Betfair Group Plc. 7.52, BUY, TARGET PRICE 8.74 (Upside 16.2%) Oct 9, 2012

Transcription

1 Oct 9, 2012 Betfair Group Plc 7.52, BUY, TARGET PRICE 8.74 (Upside 16.2%) Market data Stock price 7.52 Shares nb diluted (m) Market value Net Debt adjusted EV (mls) ISIN Market Analyst GB00B44JTH01 AMSM P.Schang e 2014e 2015e Sales %growth -0.9% 5.0% 5.0% 5.0% EBITDA %margin 23.0% 23.2% 22.8% 22.4% EBIT %margin 8.7% 11.0% 10.7% 10.5% Net profit %margin 8.7% 9.3% 9.2% 9.2% e 2014e 2015e PE EV/Sales EV/EBITDA EV/EBIT Covered by Nfinance since oct 9, 2012 Calendar December 13, H1 FY13 Results Announcement Significant Shareholders of Betfair Group plc Name of shareholder % of share capital (June 28,2012) Edward Wray 11.36% Charlton Corporation 10.78% Le Peigne S.A. 9.54% Andrew Black 9.06% Richard Koch 6.53% SBI Holdings 4.77% Balderton Capital I,LP 4.13% Betfair is a UK based company that provides online sports betting and gambling related activities. The company launched Betting Exchange in 2000 which facilities customers to bet at odd sought by them or offered by other customers and thereby eliminating the need of traditional bookmaker. It resembles a stock market where punters can either back (i.e. buy) or lay (i.e. sell) an outcome on a race or a sporting event. The company is also having online wagering business in the US and an exchange that enables clients to trade directly with market makers in Forex, Spot Gold, Oil and CFDs. The company also offers ratings to horseracing punters. LATEST PRESS RELEASE COMMENTARY On September 11, 2012 the company announced its interim management statement for Q1 FY13. Revenues for the Core Betfair increased 13% to 91.6 m as compared to Q1 FY12. Nonrisk sports was the major contributor to growth with 16%increase in revenues from 59.5 m to 68.9 m. Quarterly average revenue per user (ARPU) was 188 as compared to 186 for Q1 FY12. Betfair Australia also grew by 25% in terms of revenue. TVG recorded revenue growth of 6%. ANALYSIS The major reasons for growth in Q1 FY13 were Euro 2012, increase in mobile bets and revenues and improved monetisation of exchange activity. Revenues from UK, the largest market for the company, increased 23%. The number of mobile bets increased by 98% and revenue from mobile bets increased 114%.However, various rules and regulation such as issue of license, limiting the number of games offered, turnover tax etc. in other countries may impact future profitability and revenues. VALUATION At 8.3x EV/EBITDA vs average EV/EBITDA of 12.2 for the peers we believe that stock is undervalued. We recommend buy rating on the stock with target price of 8.74 (DCF 8.92, WACC 7.4%, terminal growth rate 1%, peers 8.56) in view of growth potential from mobile betting; increase in revenues from international operations and strong balance sheet and financial position. However, the key risk to recommendation is regulations related to online gambling.

2 SUMMARY... 3 GROUP PRESENTATION... 4 GROUP HISTORY... 6 INVESTMENT TRIGGERS... 7 Potential growth from mobile betting... 7 Healthy balance sheet and positive cash flows... 7 Expansion in international business... 7 Less riskier business model... 8 INVESTMENT RISKS... 8 Regulating gambling industry by various countries across the world... 8 Regulation regarding gambling taxes... 8 Highly competitive industry... 8 VALUATION... 9 FINANCIAL OVERVIEW... 11

