Merrion Online Betting Survey

Transcription

1 Merrion Stockbrokers Killian Jones killian.jones@merrion-capital.com Merrion Online Betting Survey in association with RacingPost.com 15 th April 2010 IRELAND LEISURE & GAMING 70 Paddy Power s Online Growth Looks Set to Continue From our survey of over 1,000 regular online bettors, respondents identified Paddy Power as being the company with whom they are most likely to open a new account. In addition, Paddy Power is the second most likely company to increase its share of customer wallet. As a result, the company looks set to continue its online growth through new customer signups, as well as attracting an increased share of wallet at the expense of industry competitors. We therefore upgrade our recommendation to BUY. New Account Openings 15.2% of respondents indicated that they would be most likely to open another online sports betting account with Paddy Power. This was more than double the next highest response, with 7.0% of respondents noting that they would open a new account with Bet365. Share of Wallet - Betfair is the most likely to increase its share of customer wallet, with 21% of respondents noting that they would increase spend here. Paddy Power also scores very well with 16% of respondents, while Bet365 follows in third place with 11% of responses. Brand Awareness - 82% of respondents have an online betting account with the brand that they are most aware, with 71% having an account with either of the brands that they are second or third most aware of. This indicates that building brand awareness does directly translate into new customer account openings for online betting companies. Our survey indicates that having a value proposition is the key to growing market share in the online betting industry. Best odds, money back specials and sign-up bonus continuously ranked highly as the main reasons why respondents opened their first online betting account, why they would open a new online betting account and why they would increase their share of wallet with one company over another. For Paddy Power, we are very encouraged by the responses to our survey and what they indicate for the future growth prospects of its online business. Paddy Power s online division, and in particular active customer numbers, look set to continue growing over the coming years and this should give the Australian and UK retail businesses the necessary time to become meaningful future drivers of Group earnings. Our survey give us significant comfort over our current EPS forecasts of 154.6c in FY 10 and 174.4c in FY 11 and also highlights that there is potential upside to these numbers from higher than forecast online active customer growth. At a share price of 26.70, we feel that the current P/E multiple of 15.3x our FY 11 forecast and an FY 11 EV/EBITDA multiple of 8.2x is an attractive entry point into this very well managed business. As a result of this, and with our tangible survey evidence in hand, we are more confident with Paddy Power s future growth prospects and we therefore upgrade the company to a BUY recommendation. Published by Merrion Stockbrokers

2 Merrion Stockbrokers Merrion Online Betting Survey - Spring Contents Merrion Online Betting Survey Spring 2010 Survey Background 3 Demographics 4 Betting Frequency 5 Brand Awareness 6 New Account Openings 8 Share of Wallet 10 Online Gaming 13 Paddy Power 15 Survey Conclusion 17 Paddy Power Investment Case - Background 18 Paddy Power Investment Case - Conclusion 19 Paddy Power Investment Case - Financial Models 21

3 Merrion Stockbrokers Merrion Online Betting Survey Spring Survey Background We conducted our first online betting survey in March 2010 over the weekend preceeding the Cheltenham Festival. A total of 1,256 online bettors started the survey and we received complete responses from 997. For each question, we include results as a percentage of the total responses received for that particular question. We designed a questionnaire to gain specific information about respondents online betting behavioural patterns. Our primary goal in conducting this survey was to ascertain how Paddy Power is performing versus its competitors and whether the strong growth seen in its online business over the past number of years is likely to continue into the future. We also wanted to gain an understanding of the overall growth and competitive dynamics at play within the online sports betting and gaming sectors. In this regard, we anticipate that our survey results will also be of interest to readers who are not specifically focused on Paddy Power. We conducted our survey through the RacingPost.com website. While we are aware of some potential bias in the results due to this single end-user access point, our survey sought to focus on the behavioural patterns of regular online bettors. We feel that the views of RacingPost.com customers are likely to be representative of the views held by regular bettors at large.

4 Merrion Stockbrokers Merrion Online Betting Survey - Spring Demographics We began our survey by gathering some basic demographic details on respondents: Chart 1: Gender Breakdown 9.1% 90.9% Ma le Female Chart 2: Age Bracket % % % 1 5.0% Chart 3: Geographic Location 3.8% 10.2% 2.3% 7.2% 76.5% England Scotland Wales Ire la nd Other

5 Merrion Stockbrokers Merrion Online Betting Survey Spring Betting Frequency We then asked respondents for some preliminary information on betting frequency - number of active accounts, average number of bets per week and average stake size: Chart 4: Number of Accounts % % % 1 5.0% Chart 5: Average Number of Bets Per Week % % % 1 5.0% < n/a Chart 6: Average Stake Size ( or ) % % % % 1 5.0% < n/a

