Spreading risk across three markets

ANALYSIS:Paddy Power has added a sizeable presence in Australia and the UK to its Irish core

PADDY POWER told a recent Cheltenham festival preview that the bookies “could have their trousers around their ankles” at the end of the first day’s racing in the Cotswolds next week.

It’s an unedifying thought. What the company’s communications manager meant was that the first day’s results look like favouring the betting public rather than the bookies.

If that is the case, Paddy Power plc will have three other days in which to get its money back and make a profit into the bargain. On previous form, this is the likely outcome. Cheltenham is one of the biggest betting events of the year and no bookmaker wants a run of bad results there.

However, Paddy Power has evolved to the point where this would be of less consequence than seven or eight years ago.

The company now has three key markets – Ireland, Britain and Australia – where it is the biggest online bookmaker as result of recently completing the buyout of Sportsbet and IAS.

Yesterday’s results showed that operating profits from Australia came to €19.4 million, while its Irish bookie shops, once the company’s core business, delivered €17.6 million.

The dark art of bookmaking is all about managing risk. Different territories and different markets bring different risks, but also serve to spread them.

Good results in the Melbourne Cup or Australian football league could offset bad outcomes at Cheltenham or Punchestown, or vice versa. The probability that all Paddy Power’s markets and territories will simultaneously deliver a set of profit-denting sports results is low.

Its online business, paddypower.com, was responsible for 55 per cent of its €104 million operating profit, which, at €57.5 million, was up 26 per cent on 2009.

This business has been growing strongly since the early years of he last decade. In one way, though it was its UK betting shops that delivered a standout performance this time, ending with €7.4 million in operating profits, almost six times the €1.3 million it earned in 2009.

This business lost money between 2003 and 2006. From that point it delivered slender profits between that and 2009.

The company yesterday suggested that the division has entered a third phase of its development. Paddy Power now has a good presence in the UK across retail, online and telephone, but it says that there is plenty of headroom for growth.

Its online share is in the low double digits while it is likely to end this year with 2 per cent of the high street market. The company says that the scale it has achieved in the UK at this point gives it scope for investing in the brand to drive further growth.

These developments mean that it is poised to grow further in both Australia and Britain. The Republic should be a more mature market, but the company also grew its share here. This growth presumably came at the expense of competitors, as the market itself is not getting any bigger.

All in all, it looks like Paddy Power could afford one or two losing days next week.

2010 Results

Gross win:€443.5 million (+50%)

Pretax profit:€104.2 million (+55%)

EPS:168.9 cent (+40%)

Dividends:75 cent (+28%)

Summary:Strong growth in its retail and internet channels, plus an enhanced contribution from the Australian online betting business it bought in 2009, boosted bookmaker Paddy Power's profits by 55 per cent to €104.2 million in 2010.

Bookie shops and online operations in Ireland and England grew during the year. Online operating profits were up 52 per cent at €75 million. Irish betting shops delivered €25 million in operating profit. Australia contributed more than €19 million.

The company increased its share of the Irish market as a number of rivals closed all or part of their businesses.