Power Leisure takes a bet on the Internet


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That blurb has already enticed hopeful surfers to place their bets; www.paddypower.com which hosts the site, generated €925,639 (£728,478) in sales from its 2,666 active customers in its first 10 weeks of trading to June 30th, 2000. And since then, active users have more than doubled to 5,887.

Power Leisure, the new plc and owner of the Paddy Power betting group, which will get an Irish and London listing for its shares on Thursday, will want this new division to generate an increasing proportion of its sales. And the impetus to this growth is expected to come from the link-up with NTL Group; that link-up aims to provide an interactive betting service on NTL's interactive TV service in the UK.

But will it? And will Power Leisure be ranked among the growth companies, or the others?

The placing price of the shares has been fixed at €2.40 which capitalises the group at €113 million. At that price the shares have an historic price earnings ratio (p/e) of 21.6. Few publicly-quoted companies can be compared with these ratios. Ladbrokes is part of the Hilton Group, but a value of £1.5 billion sterling has been placed on it. Corals is owned by Deutsche Morgan Grenfell's private equity arm. A direct comparison, however, can be made with Stanley Leisure, the publicly-quoted British betting company with UK and Irish outlets. Its historic p/e is 8.8, or nearly one third of Power Leisure. Granted Stanley Leisure's shares have plummeted from 262.5p sterling in March to 152.5p now, but how can this sort of disparity be justified?

Power Leisure has had a steady profit record. Sales rose to €269.6 million in 1999 from €154.9 million in 1997, and further strong growth has been reported for the first six months of 2000. Pre-tax profit rose to €7.05 million from €4.5 million over the same period with strong growth indicated in the first half of this year. Also it is a cash generative business - net cash generated from operations amounted to €8.9 million in the six months to June 2000, it had cash of €8.7 million in its June balance sheet and will raise some €2.7 million from the placing of shares (existing shareholders get €16.3 million).

The pathfinder is transparent and forward looking. The currency, for example, is in euros, and the executive directors are not scorching the company. There is also a discretionary bonus which last year amounted to €77,000. Also, all employees who have more than three years' service will get €1,270 to €2,500 of free shares and there will be a Sharesave scheme for employees with more than one year service.

Taking an optimistic view, and assuming that first-half earnings are doubled for the full year, earnings per share could rise from 11.1 cents in 1999 to 17.8 cents in 2000. This would put the shares on a prospective p/e of 13. As Stanley Leisure is not expected to show much growth for the next few years, Power Leisure, which should grow strongly in 2001, could justify having a premium rating.

Power is pinning its hopes on Internet betting which will move to the UK early in the new year through NTL which has a franchise to 12 million homes. NTL expects to sign up 500,000 by the end of the year but the deal with NTL is not exclusive so Power will have to compete with the other betting houses on the system. Because it is used to competing in the hurly-burly, unrestricted Irish market, it is convinced it will carve a useful niche in the UK market.

But the Irish betting tax (reduced from 10 per cent to 5 per cent in July 1999) will have an important bearing on Internet betting. Power absorbs this tax but it can only do that for so long. Ladbrokes ended the tax-free honeymoon period for online betting last week by imposing a 5 per cent duty on domestic Internet bets.

"No bookmaker would tell you that they could swallow the tax in perpetuity. The margins in this business are not that significant and if you then have to swallow the tax, you just haven't got a business," according to Ladbrokes.

In the UK a gross-profits tax might be introduced instead of a betting tax and Power is understood to be pushing the Irish Government for a cut in betting tax for international business. Alternatively this business which is losing money (it could be next year before there is a prospect of profits) could be housed in an untaxed offshore region.

Power Leisure gets its fodder from the betting fraternity and they are bound to back the company with a bet on Thursday, giving the share a good premium. But when the dust settles, it will be judged on its earnings stream.

Bill Murdoch is at bmurdoch@irish-times.ie