good progress on the key strategic priorities I outlined in March,” Paddy Power Betfair Chief Executive Peter Jackson, who took over in January, told an analyst call.

“It’s clearly too soon for these initiatives to have an impact but we’re seeing early signs of success.”

The bookmaker said that excluding one-off annualisation of taxes and start-up losses in the U.S, core quarterly earnings would have been flat.

For the year as a whole, it forecast something between a slight decline and 5 percent increase.

The guidance for underlying EBITDA of USD 643-677 million compares to 18 percent growth last year, when earnings came in ahead of expectations at USD 647 million.

MARKETING INVESTMENT

Quarterly revenue was flat on constant currency terms as the company said customer activity in its main market of Britain and Ireland was hit by a sustained period of bookmaker friendly sports results and a high level of racing fixture cancellations.

The gambling group said in March that it would increase its marketing spend by USD 27 million this year, an investment drive analysts said was welcome but nevertheless led to some short-term earnings downgrades.

It said on Wednesday that it would invest an additional 10 million pounds in promotional activity in its Sportsbet business in Australia to take advantage of the potential disruption to competitors amid market consolidation there.

It said the share buyback programme was a step towards taking its medium-term leverage to a target of 1 to 2 times net debt to earnings.

“Overall, we believe that the update re-emphasizes what many holders already knew; returning the group to double-digit growth is going to take time,” analysts at Davy Stockbrokers wrote in a note, saying they would cut their earnings forecasts for this year and next by around 3 percent.

“The next quarter should see an improvement; the development team will have had a further quarter to roll out a new product, while the (soccer) World Cup will provide an excellent opportunity to re-engage with customers.”