6 Merrion Stockbrokers Merrion Online Betting Survey - Spring Brand Awareness Paddy Power frequently refers to brand awareness in its earnings presentations and how awareness of its brand has been growing versus the competition (TNS publishes research on brand awareness). While growing brand awareness is a positive for the company from a marketing perspective, we wanted to ascertain whether there is much, if any, correlation between brand awareness and new customer sign-up activity. Table 1: What Online Sports Betting Brand Are You Most Aware Of? % of Total Betfair 34.4% Paddy Power 14.7% Bet % Ladbrokes 13.0% William Hill 8.9% Tote Sport 3.1% Skybet 2.3% Stan James 1.6% Victor Chandler 1.6% Betfred 1.1% BlueSq 0.9% Coral 0.9% Boyle Sports 0.8% Sportingbet 0.6% Betdaq 0.5% SportingIndex 0.5% Others / Not Applicable 0.5% Table 2: What Online Sports Betting Brand Are You Second Most Aware Of? % of Total Ladbrokes 17.7% Paddy Power 15.7% William Hill 15.2% Betfair 12.0% Bet % Coral 4.0% Tote Sport 3.8% Betfred 3.5% Victor Chandler 3.4% Skybet 2.9% BlueSq 2.6% Boyle Sports 2.2% Stan James 1.6% Sportingbet 1.5% Betdaq 1.3% Others / Not Applicable 1.3% Table 3: What Online Sports Betting Brand Are You Third Most Aware Of? % of Total William Hill 16.2% Ladbrokes 14.9% Paddy Power 14.5% Bet % Betfair 7.4% Tote Sport 5.6% Coral 5.1% Victor Chandler 5.1% Skybet 4.7% Betfred 3.4% BlueSq 2.9% Boyle Sports 2.9% Stan James 2.9% Betdaq 2.0% SportingIndex 0.9% 888 Sport 0.8% Others / Not Applicable 3.0% Betfair is the brand that respondents are most aware of. We would expect a higher awareness of a betting exchange amongst regular online bettors than might be seen

7 Merrion Stockbrokers Merrion Online Betting Survey Spring amongst less frequent bettors. From tables 1-3, we can see that Paddy Power has achieved strong brand awareness in Britain (87.5% of our survey respondents came from England, Scotland or Wales) as it is in the top three results for each awareness level. Ladbrokes and William Hill also had high brand awareness with survey respondents, likely helped by their considerable high-street presence throughout Britain. Chart 7: Do You Have An Account With The Online Sports Betting Brand You Are Most Aware Of? 17.8% 82.2% Yes No Chart 8: Do You Have An Account With Either Of The Online Sports Betting Brands You Are Second or Third Most Aware Of? 29.4% 70.6% Yes No We can see from charts 7 & 8 that there is a strong correlation between brand awareness and account openings, with 82% of respondents having an account with the brand that they are most aware of and 71% of respondents having an account with either of the brands that they are second or third most aware of. We conclude from this that brand building and brand awareness does translate into new customer account openings for online sports betting companies.

8 Merrion Stockbrokers Merrion Online Betting Survey - Spring New Account Openings Table 4: What Was The Most Important Factor For You In Opening Your First Online Sports Betting Account? % of Total Best Odds 27.4% Easy to Use Website 19.6% Sign-up Bonus 12.3% Range of Markets Offered 11.5% Recognised and Trusted Brand 10.2% Money Back Specials 4.7% Customer Service 0.6% Online Advertising 0.3% Other 4.3% Not Applicable 9.0% Responses to this question were of particular interest to us as betting companies aggressively compete for new customer acquisition. We can see that having the best odds is the leading reason behind customers opening their first online betting account. Paddy Power regularly emphasises its value proposition to both customers and investors, and we see from table 4 that this is likely to have contributed to its strong online customer growth over the past number of years. Table 5: Would You Be Willing To Open Another Online Sports Betting Account? % of Total Definitely 30.3% Quite Likely 18.8% Possibly 33.2% Unlikely 11.1% Definitely Not 3.1% Not Applicable 3.5% Table 5 indicates that the majority of respondents (82%) are in some way willing to open another online sports betting account. This is encouraging for the continued growth of the industry as well as for companies trying to gain market share at the expense of others. Table 6: What Would Be The Most Important Factor For You In Opening Another Online Sports Betting Account? % of Total Best Odds 3 Sign-up Bonus 29.9% Money Back Specials 9.5% Easy to Use Website 8.5% Range of Markets Offered 8.1% Recognised and Trusted Brand 4.0% Customer Service 0.6% Online Advertising 0.1% Other 1.4% Not Applicable 7.9% The value proposition is again strongly evident in what influences the decision making process when opening a new betting account. Our view is that having a high sign-up bonus may attract new business in the short-term, but this business is unlikely to be retained thereafter. However, a company consistently possessing the best odds is likely to attract and retain customer business over the long-term.

