Paddy Power shares take a hit

Savvy investors in the UK online and land gambling company Paddy Power plc have become accustomed over the last few years to seeing analyst praise in the form of ‘outperform’ ratings, but this week prospects in the Italian online market caused an unexpected reversal.

Davy Stockbrokers reluctantly downgraded Paddy Power to ‘underperform’, a move that sent the share price down almost 6 percent – the biggest decline since August 2012, leaving the company’s market capitalisation at just under Euro 3 billion.

The newspaper Independent.ie reported that Davy is concerned that the group’s core online business in Ireland and the UK is facing diminishing returns and the company could face a longer payback time for its substantial investment in the Italian market.

Softening the blow somewhat, Davy analysts commented:

“In our view, the group remains – by some distance – the highest quality name in the European gaming sector. Therefore, our decision to reduce the stock to ‘underperform’ is not one we take lightly.”

Analysts said the downgrade reflects the fact that Paddy Power stock has re-rated “significantly” in recent months, while at the same time signs emerge that group returns are starting to fall.

They argue that the current trading multiples of Paddy Power shares “are more a reflection of the group’s historic track record than its future prospects”.

Davy reckons that Paddy Power is starting to experience declining earnings before interest and tax per customer at its core online business in Ireland and the UK and they are likely to continue to fall. Analysts were also “very discouraged” by the recent growth rate in the Italian online market and believe Paddy Power may be over-investing in the country relative to the scale of the opportunity that exists.

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