Against the odds

More than any of its competitors, Paddy Power has developed a knack for making itself seen and heard. Although the company is more often than not getting its knuckles rapped for offensive advertising, its talented marketing team usually manage to turn controversy to their advantage.

Ploys such as paying out on Barack Obama to win the US presidential election- before the votes had been counted- and later tastelessly offering odds on the newly-elected president’s assassination, have demonstrated the bookmaker’s talent for keeping itself in the limelight. As the company celebrates its twenty-one year anniversary, its bosses must be reflecting that is doing the unconventional thing which has made it stand out from its competitors- mostly for the right reasons.

In the years since Paddy Power was set up, the gaming sector has seen a great many changes. Developments in technology- particularly the democratization of the internet- have facilitated the spread of risk-based entertainment and contributed to the perception of gambling as a hobby of the young and old alike. It must be said that all bookmakers have benefited from this development but it is Paddy Power which has pulled ahead of the rest of the Irish bookmakers and managed to repackage itself as a brighter, fresher, younger product.

A force to be reckoned with…
Paddy Power’s performance is thrown into sharp relief when placed alongside its competitors. Since February this year, shares in Paddy Power have rocketed 102%. This compares with a rise of only 15% and 14% respectively for rival bookies Ladbrokes and William Hill. Under normal conditions double-digit growth in share value would look impressive; but given the rally that has swept the Irish market over the last few months, this is certainly an underperformance. It is Paddy Power which stands alone in this industry for exploiting the opportunities that have been brought about by a recovery in the markets.

There are several aspects of Paddy Power’s success story. First, the company is incredibly well-run and has had a great track record since it was first created in 1988. It also has the best balance sheet in its sector, with net cash of €60m, or 6% of the market cap. This stands in stark contrast to Ladbrokes and William Hill- who are both still leveraged- although the latter has improved its position substantially through a rights issue.
Secondly, the central pillar of growth for Paddy Power has come not from domestic markets in Ireland and the UK, but from its expansion into the Australian market.  The acquisition of Australia’s largest bookmarker, Sportsbet, has given the bookmarker a strong foothold in an important region. Making this acquisition even more attractive is the fact that advertising restrictions have recently been relaxed in this market. Paddy Power knows that this easing of regulations will play to one of its core strengths and the firm is bound to exploit the opportunity.

It is therefore Australia which is likely to be the engine of the company’s growth story over the next couple of years. Profits are forecast to start out at 20% of group profits and grow substantially from there. The potential for structural improvements is clear and the recent liberalisation of the Australian market has set the stage for a prolonged period of growth for the bookmaker in the region. It is thought that the expansion and improvement of Sportsbet’s online gaming facilities already in existence will prove to be an important source of revenue for the firm.  Commenting on the acquisition, Paddy Power’s Financial Director Jack Massey said he believed that profits from the company’s Australian operations could grow to 33% of group profits in the not too distant future.

Separately, the UK online space is expected to grow at 10% per annum over the next number of years with the group expecting to make further market share gains (currently standing at 10% from 9% last summer). A key factor here for bookmakers in general will be whether or not people will have the ability to access the site in order to participate in online gaming. Fortunately, the penetration rate of broadband continues to rise: it is estimated that 90% of the population of the UK will have high speed broadband by 2017.

It is this determination to embrace and exploit the internet which represents the final aspect of Paddy Power’s recipe for success. The company now offers free online streaming of live sports events for its patrons. This has enabled the bookmaker to provide clients with a unique betting experience which is 100% interactive. It is through such innovation that Paddy Power has truly separated itself from the pack.

Recession-proof? Almost…
Although Paddy Power is showing itself to be unique in its field, the gaming sector in general is holding its own. In fact the sector is proving to be quite recession-proof. It might be thought that people would cut-back on gambling in times of uncertainty- or indeed that they might abandon it altogether- but studies are showing that the reality is quite different. Interestingly, a survey of online gamers reveals that there is a marked reluctance to cut back on gambling in the online gaming space. 75% of gamblers in the UK and 61% of mainland European ones said they had no intention of giving up their hobby. The recession has understandably impinged on the average stake per bet; this has been reduced by 11% but bet volumes and active customers are up 52% and 21% respectively. More people are enjoying the flutter and this is compensating for the fact that they are risking less of their money. Assuming a return to more normal conditions, average stake should recover in time.

While the outlook for Paddy Power is shaping up to be quite positive, the Irish bookmaker still faces a number of challenges. The challenge for the firm relates to possible changes to the Irish taxation system. In last year’s budget, the Government outlined its intention to increase the betting tax from 1 to 2%. It has since postponed this measure with the intention of carrying out a study into taxing online and phone betting, which are not currently subject to any levy. As this area is set to be one of the main driving forces behind growth for Paddy Power over the coming years, any changes in the rules regarding taxation must give the company cause for concern. At worst the imposition of a betting tax in this area could seriously impair the company’s profitability if it is not met with a coherent response.

Perhaps the most immediate risk to Paddy Power’s balance sheet stems from currency movements of Sterling, as well as the Australian dollar, against the Euro. Sterling, a currency that traditionally traded in a tight range against the Euro, has weakened considerably over the past few months. While this represents good news for some, those firms- like Paddy Power- who calculate their revenue in Euro know that a strong Euro is bad for profits.
Although problems lie ahead, it must be said that the fundamentals at Paddy Power have never been more solid and, provided external factors don’t deteriorate further, this company looks set to remain at the head of the pack.