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Leisure industry offers rich pickings
While sterling depreciation following the vote for Brexit will hit consumers in the pocket, it may also fatten the wallets of savvy leisure sector investors. Broker Canaccord Genuity for one believes the online gaming sub-sector remains ripe for further consolidation.
Key constituent Paddy Power Betfair (PPB) shrugged off adverse sports results in late 2016 and assured investors (23 Jan) full year earnings will come in at the mid-point of its previously guided £390m to £405m EBITDA range.
The sports betting and gaming group formed through February 2016’s mega-merger said that since its third quarter update, it had continued to see good sportsbook staking growth, although it was hit by the US election result and unfavourable football scores.
‘Betfair’s sportsbook, Paddy Power’s sportsbook and the over-the-counter sportsbooks in Paddy Power’s 600-plus shops all lost money on football during the month of December,’ says Davy, albeit sticking with its ‘outperform’ rating on the shares.
The broker seems confident 2017 earnings forecasts will have to be revised upwards as the year progresses. It notes prospects are good in Europe and Australia, where the Sportsbet arm ‘exited the year with good top-line momentum’.
Canaccord Genuity highlights 888 (888) as a prime leisure sector bid target.
Online gaming is an industry with significant economies of scale which is currently facing rising regulatory and marketing costs; this fact lies behind the recent Paddy Power/Betfair, Ladbrokes/Coral, GVC/bwin and Amaya/PokerStars mergers.
‘888 looks the most compelling target, in our view – unusually, it owns its own technology (outside Sportsbook), meaning it has lower margins but conversely offers greater potential cost synergies to acquirers,’ says Canaccord.
‘It also boasts a best-in-class CRM platform and online marketing capabilities which could drive potential revenue synergies.’ The broker reckons Ladbrokes Coral (LCL), William Hill (WMH) and Rank (RNK) are potential suitors, while ‘a tie-up with GVC (GVC) would also generate material synergies.’
Canaccord also believes pubs-to-restaurant business Mitchells & Butlers (MAB) looks vulnerable to a bid, mindful that UK tax exile Joe Lewis owns 26.6% and made a failed takeover in 2011 at the 230p level.
‘He may be tempted to bid again, given the persistent weakness of the share price. It’s also possible that, following Heineken’s recent decision to bulk up its pub estate, other brewers could look to M&B,’ says Canaccord. (JC)