9 Merrion Stockbrokers Merrion Online Betting Survey Spring Chart 9: Which Company Would You Be Most Likely To Open Another Online Sports Betting Account With? % 16.0% 14.0% 12.0% 1 8.0% 6.0% 4.0% 2.0% 888 Sport Bet 365 Betdaq Betfair Betfred BlueSq Boyle Sports BWin Coral Expekt Ladbrokes Paddy Power Skybet Sportingbet SportingIndex Stan James Tote Sport Victor Chandler William Hill Other Not Applicable This is a very important question in our view as it provides an indication of potential future new business wins for an online betting company. 15.2% of respondents indicated that they would be most likely to open another online sports betting account with Paddy Power. This was more than double the next highest scoring to this question, with 7.0% of respondents indicating that they would open another account with Bet365. William Hill and Ladbrokes also scored well, with 6.6% and 6.5% of respondents respectively. Betfair was the next highest with 6.0%. This is particularly encouraging for the future growth prospects of Paddy Power s online business. While the company has already achieved significant growth in active customer numbers over the past number of years, chart 9 indicates that there is still plenty to play for in the years to come.

10 Merrion Stockbrokers Merrion Online Betting Survey - Spring Share of Wallet Industry commentators frequently note that the online betting sector continues to grow at a rate of 8-10% per annum. While it was difficult for us to ascertain the exact industry growth rate from survey respondents, we see in chart 10 that there is a low likelihood of growth stagnating in the near term. Chart 10: In The Future Is Your Overall Spend On Online Sports Betting Likely To? Increase Remain the Same Decrease Not Applicable Regarding the percentage share of wallet between different sports, horseracing dominates with 64%, followed by football at 18% and then a sharp fall to golf at 4.4%. Greyhound racing accounts for 4% of existing spend, while NFL is at 2% and tennis at 1%. Other sports (including novelty bets) account for 7% of spend. Chart 11: Percentage Split Of Existing Spend Between Different Sports Football Golf Greyhound Racing Horse Racing NFL Tennis Others We also asked respondents for a percentage split of their spend between their various accounts. We can see from chart 12 that 41% of wagering occurs through respondents main betting account, with 12% being spent through their second account and 7% through their third.

11 Merrion Stockbrokers Merrion Online Betting Survey Spring Chart 12: Percentage Split Of Existing Spend Between Different Accounts % % % % 1 5.0% Account 1 Account 2 Account 3 Account 4 Account 5 Others Not Applicable From table 7, we see that 72% of respondents are in some way willing to increase the amount that they bet with one of their existing accounts at the expense of their other accounts. Table 7: Would You Be Willing To Increase The Amount You Bet With One Of Your Existing Accounts Over Others? % of Total Definitely 17.0% Quite Likely 20.4% Possibly 34.7% Unlikely 16.9% Definitely Not 2.4% Not Applicable 8.5% Table 8: What Would Be The Most Important Factor For You In Increasing The Amount You Bet With One Of Your Existing Accounts Over Others? % of Total Best Odds 50.7% Money Back Specials 15.6% Range of Markets Offered 7.0% Sign-up Bonus 4.7% Easy to Use Website 3.6% Recognised and Trusted Brand 1.7% Customer Service 0.8% Online Advertising 0.5% Other 2.8% Not Applicable 12.6% We again see the importance of the value proposition in table 8, with over 50% of respondents noting that best odds would be the main reason for them increasing their spend with one account versus another. Money back specials also scores well in this question, with other responses in the single digits. Value proposition thus appears to be the key factor for a company to focus on when aiming to grow its share of customer wallet.

12 Merrion Stockbrokers Merrion Online Betting Survey - Spring Chart 13: Which Online Sports Betting Company Would You Be Most Likely To Increase The Amount You Bet With Over Others? 25.0% % 1 5.0% 888 Sport Bet 365 Betdaq Betfair Betfred BlueSq Boyle Sports BWin Coral Expekt Ladbrokes Paddy Power Skybet Sportingbet SportingIndex Stan James Tote Sport Victor Chandler William Hill Other Not Applicable As would be anticipated following the responses in table 8, the leading value players in the industry (Betfair and Paddy Power) were identified by respondents as being most likely to win an increased share of customer wallet. We see that Betfair is the most likely to increase share of wallet, with 21% of respondents noting that they would increase their spend here at the expense of their other existing accounts. Paddy Power also scores very well with 16% of respondents noting that they would increase spend with the company. Bet365 comes next at 11% before responses fall into the single digits. Responses to this question, along with the responses detailed in chart 9 (which company would you be most likely to open a new online sports betting account with), are the two most important questions in this survey in our opinion. We are again encouraged by responses to this question and what they indicate for the future growth prospects of Paddy Power. Not only can the company continue to target growth through new customer signups, it also looks poised to attract business from increasing its share of customer wallet at the expense of its competitors.

