The prospects for Flutter Entertainment were transformed by the US Supreme Court’s decision four years ago to overturn the 1992 Professional Amateur Sports Protection Act (Paspa), which banned betting on sport in most states.
Paspa was a classic example of Congress getting itself in the sort of tangle that led to alcohol prohibition in the 1920s. Sports administrative bodies, primarily in basketball but also in baseball and American football, were spooked by match-rigging scandals and naively thought that the problem could be legislated away. As with prohibition, though, Paspa merely drove activities underground.
The Supreme Court decided that Paspa infringed states’ constitutional right to regulate their own citizens, starting a race to feed the sort of betting mania that pervades the UK.
After huge investment in America under the FanDuel, FoxBet and Stardust Casino brands, Flutter turned in a maiden US profit in this year’s April-June quarter. Morgan Stanley analysts note that this came despite continued investment, including start-up costs in Canada. Flutter added 500,000 new customers during the period and now claims 51 per cent of the online US sports betting market where it operates.
The US has the greatest potential but is also the most complex, because of individual states’ laws. From virtually a standing start, Flutter’s US revenue nearly matched the UK’s half-year £1.09 billion, flattered by a historically low exchange rate.
The almost certain growth in the market, with California probably voting to join the sports betting party in November, will intensify competition. California is potentially worth about 1.5 times the UK income.
Flutter, which runs Paddy Power and Betfair in this country, is well spread internationally. The group’s other two legs, Australia and the rest of the world, both checked in with a little over £600 million each in the first half of the year. Australia is buoyant and Flutter is excited by the growth in Indian rummy.
At home, the prime long-term concern is regulatory: Entain’s recent £17 million fine by the Gambling Commission has concentrated minds. Flutter is careful to emphasise that it has “a strong track record of developing industry-leading safer gambling initiatives across its key markets”. It has spent £100 million so far, which beats paying a fine then having to take the measures anyway.
Flutter shares are weighed down by nervousness around the long-awaited Gambling Commission white paper, delayed most recently by the Conservative leadership contest. It is believed to be concerned with widespread addiction and the risks surrounding children seeing so much gambling advertising and the names of betting firms on football club shirts.
Meanwhile, the outlook for its second half-year is promising. Following the Commonwealth and European games, the European and UK football seasons have started early to create room for the World Cup in November and December. The qualifying teams feature several Flutter territories: England, Wales, the US and Australia, Brazil, Germany, Spain and other competing nations.
Deutsche Bank sees total revenues rising from £6 billion to £7.4 billion for the year, £9.2 billion next year and £10.3 billion for 2024, taking earnings before interest, taxes, depreciation and amortisation up from £1 billion last year to £1.1 billion, £1.6 billion and £1.8 billion.
Analysts have been led to expect dividends to begin in respect of next year at 200p, a 1.87 per cent yield at the present price of about £107. If California votes for sports betting in November, however, the consequent investment will delay dividends for another year.
ADVICE Hold
WHY Despite the World Cup, risks still outweigh rewards until California and the Gambling Commission have turned their cards up
Avon Protection
Have Avon Protection shares run out of the capacity to disappoint? Or, to put it another way, have they reached bottom?
In the past two years the former Avon Rubber has had four jaw-dropping share price falls. The first, in November 2020, was dismissed as profit-taking after rushing that year to a £43 record high. Fair enough, except that profit-taking is usually temporary. This looks permanent.
A profit warning in July last year took the shares down to £21 and in November word spread that the company was closing its body armour business after its bullet-proof vests failed US regulatory tests. The shares fell below £9. They perked up to £13 but another profit warning this April knocked them back to £10 and they are struggling to hold that level.
Paul McDonald, the chief executive who presided over this implosion, has quit — but it is concerning that after nearly three months a replacement has not been found. That suggests heavy lifting for his successor.
As an investment prospect the company has all the ups and downs of a transition story that has some way to go. It used to be best known for rubber products such as car tyres, sports equipment and cow milking tubes. That has been abandoned in favour of total commitment to defence-related equipment, from helmets to body armour, which has the virtue of being recession-proof but not geopolitics-proof.
Avon is joining in the Ukraine-inspired scramble for military hardware, but it has been hampered by management missteps. Hence McDonald’s departure.
In the half-year to April 2 revenue was little changed at $121.9 million (£101 million: Avon accounts in dollars because most of its business is in the US). The loss before tax from continuing operations was $13.6 million, compared with a $3.4 million profit a year ago.
The company dipped into reserves to maintain the 14.3 cents interim dividend, despite the business losing 34.9 cents per share, confident that earnings will be more than enough to finance future payouts. Peel Hunt’s analysts think so, predicting a 5 per cent yield for this financial year, rising to 6.5 per cent for 2024.
ADVICE Hold
WHY New chief executive’s plans will be crucial
