Flutter Flies High
Flutter Entertainment, which started out as Paddy Power, now has almost the same market cap as CRH. Chris Sparks explains why
Lockdowns in Ireland and the UK in the spring didn’t seem good for Flutter Entertainment plc, the owner of the Paddy Power betting business. Bookie shops were shuttered and live sport disappeared from screens. Sure enough, like almost every other blue chip stock, the share price cratered 40% in the month leading up to St Patrick’s Day.
Since then though, Flutter has been on a roll. From the mid-March low to the end of October, share price appreciation was 140%. The company that started out with a few Dublin bookies banding together is now Ireland’s second largest public company by market capitalisation, just behind building materials colossus CRH.
On the price/earnings metric, the Flutter valuation doesn’t make sense. The company booked a net profit of £110m in 2019, which on the recent market cap of c.£20.7bn means a trailing p/e of 118. In addition, this year Flutter was so tight for cash that it paid the final dividend with shares rather than cash, and had a dilutive rights issue.
Even on a free cashflow basis, Flutter is expensive, with the share currently trading on a multiple of x44 times the free cashflow figure last year. However, investors look forward, not backwards, and Flutter’s 2020 numbers will look a lot different from the outcome last year.
The key corporate development for Flutter this year was approval by UK regulators in March for Flutter’s takeover of The Stars Group (TSG), the Canadian company that also leveraged its way to becoming an online betting company of scale. That deal brought Flutter into the booming online poker sector, and strengthened its market position in the UK and Australia.
TSG also had something to offer in the US betting market, where Flutter has been putting down roots. Desperate
After the TSG merger, Flutter’s betting operation in Australia improved operating profit by 50%
for new revenue sources, some US states are gradually embracing the gambling demon, and Flutter shareholders are hoping that over time the trickle will turn into a flood.
Investors also like the story of market concentration. Though Flutter has its corporate base in Ireland and sizeable operations in Dublin, the company acquired more of a British hue after the 2015 merger of Paddy Power with Betfair. The company entered the US market in 2018 by buying into FanDuel, and the PaddyPower Betfair moniker was swapped for Flutter in 2019. The Stars Group, a Canadian company, became the parent of PokerStars and Full Tilt Poker in 2014, paying $4.9bn for a seat at the top table. PokerStars is almost as old as the internet, starting out in 2001. TSG bulked up in 2018 with the $4.7bn acquisition of Sky Betting & Gaming (SBG), and between the poker and SBG, The Stars Group reported an operating profit of $260m on revenue of $2,530m in 2019. Net profit was just $63m.
TSG’s interest payment on borrowings last year was $300m, as TSG had bought its online gambling market share with debt of $4.9bn. TSG’s December 2019 balance sheet showed liabilities of $6.7bn and assets of $11.3bn, of which $9.9bn were goodwill or intangibles. Including those notional assets, net worth was estimated at $4.5bn.
The Flutter/TSG combination gave TSG shareholders a 45.4% stake in the enlarged company. At recent share price levels for Flutter, that means TSG’s end-2019 stretched balance sheet has been swapped for something much more tangible, currently worth £9.4bn ($12.2bn). Flutter shareholders have also seen a big lift in the value of their equity, but not to the same extent.
With the addition of Sky Bet, PaddyPower Betfair grew its UK sportsbook by half. The UK’s Competition & Market Authority stated the two brands would have a combined market share of 30-40%, but waved the deal through anyway, taking the view that rivals such as bet365, Ladbrokes Coral, and William Hill would provide
‘a degree of constraint’ on the merged entity. In H1 2020, PaddyPower Betfair grew its sportsbook net margin to 10.2% from 7.7% the year before, while the Sky Bet margin doubled to 14.8%.
The TSG deal also brought more market concentration for Flutter in Australia, and the TSG brand BetEasy is now being phased out and customers migrated to Flutter’s Sportsbet brand. On a pro-forma basis in H1, the Australia division’s sportsbook margin widened to 11.7% from 9.5% a year ago, and operating profit improved from £120m to £180m.
Flutter’s largest margins are in the new PokerStars division. Due to lockdowns in H1 around the world, the division’s revenue surged 37% to £700m and operating profit was £380m, a massive margin of 54%, highlighting that the house always wins.
PokerStars spans casino and other games too, and gaming revenue is an increasing part of the Flutter mix, accounting for 50% of group revenue in H1, up from a pro-forma 43% in the comparable 2019 period. That partly reflects a lockdown effect, but it’s clear that online slots and other games are sucking in more mug punters all the time.