13 Merrion Stockbrokers Merrion Online Betting Survey Spring Online Gaming Table 9: Do You Participate In Online Gaming? % of Total Yes 28.1% No 71.9% Online gaming (poker, casino, bingo, games etc) is another area that holds potential future growth prospects. Interestingly, a relatively low percentage of respondents (28.1%) currently participate in online gaming. While this could be seen as a potential crossmarketing opportunity for online betting companies, table 10 indicates that 57.4% of respondents are either unlikely to or definitely won t participate in online gaming in the future. Table 10: If Not, Would You Be Willing To Participate In Online Gaming In The Future? % of Total Definitely 2.7% Quite Likely 3.8% Possibly 16.7% Unlikely 30.9% Definitely Not 26.5% Not Applicable 19.5% Chart 14: Percentage Split Of Existing Spend Between Online Sports Betting And Online Gaming? Online Sports Betting Online Gaming Not Applicable Chart 15: In The Future, Are You More Likely To Increase Spend In Online Sports Betting Or Online Gaming? % % % % 1 5.0% Online Sports Betting Online Gaming Both Neither Not Applicable We see from chart 15 that future spend is significantly more likely to increase in online betting versus online gaming, with only 2.8% of respondents noting that they would increase spend in online gaming rather than online betting.

14 Merrion Stockbrokers Merrion Online Betting Survey - Spring Chart 16: Would You More Easily Switch Account Provider Of Online Sports Betting Or Online Gaming? Online Sports Betting Online Gaming Not Applicable Chart 16 examines the stickiness of an online betting account versus an online gaming account. Interestingly, respondents noted that they would be more likely to switch account provider of online sports betting than they would be to switch account provider of online gaming.

15 Merrion Stockbrokers Merrion Online Betting Survey Spring Paddy Power Table 11: Are You Aware Of Paddy Power? % of Total Yes 99.6% No 0.4% We concluded our survey by asking respondents some questions specific to Paddy Power. From table 11 we see that almost all respondents are aware of Paddy Power and from chart 17, we see that 53% of them already have an account with Paddy Power. Chart17: Do You Have An Online Sports Betting Account With Paddy Power? Yes No Chart18: Would You Be Willing To Open An Online Sports Betting Account With Paddy Power? Yes No Not Applicable Chart 18 indicates that of those respondents who do not already have an account with Paddy Power, circa 75% would be willing to open an account while circa 25% would not be willing to open an account. Table 12 again highlights the prominence of the value proposition in determining why respondents would open an account with Paddy Power. Table 12: What Would Be The Most Important Factor For You In Opening An Online Sports Betting Account With Paddy Power? % of Total Best Odds 23.1% Sign-up Bonus 18.3% Money Back Specials 12.9% Range of Markets Offered 8.0% Easy to Use Website 6.3% Recognised and Trusted Brand 4.9% Customer Service 0.9% Online Advertising 0.4% Other 1.3% Not Applicable 23.9%

16 Merrion Stockbrokers Merrion Online Betting Survey - Spring What do you think of when you see Paddy Power? For our last question, we asked respondents an open ended question on what they think of when they see Paddy Power. Rather than providing a number of choices for respondents to choose between, we wanted to guage the image that the company conveys to its customers in their own words. The reponses were many and varied but we include a small sample set below that is indicative of the total responses: Best Odds Novelty Bets Humour TV Advertising Good Value Cheltenham Richard Dunwoody Irish / Ireland Trusted Irish racing Irish guy who keeps paying out too early Fun & Quirky Horse racing Money back specials Paddy Power Gold Cup Paddy Power himself Dynamic & Innovative Cheeky Low stake limit Mad Irishmen A bit of fun Guaranteed Odds A bit of a daft name

17 Merrion Stockbrokers Merrion Online Betting Survey Spring Survey Conclusion We draw two main conclusions from our online betting survey: Firstly regarding the industry in general, it appears that having a value proposition is the key to growing market share. Best odds, money back specials and sign-up bonus continuously scored highly on the reasons why respondents opened their first account, why they would open a new account and why they would increase their spend with one company at the expense of another. While a sleek, easy-to-use website and excellent customer service are certainly necessary in online betting and gaming, value proposition appears to dominate customers share of mind. Secondly regarding Paddy Power, we are encouraged by the responses to our survey and what they indicate for the future growth prospects of the business. Respondents indicated that Paddy Power was the company that they are most likely to open a new online sports betting account with and is the company they are second most likely to increase their share of wallet with. These two questions were our main focus when we first thought of conducting an online betting survey and Paddy Power has scored excellently in each. We therefore anticipate that Paddy Power s online business will continue to grow market share, and as a follow-on, profitability over the years to come.

