Barclays and Paddy Power

Friday, November 2, 2018 - 10:15

“A 0.6% rise in the FTSE 100 on Friday to 7,158 puts the index at its highest level since early October. However, investors are unlikely to be celebrating too hard given the index still remains 6.9% down year-to-date.

“The FTSE 100’s star performers at the end of the week included construction rental group Ashtead, banking firm Standard Chartered and miner Antofagasta.

“Markets were fairly strong elsewhere in the world, particularly in Hong Kong where the Hang Seng index jumped 4.2% off the back of discussions between the US and China regarding trade relations, and a 9.3% rally by market giant Tencent,” says Russ Mould, investment director at AJ Bell.


“Investors will be hoping incoming chairman Nigel Higgins can herald a change in fortunes at Barclays as he gets set to replace the departing John McFarlane in 2019.

“He faces a tough job. The bank is under severe scrutiny over its corporate strategy with Edward Bramson’s activist investment vehicle Sherborne Investors taking a large stake earlier this year. Reportedly Sherborne had no role in the appointment of Rothschild alumni Higgins.

“Sherborne, and by extension Bramson, want Barclays to jettison parts of its investment banking business. Given a lot of Higgins’ experience is in the investment banking arena, the activists may not be particularly encouraged by the appointment. Chief executive Jes Staley has so far proved resistant to a shift in direction.

“Nevertheless, the case for change at the top was compelling. The shares are trading substantially lower than their level when Macfarlane was appointed in July 2015, despite him targeting at the outset a doubling of Barclays’ share price within three years.

“Given Macfarlane’s experience Higgins might consider avoiding big promises at this stage, achieving a targeted return on equity, a key measure of profitability, of 10% by 2020 would represent a good start.”

Paddy Power Betfair

“It must be hard managing a gambling company when staying abreast of regulatory changes probably takes up as much time as making sure day-to-day operations are running smoothly.

“While Paddy Power Betfair has lifted its earnings guidance, it is facing regulatory headwinds in the UK, Ireland and Australia. This relates to restrictions on fixed odds betting terminal stakes and higher remote gaming tax in the UK; and tax hikes in the other two locations.

“The US market arguably remains the most exciting part of the business given the scale of the opportunity with legalised sports betting.

“Paddy Power’s acquisition of FanDuel earlier this year is proving to be a clever move as it provides a ready-made audience of people betting on sports, albeit from a fantasy level. It is pinning its hopes on cross-selling legal sports betting to this customer base as and when more US states allow it.

“Most of the big gambling companies these days have lots of moving parts and they are increasingly international which helps to diversify risk – that’s important because several territories are incredibly competitive.

“Paddy Power has been spending more money on marketing in the UK in response to aggressive advertising by rivals such as Bet365 and William Hill. It has also been spending more on promotions in Australia, a country that has been particularly tough for gambling firms in recent years.

“For example, William Hill sold its Australian business earlier this year after admitting defeat. The industry has been hit with new taxes and advertising rules, plus a ban on borrowing money to place bets.

“Interestingly, Paddy Power’s third quarter update reveals a 2% decline in Australian revenue with the company saying that customers had the winning hand in the period. Nonetheless it remains confident of gaining market share in the country.”

These articles are for information purposes only and are not a personal recommendation or advice.

The daily market comment is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.