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Paddy Power: Creative Marketing, Strong Management, Growth Opportunities

This analysis evaluates Paddy Power, a leading betting and gaming company, highlighting its operating segments, financial analysis, investment risks, and valuation. The conclusion recommends holding the stock based on its current share price of €29.55, which is fairly valued.

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Paddy Power: Creative Marketing, Strong Management, Growth Opportunities

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Presentation Transcript

  1. Agenda • Introduction • Highlights & Operating Segments • Financial Analysis • Investment Risks • Valuation • Conclusion

  2. Hold Recommendation • Based on current share price of €29.55 • Fairly valued • Realistic valuation assumptions

  3. Share Price Graph

  4. Market Capitalisation €m

  5. Highlights • Creative marketing strategy • Strong management team • Excellent growth opportunities

  6. Operating Segments • UK and Ireland Online • Australia • UK Retail • Irish Retail • Telephone

  7. UK and Ireland Online • Australia • UK Retail • Irish Retail • Telephone

  8. UK and Ireland Online • Australia • UK Retail • Irish Retail • Telephone

  9. UK and Ireland Online • Australia • UK Retail • Irish Retail • Telephone

  10. Financial Analysis • Margin Analysis • Earnings Analysis • Cash Flow Analysis

  11. 1. Margin Analysis

  12. 2. Earnings Analysis €‘000 EBIT

  13. 3. Cash Flow Analysis €‘000

  14. Investment Risks • Economic Environment • Competitive Environment • Inexperience in Australian market • Taxation and Regulation

  15. Valuation

  16. Valuation - Base case

  17. Valuation - Bull case

  18. Valuation - Bear case

  19. Relative Valuation

  20. Conclusion • Growth opportunities • Successful management • Creative marketing strategy • Fairly priced HOLD

  21. Questions?

  22. Questions?

  23. Forecasted EBIT Growth €’000m

  24. Segmented Profits

  25. UK Retail – Market Share

  26. Irish Retail – Market Share

  27. Australian Regulatory Bodies The Racing and Gaming Authority The Queensland Office of Gaming Regulation Office of Racing, Gaming and Liquor Casino, Liquor and Gaming Control Authority ACT Racing and Gambling Commission Independent Gambling Authority Tasmanian Gaming Commission Victorian Commission for Gambling Regulation

  28. Profitability

  29. Valuation Summary

  30. Beta Calculation • Pro-Cyclical stock, dependant on economic conditions • Recent turbulence in ISEQ

  31. Target Price Sensitivity - Leverage *At current borrowing costs

  32. Target Price Sensitivity - Beta

  33. Competitor Specifics: • Betting Exchange, online gaming & Financial Trading • On average significantly better odds then traditional bookmaker • Charges commission on winning bets (c.5%) • “Market Makers” keep the market for an event liquid. (same function as a stock market)

  34. Share price graph since Oct 2010 IPO • BetFair current Market cap c.€1.1bn • P/E Ratio 21.79 times

  35. Online – EBIT by Product

  36. Risk Free Rate • Current yield on 10 Year UK government bond • Most of peer group competitors domiciled in the UK • Using German Bond would add c. €2.50 to share price

  37. Risk Premium • Market risk premium of 4.5% • A fair representation of the current appetite for Risk in the market • Appetite for risk has been increasing in recent years

  38. Base Case Valuation - Assumptions • Paddy Power maintains a certain level of profitability in its UK and Ireland  as macro conditions improve • Australia business continues to grow with the market • Online business will face diminishing growth rates and EBIT margins due to increased competition in the online segment

  39. Bear Case Valuation - Assumptions • Based on a number of unlikely events occurring, which would negatively effect Paddy Power's business. • Worst case scenario for taxes in the UK and Ireland. • Further contraction of UK and Irish economies • Reduced online market share

  40. Bull Case Valuation - Assumptions • Based on a number of events, that if they were to occur would positively impact Paddy Power. •  Australia legalises in-running betting online. •  Paddy Power's fortunes in Ireland and the UK improve as the economies of both markets turn around. •  Paddy Power secures a similar deal to the one it secured in France with PMU.

  41. Terminal Value - Stable Growth

  42. Liquidity and Leverage Current Ratio Net Debt/EBITDA

  43. Marketing strategy

  44. 5 year Cash Balance €m

  45. Balance Sheet Strength €m

  46. Corporate Governance • Currently satisfy all requirements • Board members must have sufficient time to add value to the company • Potential COI with Pádraig Ó Ríordáin

  47. Non-Executive Board Members

  48. Australia's premier internet betting and entertainment website • Operating profit - €4.6m in 2009 • Active customers – 92,820 in 2009 • 2009 – IAS takeover

  49. May 2009 – entry into the Australian market. 51% stake for €27.2m • December 2010 – announcement of buying the remaining 39% for €101m • EBITDA

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