18 Merrion Stockbrokers Merrion Online Betting Survey - Spring Paddy Power Investment Case Background We had previously been concerned that Paddy Power would struggle to achieve the growth rates that it has seen over the past five years (2004 adjusted EPS of 54.3c, 2009 adjusted EPS of 120.7c, giving a CAGR of 17.3%). In particular, we felt that growth in the online division (which currently accounts for c.70% of Group profitability and is therefore the major driver of Group growth at present) may begin to slow over the coming years. While we viewed last year s Australian acquisition as a logical step towards maintaining long-term growth prospects for the Group, our concern remained that if the online business was to slow before the Australian business (and the UK retail business) became meaningful contributors to Group profitability, then the growth multiple that has justifiably been attributed to Paddy Power in the past would quickly dissipate. With this in mind, we sought to conduct our online betting survey in order to confirm or disprove our concerns regarding the sustainability of growth in the online division.

19 Merrion Stockbrokers Merrion Online Betting Survey Spring Paddy Power Investment Case Conclusion As our survey results indicate, Paddy Power s online division looks set to continue growing over the coming years and this should give the Australian and UK retail businesses the necessary time to grow and become meaningful future drivers of Group growth. Table 13: Segmental Split of Group Operating Profit (%) f 2011f Irish Retail 48.4% 48.0% 37.4% 24.5% 22.7% 22.5% UK Retail -13.2% -1.3% 1.6% 1.9% 2.4% 3.8% Telephone 13.2% 8.9% 4.5% -1.8% 3.0% 2.8% Online 51.5% 44.3% 56.6% 68.5% 55.1% 50.7% Australia 6.8% 16.9% 20.2% Group Source: Company reports, Merrion Stockbrokers estimates From table 14 we can see that our current forecasts assume amounts staked in the online sportsbook will grow at high single digit rates over the coming years. Amounts staked is a function of three metrics number of active customers, volume of bets per active customer (which gives total volume of bets) and average stake size. Our forecasts assume that active customer numbers will grow by 10% in FY 10 and by 7.5% in FY 11. Our survey results give us significant comfort that these growth rates are achievable in FY 10 and FY 11. Furthermore, our survey results indicate that i) there is potential for active customer growth to be greater than this over the coming two years; and ii) that meaningful active customer growth is likely to continue past our current forecasting period. Table 14: Online Sportsbook & Gaming ( m) f 2011f Sportsbook Average stake size in online sportsbook ( ) Growth rate in average stake size in online sportsbook (%) -5.7% -4.4% -19.8% -19.8% -5.0% -2.5% Volume of bets in online sportsbook (m) Growth rate in bet volumes in online sportsbook (%) 69.8% 23.9% 37.1% 54.7% 15.0% 1 Amounts Staked in Online Sportsbook ( m) Growth rate in amounts staked in online sportsbook (%) 60.2% 18.5% % 9.2% 7.2% Gross win margin in online sportsbook (%) 7.9% 9.2% 9.0% 6.9% 7.6% 7.6% Gross Win in Online Sportsbook ( m) Growth rate in gross win in online sportsbook (%) 52.0% 38.3% 8.3% -5.6% 20.6% 7.2% Gaming Gross win in Gaming ( m) Growth rate in amounts held in gaming (%) 64.5% 43.8% 15.7% 11.5% 5.0% 4.0% Source: Company reports, Merrion Stockbrokers estimates Table 15: Online Division ( m) f 2011f Amounts Staked in Online ( m) Growth rate in amounts staked in online (%) 60.4% 19.9% 10.4% 23.2% 8.9% 7.0% Gross Win in Online ( m) Growth rate in gross win in online (%) 57.0% 40.6% 11.5% 2.0% 13.0% 5.8% Gross win margin in online (%) 12.8% 15.1% 15.2% 12.6% 13.1% 12.9% Taxes and Duty in online ( m) Gross Profit in Online ( m) Growth rate in gross profit in online (%) 54.7% 45.7% 20.9% 3.8% 12.0% 6.5% Gross profit margin in online (%) 9.8% 12.0% 13.1% 11.0% 11.4% 11.3% Operating costs in online ( m) Growth rate in operating costs in online (%) 72.0% 53.5% 11.3% 1.1% 12.0% 8.0% Operating Profit in Online ( m) Growth rate in operating profit in online (%) 37.9% 36.4% 33.9% 6.7% 12.0% 4.8% Operating profit margin in online (%) 4.5% 5.1% 6.2% 5.3% 5.5% 5.4% Source: Company reports, Merrion Stockbrokers estimates

