July 09, 2012

Betfair drops 4.5% as Cyprus announces restrictions on online betting

Betting exchange group faces unexpected blow from new laws to limit gambling.

The beleaguered eurozone state said it would restrict online casino and poker as well as exchange betting. Betfair said Cyprus contributed around 4% of group revenues last year, and around £9m of profit. Its shares have lost 34p to 722p on the news, but it is taking advice on the legality of the move. It said:

The company believes the legislation contains serious flaws and, in certain areas, is inconsistent with European Union law.

Betfair...will be taking all necessary steps to reduce the impact on profitability through both legal action and cost management.
Analyst Michael Campbell at broker Daniel Stewart said he believed Cyprus also planned to introduce a new betting tax of 13% of gross profits.

This is another blow to Betfair's exchange betting business. The stock trades on around 6.6 times 2012 consensus EBITDA which appears reasonably priced, though our biggest concern remains whether other markets will, like Cyprus, ban exchange betting which will hamper the business's ability to grow outside of its core UK market.
Karl Burns at Shore Capital said full year forecasts were likely to be reduced after the news:

We retain our hold recommendation, highlighting that whilst we believe the exchange is a unique and highly cash generative business model, in addition to reporting strong underlying revenue growth recently, we continue to harbour concerns over the pace of exchange regulation in Europe, with Europe around 40% of group revenue, whilst comparatives will toughen through the year.
Overall markets have begun the week on a downbeat note, on renewed worries about the eurozone as Spain's 10 year bond yields climb above 10% again, ahead of the latest EU finance ministers meeting. The FTSE 100 is currently down 23.49 points at 5639.14.

Banks are mixed, with Barclays down 0.85p at 163.9p as the libor fixing scandal continues to cast a shadow over the group. But Royal Bank of Scotland has risen 1.1p to 202.6p as analysts at, yes, Barclays issued an overweight rating although they cut their price target from 340p to 270p.

Elsewhere the profit warning from JJB Sports, down nearly 30% at 7p, which blamed the weather and poor sales of Euro 2012 replica kits has helped push the rest of the sector lower. JD Sports is down 28p at 712p while Mike Ashley's Sports Direct International has dropped 1.8p to 308.2p. But Jonathan Pritchard at Oriel Securities remained positive on Ashley's business:

We do not think that the trends should be read across to Sports Direct - indeed that company's actions have caused JJB's problems.

Sports Direct has been aggressive in terms of replica kit pricing and stated as soon as Dick's arrived [to invest in JJB] that it would up the ante on price.

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