2023-03-17 04:20:03 ET
Summary
- Flutter Entertainment is a leading player in the sports betting and iGaming industries with a strong brand name and a wide variety of products and services.
- The inflection point in US profitability will be a significant driver for the group in 2023 and beyond.
- A shift in the valuation paradigm towards valuing Flutter as a whole, rather than using the SOTP approach, would provide a greater upside for investors.
Summary
In the United Kingdom, Australia, and the United States, Flutter Entertainment (PDYPF) is a leading player. To begin, the company has a proven track record in the sports betting and iGaming industries, which is supported by a powerful brand name and a wide variety of products and services. By purchasing FanDuel , Flutter has also become the market leader in the United States. As a result of the purchase, Flutter now has excellent exposure to the US opportunity and is in the best possible position to reap the rewards of the rapid growth of online betting in the US. In particular, I believe that beginning in 2023 and beyond, the inflection in US profitability will be a major driver for the group, and as such, it should begin to account for a larger percentage of the Flutter valuation, eventually making the "SOTP" valuation method obsolete (which in my opinion never really truly reflect the sum of the parts). The stock price should see significant upward momentum as a result of this re-rating. As such, I recommend a long position.
FY22
Ex-US EBITDA of £1.295 billion and US EBITDA of -£250 million for FY22 were both within the expected range. The United States was the most successful market in 4Q22, generating £955 million in revenue, with 50% share of the sports betting market, and 21% of the iGaming market. The two increased their market share from the previous year. Although UK&I Online was depressed by December sporting results, it still grew 14% on a pro forma basis, bringing the total revenue growth outside the US to 16% for 4Q22. In this respect, it remains far ahead of the market and with strong momentum. In sum, I think we can safely let the US performance remain the primary focus, as results from Ex-US are still within expectations (i.e. not falling too far off that requires a large discount in the SOTP valuation).
Highlights
The most impressive part was the United States' brilliant showing. A good start in Maryland and Ohio bodes well for US revenue in FY23. Consensus and investors, in my opinion, will also significantly raise their expectations due to the excellent performance in 4Q22 in the United States. Based on historical trends, I believe we can look forward to prosperous FY23, with growth throughout the first 3 quarters, followed by a further seasonal increase in Q4. While I am optimistic about FY23's results, I do want to point out that quarterly revenue performance will be impacted by state opening cadence and hold variance. In addition, it is also encouraging that growth will be supported by both long-term structural improvements and steady gains in market share.
The growth's high value stems from the fact that it has been accompanied by an improved payback profile, an indicator of future profit growth or the opportunity to more aggressively pursue market share. More information about TSG US and non-OSB moving parts has also been made available thanks to management's disclosure of cohort details. Based on this updated data, the primary drivers of upside/downside in FY23 US EBITDA are cohort investments in 2023, payback improvements that are superior to FY22, and iGaming show contributions that improve. However, the two biggest unknowns are timing in state openings and profitability of iGaming. Nonetheless, I expect management to continue investing heavily whenever competitors cut back on growth investments as it provides avenue for share gains. In my view, the key point to take from the 2022 results and the updated cohort information is that they validate my belief that the United States will experience a rapid increase in profits, which will have a significant positive impact on Flutter's overall financial performance.
Valuation
In my opinion, the inflection point in US profitability will be a significant driver for the group in 2023 and beyond, providing a significant positive catalyst for stock re-rating. The difference between investors valuing Flutter as a whole vs. the SOTP approach is illustrated below (using consensus figures). The former would provide greater upside as the market values the company as a whole, aided by the faster growing US segment, which would eventually account for a larger portion of the pie. The latter would penalize the EX-US segment, which is growing at a much slower rate, while rewarding the US segment. As you can see, the premium required is much higher than the 20x I assumed to match the previous scenario (which is tough to underwrite as an investor). As a result, I believe a shift in valuation paradigm would be a catalyst, though this is difficult to track.
Own estimates
Conclusion
I believe the inflection point in US profitability will be a significant driver for the group in 2023 and beyond. The company's impressive performance in 4Q22 in the United States is a positive sign for future growth and momentum, and the improved payback profile indicates the opportunity for future profit growth. While there may be some variability in quarterly revenue performance due to state opening cadence and hold variance, I am optimistic about Flutter's prospects for FY23 and beyond, and hence, recommend a long position. The key catalyst would be the shift in valuation paradigm towards valuing Flutter as a whole, rather than using the SOTP approach, which would provide greater upside. Overall, Flutter Entertainment is a strong and growing player in the industry, with significant potential for future growth and profitability.
For further details see:
Flutter Entertainment: Performance In The U.S. Should Grow At A Rapid Pace