20 Merrion Stockbrokers Merrion Online Betting Survey - Spring The matrix below details the impact on Group EPS over the coming two years for various active customer growth assumptions (same growth rate assumed to occur in both years). We hold all other online division model assumptions as well as all other division assumptions constant. Table 16: Impact On EPS For Various Active Customer Growth Assumptions (c) Current Forecast 5.0% 7.5% % 15.0% 17.5% 2 FY 2010 EPS FY 2011 EPS Source: Merrion Stockbrokers estimates This highlights the significant upside potential to Group EPS from continued growth in online sportsbook active customer numbers. Our current EPS forecast is for 28.0% growth in 2010 to 154.6c and 12.8% growth in 2011 to 174.4c. Given the upside potential evident in table 16, we feel that the current P/E multiple of 15.3x our FY 11 forecasts and an FY 11 EV/EBITDA of 8.2x is an attractive entry point into this very well managed business. As a result of this, and with our tangible survey evidence in hand, we are now comfortable with Paddy Power s future growth prospects and we therefore upgrade the company from a Hold recommendation to a Buy recommendation.

21 Merrion Stockbrokers Merrion Online Betting Survey Spring Paddy Power Financial Models Table 17: Paddy Power Income Statement ( m) f 2011f Amounts Staked Gross Win Gross profit Operating Costs Operating Profit Interest Non Recurring items Pretax Profit Adj Pretax Profit Taxation Tax rate 17.0% 17.2% 15.8% 13.0% 16.6% 17.0% Minority Interest Net Income Adj Net Income Dividends Retained Earnings EBITDA Diluted Shares Average Shares Basic EPS Norm/Diluted EPS Growth rate in Norm EPS (%) 47.1% 60.9% % 28.0% 12.8% Dividend per share Growth rate in dividend per share (%) 56.4% 60.9% 5.9% 8.1% 1 1 Dividend Cover Payout Ratio 41% 41% 39% 48% 42% 41% Source: Company reports, Merrion Stockbrokers estimates

22 Merrion Stockbrokers Merrion Online Betting Survey - Spring Table 18: Paddy Power Segmental Analysis f 2011f Amounts Staked ( m) Irish Retail UK Retail Telephone Online Australia Group Gross Win ( m) Irish Retail UK Retail Telephone Online Australia Group Gross Win Margins (%) Irish Retail 12.5% 13.6% 13.3% 11.2% 12.0% 12.0% UK Retail 17.2% 18.1% 18.8% 17.8% 18.4% 18.5% Telephone 8.0% 9.1% 7.1% 5.0% 6.8% 6.8% Online 12.8% 15.1% 15.2% 12.6% 13.1% 12.9% Australia n/a n/a n/a 7.1% 6.5% 6.8% Group 12.2% 13.8% 13.5% 10.8% 10.4% 10.7% Gross Profit ( m) Irish Retail UK Retail Telephone Online Australia Group Source: Company reports, Merrion Stockbrokers estimates Table 19: Paddy Power Operating Profit Analysis f 2011f Operating Profit ( m) Irish Retail UK Retail Telephone Online Australia Group Growth Rate in Operating Profit (%) Irish Retail 55.8% 57.1% -18.3% -42.2% 28.8% 12.9% UK Retail 28.8% -84.9% % 5.4% 78.0% 79.8% Telephone 64.5% 7.3% -46.9% % % 8.0% Online 37.9% 36.4% 33.9% 6.7% 12.0% 4.8% Australia n/a n/a n/a n/a 243.8% 36.5% Group 50.9% 58.6% 5.0% -11.9% 39.3% 13.9% Operating Profit Margins (%) Irish Retail 2.6% 3.7% 3.0% 1.7% 2.2% 2.4% UK Retail -4.6% -0.5% 0.7% 0.6% 0.9% 1.3% Telephone 2.0% 2.2% 1.2% -0.4% 1.0% 1.1% Online 4.5% 5.1% 6.2% 5.3% 5.5% 5.4% Australia n/a n/a n/a 1.0% 1.3% 1.7% Group 2.5% 3.6% 3.6% 2.4% 2.6% 2.7% % of Group Operating Profit (%) Irish Retail 48.4% 48.0% 37.4% 24.5% 22.7% 22.5% UK Retail -13.2% -1.3% 1.6% 1.9% 2.4% 3.8% Telephone 13.2% 8.9% 4.5% -1.8% 3.0% 2.8% Online 51.5% 44.3% 56.6% 68.5% 55.1% 50.7% Australia 6.8% 16.9% 20.2% Group Source: Company reports, Merrion Stockbrokers estimates

