Betfair hasn’t been the thoroughbred IPO success many people expected.
In fact the internet betting exchange already looks like something of an old nag:
And Tuesday’s maiden (half-year) results spell out exactly why.
What was marketed as a high growth company by IPO sponsors Goldman Sachs and Morgan Stanley is shown to be anything but in these figures, as analysts are forced to lower forecasts less than two months after flotation.
From Liberum Capital:
We believe consensus core revenues will fall today by c2-3% towards our forecast of £340m. Given that marketing spending is lower than planned, and R&D is higher than expected, consensus FY EBITDA will be unchanged. However, there is significant discretion for online gambling companies to hit their numbers by reducing costs, so we believe the revenue miss will be taken negatively.
Indeed it will.
At pixel time, shares in Betfair were down 101p at £10.80 — 17 per cent below their IPO price.
The main negative in today’s figures is that fact that Betfair has generated revenue growth of just 1.6 per cent year-on-year in the second quarter and down 6.3 per cent quarter-on-quarter.
Liberum breaks down the numbers:
The company had already reported strong Q1 trading at the time of the IPO, with Net Gaming Revenue of 22% in Q1. Consequently, these results demonstrate that the company has generated revenue growth of just 1.6% in Q2. This reflects weakness in poker (migration to Ongame) and horseracing, with the higher value customers reducing spend per head.
Now, it’s the sluggish growth of the core horse racing and sportsbook businesses that has caused most alarm among analysts.
Here’s Evolution Securities on horse racing:
Betfair’s 1H core EBITDA was below our estimate and consensus. Of greater concern is the decline in 2Q horse racing revenue. Where we had concerns over driving profitability in its non-core US and LMAX divisions, we find it hard to marry the group’s premium rating with myriad regulatory issues and the need to ‘address challenges’ in its core horse racing product.
(Betfair says horse racing revenue showed a slight year-on-year decline in the second quarter because of a reduced level of spending from existing customers who, while maintaining their frequency of activity, decreased their average bet size).
And here’s Davy on the sportsbook:
These numbers may cause some concern, given the deceleration in revenue growth in the second quarter. As anticipated, the migration to a new poker network has brought teething problems. However, of more concern will be the performance of the sportsbook which only grew by 1.4% in the second quarter. This is the engine of the overall business. If it is only growing at this rate now, we believe people will continue to question the considerable premium Betfair is trading at relative to the rest of the gaming sector.
In order to offset these pressures, Betfair has cut marketing expenditure to help bolster profits, notes Investec Securities:
Betfair’s maiden H1 is slightly below consensus on core revenue and EBITDA levels, with a strong Q1 (ahead of IPO) followed by a lacklustre Q2. Given the reduction in marketing spend, we see no need to downgrade our FY11E forecasts, but believe risks are being stored up for FY12E. Without ‘secular growth’ we see material downside risks from regulatory change next year, which are not reflected in the rating. We therefore reiterate SELL.
Which is not the sort of thing one expects from a company trading on a 2012 price earnings multiple of 22 times (following today’s share price fall) :
And here is the most bearish forecast on the street from Investec Securities.
Related links:
Betfair slips after analysts attack stock as 70% overvalued – FT
Betfair finds the going heavy – FT Alphaville
Betfair soars 19% on trading debut – FT Alphaville