Analysis by the Gambling Commission in the UK found that gross gambling yield (i.e. profit extracted from players) for online gambling operators covering c.80% of the market, was £1,180m for the three months from March to May 2020. Of that yield, twothirds was accounted for by slots and other gaming, including casino. When live sports came back on stream in June, the slots/casino share fell back to half the total yield, but was still higher than the yield from betting on real events.
Such data reassures Flutter investors, insofar as it goes to show that while the company is not quite pandemic-proof, there is decreasing reliance on horse racing, team sports, tennis, golf and F1. The upshot was that through H1, on a proforma basis (i.e. including TSG this year and last) revenue increased by 22% to £2.4bn and adjusted EBITDA by 35% to £680m.
Free cashflow in the period was £520m. Flutter started the year with net debt of £3,830m, and the board decided there wasn’t scope to pay the final dividend of c.£100m in cash. Instead in May, Flutter tapped shareholders for £810m in a share placing priced at £10.10 per share (€11.24). At the end of October, the share was trading at the £13.40 level.
Meanwhile, Flutter’s US division is a work in progress. Activities include FanDuel, FoxBet, the horse-betting business TVG, PokerStars and Betfair brands. These offer real money and freeto-play sports betting, online gaming, daily fantasy sports and online racing wagering products in some US states. In H1 2020, the pro-forma operating loss was £20m on turnover of £1.1bn. Lockdown didn’t help but the division was also loss-making a year earlier. For the moment, Flutter’s fan club seems content to take the long view.
Taking A Punt On E-Commerce Quartet
Societe Generale has a track record of providing structured investments for Irish retail investors, and the French bank has teamed up with Cantor Fitzgerald for the 90% Protected E-Commerce Bond. The bond is tied to the performance of just four stocks: Amazon, PayPal Holdings, FedEx Corp and Smurfit Kappa. The Irish plc is included in the same company as two online retail giants on the basis that when e-commerce thrives, so does demand for cardboard boxes to ship the goods.
The E-Commerce Bond has a sixyear lifespan from December 2020. As it says on the tin, 90% of the capital invested is guaranteed at the end of the period, and the upside is limited too. The promise is that at maturity investors will receive the growth of the least performing of the four shares, subject to a maximum return of 40%. If the least performing stock is negative at maturity, investor capital will only be reduced by up to the first 10% of any negative performance.
Steady Return From Sovereign Debt
Speculative retail investors had their cough softened in September when major global tech stocks fell out of bed. Apple, Microsoft, Amazon, Facebook and Alphabet were sold off by c.16% before starting to recover lost ground. The view from Richard Temperley, Head of Investment Development at Zurich, is that the correction was temporary, and that the global economic and earnings
FedEx is one of the four stocks in the SocGen E-Commerce Bond
SocGen is obviously hoping that all the quartet won’t have 40% or higher share prices in 2026. Smurfit Kappa regularly goes in and out of favour and could be the laggard, but there’s no way of knowing so the investment is very speculative.
SocGen has also hedged its bets
recovery, as well as ample liquidity, remain the driving forces for risk assets.
One of the Zurich’s best performing funds year to date, up 6.5% at end September, is the
Long Bond Fund, which invests in eurozone sovereign debt with over ten years to maturity. It’s challenging for retail investors to buy into individual state bonds, and with this fund you can finance the endeavours of governments in Italy (27% of the fund), France (24%), Germany with a call option. After year one, the issuer can redeem the bond at 100% of the initial investment plus a return of 5% p.a., and 1.25% for each quarter elapsed starting from the end of year one. There are 21 potential callable dates between launch and the final maturity. Happily, the bond is not callable at that final date.
SocGen says it will aim to provide a secondary market to facilitate early redemptions. However they caution that the bond may be subject to significant price volatility, which may in certain cases lead to the loss of the entire capital invested for early redemptions. For investors who stay the course, there’s the possibility of a much better return than a cash deposit, with downside limited to 10% if one of the shares disappoints.
The minimum investment is €10,000 and in multiples of €1,000 thereafter, and closes for investment on December 10. Entry charges of 4.5% for Cantor Fitzgerald and 2% for intermediaries are built into the terms of the bond. Any capital gains from the investment are subject to CGT, currently 33%.
(14%), Spain (12%) and six other EU member states.
Given the gains this year, the Long Bond Fund, launched in 2003, must have some high-yields in its portfolio. Sovereign debt issuance is increasing to pay for Covid costs, but the ECB is as committed as ever to compressing sovereign spreads. According to Temperley, Zurich has increased exposure to corporate bonds at the expense of sovereign bonds in recent months.