Flutter Entertainment, the gambling group behind of Paddy Power, Betfair and Skybet, may not be a pin-up for environmental, social and governance (ESG) investors.
But that hasn’t stopped it becoming the darling of the FTSE 100 over the past 12 months, with its shares soaring almost 90 per cent, compared with a less than 7 per cent advance by the UK blue-chip stocks index.
The publication in April of long-awaited UK government plans to reform gambling regulation wouldn’t ordinarily have given investors much cause for cheer.
Flutter said at the time that proposals in the paper, such as limiting online slot machine stakes for young gamblers to as low as £2, could chip €50 million to €100 million off its annual revenues.
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That’s in addition to the €150 million hit already taken as a result of its own pre-emptive customer protection measures in 2021 – including the introduction of a slot limit of £10/€10 per spin and a triple-step approach to customer affordability in the UK and Ireland – in efforts to “do the right thing”, get ahead of legislation and, of course, address concerns about the “S” part of its ESG credentials.
However, the market’s main focus in the past year has really been on one thing: Flutter’s prospects in the US, a market where commercial online sports gambling has been opening up on a state-by-state basis since the country’s supreme court moved five years ago to strike down a federal law banning the practice.
Morgan Stanley analysts also noted last week that Flutter’s path to profit in the US has been helped by pulling back sharply on promotional spend within a year of launching in individual states
Flutter, led by chief executive Peter Jackson, moved within days of the May 2018 court ruling to take an initial stake in US fantasy sports website FanDuel and now owns 95 per cent of the largest player in the industry.
The group has forecast that the US business will deliver positive earnings before interest, tax, depreciation and amortisation (Ebitda) this year, marking a pivotal point for its investment.
HSBC analyst Joseph Thomas estimated in a recent report that the US unit will deliver £117 million (€137 million) of ebtida this year, rising rapidly to more than £800 million (€934 million) in 2025 – when it is projected to make up a third of group earnings.
It will see the business overtake the UK and Ireland division, currently the group’s largest, which is on track to only see its earnings edge up less than 2 per cent over the period, by Thomas’s calculations, to just more than £700 million (€817 million).
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Flutter had a 50 per cent share of the fast-growing US online sports betting market in the first quarter of this year, up from 36 per cent for the same period last year, while its slice of the internet gaming (iGaming) – including online casino and bingo – expanded marginally to 23 per cent.
Morgan Stanley analysts also noted last week that Flutter’s path to profit in the US has been helped by pulling back sharply on promotional spend within a year of launching in individual states.
The pace of earnings growth and cash generation expected in the coming years will cut its debt burden from 4.4 times Ebitda last year to 1.5 in 2024, paving the way for Flutter to return to paying cash dividends after a six-year hiatus, according to Goldman Sachs.
While analysts have highlighted concerns about punters easing off on gambling spend in the group’s legacy markets, including the UK and parts of Europe, at some stage this year amid the ongoing cost-of-living crisis, Citigroup’s Monique Pollard reckons the fact that the US online gambling market is in a structural growth phase more than offsets concerns about the uncertain economic backdrop in that market.
Will investors wait for more clarity on the US outlook before adding to any bets?
The extent to which Flutter is pinning its hopes on the other side of the Atlantic was underscored by its recent appointment of US-based businessman John Bryant, the former head of Kellogg’s, as its next chairman from September and its plans, unveiled earlier this year, to take out a secondary listing for its shares in the US.
Few market observers doubt that it will ultimately follow fellow Iseq heavyweight CRH in electing to move its main listing from London to Wall Street – and dropping its quotation in Dublin in the process.
But while analysts continue to push the US as a one-way bet for Flutter, there is considerable uncertainty about how big the market ultimately will be.
Only last month, Pollard took a red pen to what she sees as the total addressable US online gambling market as it matures by the end of the decade, to $39 billion (€36 billion) down from almost $45 billion (€41 billion) previously, mainly because various states are taking slower to regulate for iGaming than sport betting.
While she continues to estimate that Flutter will have about a leading 32 per cent share of the total market (40 per cent of sports betting and 25 per cent of iGaming), there is a risk that the group loses material market share over the period.
An almost doubling of the price of Flutter’s stock over that past year – pushing its market value to £27.4 billion (€31.9 billion) – leaves it within 13 per cent of the consensus share price target, according to Bloomberg data. Will investors wait for more clarity on the US outlook before adding to any bets?