23 Merrion Stockbrokers Merrion Online Betting Survey Spring Table 20: Paddy Power Balance Sheet ( m) f 2011f Fixed Assets Tangible assets Intangible assets Financial assets Total Current Assets Trade Debtors Other debtors Cash Total Current Liabilities Trade Creditors Other creditors Short term debt Total Total Capital Employed Long term Liabilities Lease Liab Other/Minority Net Capital Employed Shareholders Funds Share Capital Share Premium Reserves Revenue Reserve Shareholders Funds NAV - Reported (c) Source: Company reports, Merrion Stockbrokers estimates Table 21: Paddy Power Cash Flow Statement ( m) f 2011f Operating Profit Depreciation Chg in Working Cap Other Operating Cashflow Interest Tax Capital Expenditure Free Cashflow Dividends Share Issues Acquisitions Disposals Other Cash Inflow / Outflow Cash at start of period Cash at end of period Source: Company reports, Merrion Stockbrokers estimates

24 Merrion Stockbrokers 24 Disclosures Disclosure checklist - Potential conflict of Interests Stock ISIN Disclosure (see below) Currency Price Paddy Power IE ,11 EUR Source: Bloomberg closing prices of 14/04/2010 Key: 1. Merrion Stockbrokers Limited ( Merrion ) holds or owns or controls 5% or more of the issued share capital of this company. 2. The company holds or owns or controls 5% or more of the issued share capital of Merrion. 3. Merrion is or may be regularly doing proprietary trading in equity securities of this company. 4. Merrion has been lead manager or co-lead manager in a public offering of the issuer s financial instruments during the last twelve months. 5. Merrion is a market maker in the issuer s financial instruments. 6. Merrion is a liquidity provider in relation to price stabilisation activities for the issuer to provide liquidity in such instruments. 7. Merrion acts as a corporate broker or a sponsor or a sponsor specialist (in accordance with the local regulations) to this company. 8. Merrion and the issuer have agreed that Merrion will produce and disseminate investment research on the said issuer as a service to the issuer. 9. Merrion has received compensation from this company for the provision of investment banking or financial advisory services within the previous twelve months. 10. Merrion may expect to receive or intend to seek compensation for investment banking services from this company in the next three months. 11. The author of, or an individual who assisted in the preparation of, this report (or a member of his/her household), or a person who although not involved in the preparation of the report had or could reasonably be expected to have access to the substance of the report prior to its dissemination has a direct ownership position in securities issued by this company. 12. An employee of Merrion serves on the board of directors of this company. Rating History: Merrion s current rating for Paddy Power is Buy and was issued on 15/04/2010. Merrion s previous rating for Paddy Power was Hold and was issued on 04/03/2009. We have not disclosed the recommendation to the issuer before its dissemination. Rating ratio Merrion Stockbrokers Limited Q Rating breakdown A Buy 58.6% Hold 37.9% Reduce Suspended 3.5% Not Rated/Under Review/Accept Offer Total 10 Source: Merrion Stockbrokers Limited A: % of all research recommendations Merrion s rating system consists of three recommendations: Buy, Hold and Reduce. For a Buy rating, the minimum expected upside is 10% in absolute terms over 12 months. For a Hold rating the expected upside is below 10% in absolute terms. A Reduce rating is applied when there is expected downside on the stock. Target prices are set on all stocks under coverage, based on a 12-month view. Equity ratings and valuations are issued in absolute terms, not relative to any given benchmark. Job titles: The functional job title of the person/s responsible for the recommendations contained in this report is Equity Research Analyst unless otherwise stated on the cover Compensation: The research analyst (s) primarily responsible for the preparation of the content of the research report attest that no part of the analyst (s ) compensation was, is or will be, directly or indirectly, related to the specific recommendations expressed by the research analyst (s ) in the research report. The research analyst (s ) compensation is, however, determined by the overall economic performance of Merrion. Analysts own views: The research analyst (s) primarily responsible for the preparation of the content of the research report attest that the views expressed in the research report accurately reflect the analyst (s ) personal and current views about all of the subject securities or issuers. Stock prices: Prices are taken as of the previous day s close (to the date of this report) on the home market unless otherwise stated. Regulators Merrion Stockbrokers Limited ('Merrion') is a member firm of the Irish Stock Exchange and the London Stock Exchange and is regulated by the Financial Regulator. For further information relating to research recommendations and conflict of interest management please refer to