3 SUMMARY Betfair, based in Hammersmith in West London, provides betting and gambling activities online. The company is having four million registered customers around the world and it processes over seven million transactions a day. Besides sports betting, the company offers a portfolio of other products such as casino, exchange games and poker. The company employs around 2300 employees worldwide. The company earns most of its revenues by acting in an agency role. On the Betting Exchange, the company gets commission for bringing customers together and facilitating their interaction. The commission is paid on the net profits of an individual customer irrespective of outcome of the event. The company charges a commission of between 2.6% and 5% for Australian and New Zealand racing and between 2% to 5% for all other markets.the company offers better odds to its customers as it does not need to add any margin that is added by traditional bookmakers to compensate for higher risks. In December 2011, the company launched new marketing campaign with advertisement Don t Settle for Less in order to communicate its USP. The financial trading business of Betfair, LMAX, has similar business model and get revenues in the form of commission for each transaction on its platform. The company also offers pooled or toto style betting products and gaming products on which it acts as an agent and earns commission. The company is also having risk-based model where it acts as counterparty in transactions. These involve sport betting opportunities and casinos..

4 GROUP PRESENTATION Betfair is one of the world s largest international online sports betting providers. Betfair Group consists of the following businesses: Betfair: It is one of the world s largest international online sports betting providers. It launched a betting exchange in At Betting Exchange customers can bet at odds sought by them or offered by other customers. Besides Betting Exchange, Betfair also offers a portfolio of casino, exchange games, arcade and poker. TVG: TVG was acquired by the group in 2009 which is one of the largest legal online wagering businesses in the US. TVG also owns a racing channel. TVG customers can bet from home on more than 100 of America s premier tracks. LMAX: LMAX exchange was launched in 2010 by Betfair for online FX trading and CFD trading by brokers, institutions and professional traders. Betfair holds the majority stake in the exchange. LMAX is authorised and regulated by the Financial Services Authority as a Multi-Lateral Trading Facility (MTF). This exchange enables clients to trade directly with market makers in Forex, Spot Gold, Oil and CFDs. Betfair Australia: It is a 50:50 joint venture between Crown Limited and Betfair. Betfair s Australian operations are regulated by the Tasmanian Gaming Commission under the Gaming Control Act (Tas) Betfair Australia employs more than 100 employees and has more than customers from Australia and New Zealand. Timeform: Timeform became a wholly owned subsidiary of Betfair Group in It has been providing horseracing punters with ratings, form guides and publications. Business Segments: The company divides its operating business into following business segments: 1. Core Betfair (i) Sports (ii) Games (iii) Poker (iv) Management of customer funds 2. Other Investments (i) Betfair US (ii) LMAX 3. High Rollers High roller represents gains and losses, being the amount staked and fees received less total payouts from betting activity. The company decided on July 31, 2010 not to continue with this product due to volatility of return from these customers.

5 Core Betfair accounts for almost 90% of total revenues and within Core Betfair Sports segment is contributing more than 2/3 rd of the total revenue of the group. Other investments accounts for around 10% of total revenue and Betfair US is having 9% share in total revenue of the group. The following pie chart shows business segment wise revenues for the year 2012: Business Segments % 1% 6% 9% 0% 14% 69% Sports Games Poker Management of customer funds Betfair US LMAX High Rollers Geographical Segments: The company divides its revenue into following four geographical segments: 1. UK 2. Europe 3. Rest of World 4. Unallocated In terms of geographical segments UK is the largest market with 48% market share followed by Europe that accounts for 37% of total revenue of the group. The following pie chart shows geographical segment wise revenue: Geographical Segments % 1% 48% 37% UK Europe Rest of World Unalloced

6 GROUP HISTORY The history and major milestones of Betfair Group plc are given below- January 1998 Andrew (Bert) Black develops the idea of a betting exchange August 1999 June 2000 The parent company, the Sporting Exchange Limited, is formed to develop the betting exchange platform. The Sporting Exchange launches Betfair. October 2001 Betfair launches its telephone betting services. December 2001 Betfair mergers with Flutter.com April 2005 The company gets license in Austria, first outside UK. January 2006 Awarded a license to operate in Australia. February 2007 Betfair Radio launches April 2007 Betfair launches Exchange Omaha Hi. December 2007 May 2008 Tradefair, a new business, is created to provide a range of financial products to the retail market Launches Italian Sportsbook September 2008 Betfair achieves two millionth customer January 2009 Acquires American TV Games Network(TVG) from Macrovision for 50.0m April 2010 Betfair achieves three million registered customers. October 2010 The shares of the company start trading on London Stock Exchange June 2011 June 2012 Announces its intention to commence a share buy-back program to make market purchase of up to 50.0m of its ordinary shares. The company is awarded with Spanish online gambling licenses July 2012 British Racing and Betfair agree a five-year 40.0m deal

