March 7, 2018 / 10:01 AM / in 4 months

REFILE-Paddy Power Betfair investment plan brings short term pain

(Fixes date to March 7)

By Padraic Halpin

DUBLIN, March 7 (Reuters) - Shares in Paddy Power Betfair fell by more than 4 percent on Wednesday after the gambling group’s plans to increase marketing spend and boost sluggish European growth led to downgrades in earnings forecasts.

The bookmaker grew full year earnings by 18 percent, ahead of its guidance, and said the full integration of its businesses following a 2016 merger would free up resources to develop new products either side of key trading at June’s soccer World Cup.

It will also invest an additional 20 million pounds ($27.7 million) this year in marketing and other activities to boost its Paddy Power brand in the highly competitive British market and the Betfair betting exchange in international markets.

While underlying core earnings of 473 million pounds were ahead of the company’s guidance of 450 to 465 million, its online division that accounts for two-thirds of that total and is dominated by the British business grew by just 6 percent.

“We’ve had to focus all our development resources internally so we haven’t been building out products for our customers. I think that’s definitely impacted the performance of the business in 2017,” Chief Executive Peter Jackson, who took over in January, told reporters.

“That’s why we’re beginning to add additional marketing spend, particularly behind the Paddy Power brand, which we think has really suffered from the lack of product investment.”

The group is the product of a 6 billion pound tie-up in 2016 between online betting exchange Betfair and Paddy Power, which runs betting shops as well as an online business. It was one of a number of deals in a sector facing tighter regulation and higher taxes.

Analysts at Goodbody and Davy Stockbrokers expected that the increased investment, together with adverse currency movements, would knock 5 to 6 percent of their earnings forecasts for 2018.

Shares in the group were 4.7 percent lower at 88.20 euros by 0945 GMT, which traders attributed to expected downgrades across the board.

“While this is disappointing, we believe the increased investment is the right step for the group to take to start to catch up in the UK market,” Goodbody analyst Gavin Kelleher wrote in a note, reiterating a buy recommendation.

Kelleher added that plans to target a medium term leverage ratio of between 1 and 2 times net debt/earnings implied that the group would have 750 million to 1.25 billion pounds in cash to deploy on acquisitions and/or shareholder returns.

Chief Executive Jackson predicted that there would be more consolidation in Australia following rival William Hill’s exit this week amid tighter regulation that he said its strongly performing Sportsbet business can cope with.

“We’ve got a strong balance sheet and will be extremely well placed to participate as we see appropriate,” said Jackson. ($1 = 0.7215 pounds) (Reporting by Padraic Halpin)

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