25 Merrion Stockbrokers 25 Legal information The information contained in this publication was obtained from various sources believed to be reliable, but has not been independently verified by Merrion. Merrion does not warrant the completeness or accuracy of such information and does not accept any liability with respect to the accuracy or completeness of such information, except to the extent required by applicable law. This publication is a brief summary and does not purport to contain all available information on the subjects covered. Further information may be available on request. This report may not be reproduced for further publication unless the source is quoted. This publication is for information purposes only and shall not be construed as an offer or solicitation for the subscription or purchase or sale of any securities, or as an invitation, inducement or intermediation for the sale, subscription or purchase of any securities, or for engaging in any other transaction. Any opinions, projections, forecasts or estimates in this report are those of the author only, who has acted with a high degree of expertise. They reflect only the current views of the author at the date of this report and are subject to change without notice. Merrion has no obligation to update, modify or amend this publication or to otherwise notify a reader or recipient of this publication in the event that any matter, opinion, projection, forecast or estimate contained herein, changes or subsequently becomes inaccurate, or if research on the subject company is withdrawn. The analysis, opinions, projections, forecasts and estimates expressed in this report were in no way affected or influenced by the issuer. The author of this publication benefits financially from the overall success of Merrion. The investments referred to in this publication may not be suitable for all recipients. Recipients are urged to base their investment decisions upon their own appropriate investigations that they deem necessary. Any loss or other consequence arising from the use of the material contained in this publication shall be the sole and exclusive responsibility of the investor and Merrion accepts no liability for any such loss or consequence. In the event of any doubt about any investment, recipients should contact their own investment, legal and/or tax advisers to seek advice regarding the appropriateness of investing. Some of the investments mentioned in this publication may not be readily liquid investments. Consequently it may be difficult to sell or realize such investments. The past is not necessarily a guide to future performance of an investment. The value of investments and the income derived from them may fall as well as rise and investors may not get back the amount invested. Some investments discussed in this publication may have a high level of volatility. High volatility investments may experience sudden and large falls in their value which may cause losses. International investing includes risks related to political and economic uncertainties of foreign countries, as well as currency risk. To the extent permitted by applicable law, no liability whatsoever is accepted for any direct or consequential loss, damages, costs or prejudices whatsoever arising from the use of this publication or its contents. Merrion has written procedures designed to identify and manage potential conflicts of interest that arise in connection with its research business. Merrion s research analysts and other staff involved in issuing and disseminating research reports operate independently to other areas of the business. Chinese Wall procedures are in place between the research analysts and staff involved in securities trading for the account of Merrion or clients to ensure that price sensitive information is handled according to applicable laws and regulations. United States: This report is only distributed in the US to major institutional investors as defined by S15a-6 of the Securities Exchange Act, 1934 as amended. By accepting this report, a US recipient warrants that it is a major institutional investor as defined and shall not distribute or provide this report or any part thereof, to any other person. Other countries: Persons in possession of this document should inform themselves about possible legal restrictions and observe them accordingly. Further details are available on our website and/or by contacting our Compliance Officer. Other countries: Laws and regulations of other countries may also restrict the distribution of this report. Persons in possession of this document should inform themselves about possible legal restrictions and observe them accordingly.

26 Merrion Stockbrokers 3 rd Floor Block C The Sweepstakes Centre Ballsbridge Dublin 4 Ireland Switch: Institutional Trading Desk: Private Clients: Fax: Website: info@merrion-capital.com Bloomberg: MSTK <GO> Institutional Equities Analysts - Equity Research Aisling Vaughan: Aisling.Vaughan@merrion-capital.com Sam Farthing: Sam.Farthing@merrion-capital.com Killian Jones: Killian.Jones@merrion-capital.com Sebastian Orsi: Sebastian.Orsi@merrion-capital.com Sales Liam Boggan: Liam.Boggan@merrion-capital.com Enrique Curran Enrique.Curran@merrion-capital.com Peter Frawley: Peter.Frawley@merrion-capital.com Johnny Lynch: Johnny.Lynch@merrion-capital.com Sales Support Aoife Howe: Aoife.Howe@merrion-capital.com Traders Timothy Gale: Tim.Gale@merrion-capital.com Laura Fitzpatrick: Laura.Fitzpatrick@merrion-capital.com Hannah Meyer: Hannah.Meyer@merrion-capital.com Martin McGowan: Martin.McGowan@merrion-capital.com Simon Tuthill: Simon.Tuthill@merrion-capital.com Jimmy Swaine: Jimmy.Swaine@merrion-capital.com Institutional Trading Desk Phone: Fax: research@merrion-capital.com