7 INVESTMENT TRIGGERS Increase in mobile betting The mobile betting is gaining popularity and provides tremendous growth opportunities for online gambling industry. According to a recent report by Juniper Research, the global figures for wagers made on mobile devices can rise from around US$20bn in 2011 to US $100bn by 2017.Betfair is a leader in mobile betting and has become the first operator to launch applications for the iphone and ipad. The company is making substantial investments in its in-house mobile development team and number of mobile bets increased from 20m in FY 2011 to 44m in Healthy balance sheet and positive cash flows The company has consistently delivered positive operating cash flows. It has rewarded shareholders in the financial year 2012 by using 50.2m for share buyback and 9.6m for dividends. The company has no debt as per last 5 balance sheets and is having cash balance of 135.4m as on 30 April Expansions in international business The company is also reducing its dependence upon its largest market, UK, and increasing its presence in other countries of the world. In 2008, UK accounted for 56.3% of its revenue and that figure came down to 48.0% in During the same period share of rest of world (excluding Europe and unallocated revenues) increased from 5.3% to 14.1%. Percent Share in total revenue 60,0% 50,0% 56,3% 52,4% 48,8% 45,1% 48,0% 40,0% 30,0% 20,0% 10,0% 5,3% 7,8% 13,7% 13,1% 14,1% 0,0% UK Rest of World (Excluding Europe & Unallocated segment) During financial year 2012, the company attained licenses in Denmark and Germany and made efforts towards launching a Betting Exchange in Italy. In June 2012 the company was awarded Spanish online gambling license.

8 Less riskier business model The business model of Betfair is less risky than that of traditional bookmaker. Under Betfair s Exchange model, customer bets are matched and no financial risk related to traditional bookmaking business is borne. Betfair earns commission on the net profits of any individual customer on each market regardless of outcome of the event.. INVESTMENT RISKS Regulating gambling regulation by various countries of the world Various countries of the world are beginning to regulate their online gambling market by introducing licensing regime. The growth and net income of the company can be impacted if there is an adverse regulatory decision on products of the company in a country. In July 2012, the Cypriot government passed legislation that seeks to limit the products that operators can offer in the country, including restrictions on betting exchanges, casinos and poker. Regulation regarding gaming taxes Introduction of new taxes or increase in existing taxes may impact net income and growth opportunities. There are many countries of the world that are considering increasing the existing taxes or introducing new taxes on online gambling. This may affect bottom line and revenues of the company. In July 2012 Germany introduced 5% Federal turnover tax in July As per company statement, a tax at this rate, if applicable would make current exchange rate model unviable. High competition Online gaming is a highly competitive industry. In order to maintain competitive strength the companies have to constantly look out for innovative marketing campaigns, product pricing and promotions and for this companies have to spend a lot in research and marketing. Even then the better product and pricing by competitors can result in shifting of customers.

9 VALUATION In order to arrive at the target price of Betfair Group plc stock, we have used a combination of DCF-based absolute valuation technique and relative valuation (peer multiples). We have given equal weight to value obtained through each of the methods and arrived at valuation of Method Weighting Stock price Peer comparison 50% 8.56 DCF 50% 8.92 Weighted average 8.74 PEERS COMPARISON We have used 4 peers companies in the online bookmaker industry and 5 multiple ratios to compute a stock price at 8.56 /share by taking the average of the following prices: Name of Company EV/Sales EV/EBITDA EV/EBIT PE P2B Ladbrokers Plc Paddy Power Plc William Hill PLC Holding plc Median Corresponding Stock Price Source: Annual reports of the company and 1. The median EV/Sales ratio of 2.3 gives corresponding stock price of for Betfair Group plc. 2. The median of EV/EBITDA of 10.9 of peer group results into corresponding stock price per share for the company. 3. The median EV/EBIT of 15.6 for the peer companies results into corresponding stock price of The median PE ratio of peer group at 18.5 results into corresponding stock price 6.15 for Betfair Group plc. 5. At median P2B of peers at 4.8, the Betfair Group plc is valued at 9.13.per share. The average of above 5 prices provides a stock price of 8.56 /share for the company.

