Betfair faces tough tests to continue momentum

When Betfair shares topped its £13 flotation price in November after spending four years below the threshold, even the most optimistic of investors couldn’t have predicted what would happen next.

At the end of May the firm was trading at £26.78, more than double its flotation price, and digging under the headline figures from this morning’s FY2015 report Betfair appears to be in rude health.

It has seen huge growth in its core UK market and crucially has made huge strides in diversifying its revenue mix, with £88m of the £476.5m total revenues now coming from gaming and US revenues up 29% to almost £59m.

But not all analysts have reacted positively to the results. Panmure downgraded its recommendation from buy to hold, raising doubts over the “significant proportion of the growth” driven by Betfair’s higher risk fixed-odds sportsbook.

Causes for concern

Betfair no longer reports its exchange and sportsbook revenues separately, but did say it turned over £1.2bn through the sportsbook product. In 2013 it reported revenues of £36.2m off a £500m sportsbook turnover, so a similar yield would have the sportsbook contributing in the region of £90m of revenues.

This leaves substantial room for growth in fixed-odds for the operator and during an analyst call this morning, CEO Breon Corcoran was keen to stress that the firm was working harder to “appeal to a broader part of the market”.

Part of this will also come through gaming where there is clearly a great deal more headroom with the introduction of almost 200 games over the last year and the scaling of a dedicated cross-sell team setting Betfair up for a more concerted push into casino during the next twelve months.

But there were a few further hints that Betfair’s march could be slowed as Corcoran admitted the firm’s Italian operation continues to be “slow and difficult” although did note there were signs of encouragement.

Corcoran was also cautiously downbeat on the global regulatory outlook, particularly in the US and Portugal, and the firm won’t want to rely too heavily on the ultra-competitive UK market to power growth.

And while today’s figures include a £19.2m UK Point of Consumption tax bill, weathering a full year’s worth of PoC, estimated at £47m pro-forma for the year across the UK and the soon-to-be taxed Ireland, will hit FY16’s EBITDA, as will the lack of major sporting events this summer.

Going forward

A renewed focus on cross-selling and gaming means revenue growth in the UK should help offset next year’s PoC costs as could its rapidly expanding US horse racing business.

And the company does appear to be addressing its weaknesses. After surveying identified ease of betting as the primary reason consumers choose not to use Betfair, the firm’s “Tap Tap Boom” campaign has moved to reposition the company as an option for casual bettors.

Its investment in marketing in the UK has been a key driver of growth and its in-house product development continues to give it competitive advantages, even if only in the short-term before the rest of the industry catches up.

While analysts urge caution, Betfair remains in a remarkably strong position. And with more than £100m cash in the bank, the firm can afford to take opportunistic approach to acquisition opportunities.