If Flutter Entertainment looks enviously at its peers in the United States, it’s not hard to see why. Shares in the FTSE 100 group, formed via the merger of Paddy Power and Betfair, have underperformed those of DraftKings and Caesars Entertainment since its reincarnation in 2019, despite more than doubling in value.
FanDuel, the American business in which it now owns a 95 per cent stake, might hold the top spot in the US online sports betting market, but, based upon forecast sales next year, it still trades at a discount versus stateside players. After all, Britain and other international markets still account for a chunk of revenue and for 40 per cent of Flutter’s value, according to Peel Hunt.
Executing on the opportunity opened stateside in 2018 by the liberalisation of the sports gambling market will help to address that valuation gap. By the end of next year, nearly half of all Americans will live in a state where sports betting is allowed, with seven more states expected to open to sports betting next year.
Revenue has been rising fast, up by 85 per cent during the third quarter and accounting for a fifth of the group total, but the marketing and administrative costs that come with a rapidly rising customer base mean that the American business is not expected to turn a profit until 2023. Investors are betting on high sales and profit growth. Based upon earnings forecasts for this year, the US drag means the group’s enterprise value stands at 24 — but factor in 2023 profit forecasts and that falls to just over 15. That also means the company can’t afford many mis-steps — more customers’ winning bets means that adjusted earnings this year are expected to be lower than previously anticipated.
And while it is gaining new US customers apace — average monthly players were up 17 per cent during the third quarter — the attractions of that market have not been lost on Flutter’s rivals, which have launched some aggressive offers and bonuses to new customers signing-up.
Over the first six months of the year, the average cost of nabbing a new punter was $291, which paid for itself after 12 months. Yet increased competition in the market means that the expense of acquiring customers increased slightly during the third quarter and so the payback for customers acquired during the period is also taking longer, at between 12 and 18 months.
Revenue streams elsewhere are facing more challenges, too. A turnover tax on online poker and slots products in Germany pulled revenue for the international business 3 per cent lower during the third quarter. In Britain, a government white paper into gambling safety is expected to pull back growth in the next few years. Management has forecast a flat domestic market next year, which contributed towards Peel Hunt lowering its ex-US profit forecasts for next year to £1.35 billion, from £1.44 billion.
Bolt-on deals in new markets are an important part of the business model, but tighter limits on stakes or higher taxes are an ever-present threat whatever the region.
How might it win over more investors? By floating a small stake on the American public markets, it reckons.
There’s also a dispute between Flutter and Fox Corporation over the terms of its option to purchase an 18.6 per cent stake in FanDuel. The chairman of Fox is Rupert Murdoch, executive chairman of News Corp, parent company of The Times. Flutter hopes to resolve this issue next year. But the shares seem likely to pause for breath for a while longer.
ADVICE Hold
WHY Shares look fully valued in light of growing competition in the US and more restrictive gambling regulations in Britain
IWG
According to Mark Dixon, chief executive of IWG, “there couldn’t be a better time for us”. Not everyone would agree. For the offices provider, vaunting a more permanent shift towards flexible working post-pandemic, an occupancy rate of about 71.2 per cent at the end of September, more than seven percentage points below the pre-Covid level, hardly screams boom times.
On a like-for-like basis, revenue was up 5 per cent in the third quarter compared with last year, but was 5 per cent down after taking the first nine months of the year into account. Analysts have forecast revenue of £2.2 billion this year, 11 per cent down on the year before, and a pre-tax loss of £266 million. Profits aren’t expected to recover to pre-pandemic levels until 2023.
The market has bought into the recovery story of a rebound in occupancy off a cost base that is about £320 million lower. Even based on next year’s forecasts, the shares trade at 55 times forward earnings. Dixon emphasises the credentials of IWG’s operating platform — perhaps he has one eye on the technology-style valuation secured by WeWork, its New York-listed rival, particularly if another potential bidder comes sniffing around.
The FTSE 250 constituent lets a portfolio of 3,308 flexible workspaces to occupiers in 121 countries. It owns only a minority of the property that its tenants occupy, instead signing leases with commercial landlords with an average length of just over five years, an arrangement that accounts for about two thirds of its overall footprint. The mismatch between short-term agreements with many customers and longer-term lease liabilities is an inevitable risk factor.
Invoking the ire of some customers during lockdown might not be the best advertisement — offering a 50 per cent discount on rent for April and May last year, but only if clients committed to pay rent for an additional three months at the end of their lease, was deemed tightfisted by some. It points to total support of about £100 million for customers, which also included “adapted pricing structures”. Whatever the case, the present market valuation looks too forgiving.
ADVICE Avoid
WHY Too pricey given risks with recovering occupancy