10 DISCOUNTED CASH FLOWS Based on this DCF model, we get a stock price at 8.92 per share (WACC 7.4%, terminal growth rate +1.0%): Revenues Revenue growth % -0.9% 5.0% 5.0% 5.0% 5.0% 2.0% 2.0% 2.0% 2.0% 2.0% EBIT EBIT margin % 6.3% 8.7% 11.0% 10.7% 10.5% 11.0% 11.0% 11.2% 11.4% 11.8% 12.1% Dep. & Amortisation CapEx WCR Free Cash Flow Terminal value Discounted cash flow Discounted terminal value WACC assumptions Beta 0.74 Market premium 6.0% Risk Free Rate 3.0% Cost of Equity 7.4% Long-term Equity Weight 100.0% Cost of Debt 0.0% Long-term Tax rate 23.0% Tax Effected Cost of Debt 0.0% Long-term Debt Weight 0.0% WACC 7.4% Terminal growth 1.0% Forward diluted shares(m) 102.3

11 FINANCIAL OVERVIEW Profit and Loss account: P&L ( m) Revenue % growth 24.2% 13.2% 15.4% -0.9% Sports % growth 20.2% 12.3% 9.9% 9.1% Games % growth 31.1% 0.7% 8.6% -4.9% Poker % growth 12.7% -14.6% -14.3% 1.8% Management of customer funds % growth -6.7% -69.2% 30.9% -9.8% Betfair US % growth 302.3% 9.8% 2.8% LMAX % growth % 44.1% 21.1% 15.7% High Rollers % growth % EBIT % margin 13.9% 14.8% 5.4% 6.3% 8.7% Net Profit Net Profit Margin % 12.7% 12.9% 4.4% 5.8% 8.7% Revenue of the company has increased from m in 2008 to 389.7m in 2012 resulting into CAGR of 12.6%. The major contributor of growth is sports segment that has consistently grown from to 268.2m during the past 4 years. Revenue in the year 2012 grew by 6% over 2011 if we exclude the revenue from High Rollers. EBIT during 2012 increased from 24.8m to 33.9m implying a growth of 37%. Net profit and net profit margin also improved during 2012 as compared to previous year.

12 Balance Sheet Balance Sheet ( m) Non-current assets: Goodwill Other Intangible Assets Property, plant and equipment Deferred Tax Assets Investment & financial assets Available-for-sale financial assets Current assets: Derivative financial asset Trade & other receivables Cash & cash equivalents Total Assets Current liabilities: Trade & other payables Tax payables Non-current liabilities: Borrowings Equity Provisions & Others Total Liabilities Net Debt Goodwill contributes to 31% of non-current assets and other intangible assets account for of 45% non-current assets. The major intangible assets of the company are computer software and, development expenditure. Development expenditure is internally and externally generated costs incurred on development activities. The company is not having any debt and is holding cash & cash equivalents of as on April 30, Cash & cash equivalents account for 82% of current assets. Non-current liabilities are mainly represented by equity.

13 Cash-Flow statement Cash Flows ( m) Net Profit for the year Depreciation, Amortisation & Impairment WCR Taxes & Others Operational cash flows Purchase of property, plant & equipment Cash flows on intangible Free cash flows CFF Operational cash flows have been positive in all of the five years from 2008 to Cash flows on intangibles have continuously increased over 2008 to 2012 and include acquisition of intangible assets and capitalized internal development expenditure. Under cash flow from financing activities, company raised 6.6m by issue of ordinary shares in 2011 and in 2012 the company spent for 50.2m for purchase of 6.51m share under Share Buyback Programme.

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