EU CONSUMER CYCLICALS: Flutter: 3Q Results

(FLTR: Ba1/BBB-/BBB) 

As we have said before, we question how seriously it takes its leverage target - it is doing buybacks well above FOCF even through a year of sizeable M&A spend. Costs to move into prediction markets alongside competitive pressures in US sports betting (driven by promotional environment/hitting margins) drove a FY guidance cut and we see that leaving YE leverage around adj. 3.5x. S&P was also flagging $450m-550m in capitalised costs that it will subtract (i.e. treat as opex) and on top of the c$200m it is adjusting YTD in restructuring costs we see leverage at 4.8x. Rating threshold is 4.0x. It will likely get given time to delever but earnings growth is uncertain; it is facing potential UK tax increase, uncertain impact from prediction sites and is still planning on sending ~$1b/yr into buybacks.

• Revenue $3.8b organic +5% (net of Snai acq. +17%)
  • Avg. monthly players (AMP) +9%, sports book handle +9%

US:

• Revenue $1.4b, +9% driven by iGaming (+44% with AMP +30%). Sportsbook revenue -5% (handle +6% but net margin -80bps). Total AMP +8%.
• adj. EBITDA $51m (vs. $58m LY)

International:

• Revenue $2.4b, organic +3% (incl. Snai +21%). Sportsbook revenue organic -6%, with handle -3% (4% of which was on rolling Euros from LY) and net margins -30bps. iGaming organic +10%. AMP +10%.
• adj. EBITDA $505m, organic flat, net +10% y/y
• Statutory profits subtracts another $556 non-cash impairment linked to India gaming ban and $205m cash payment to Boyd for revised access terms (separate to the $1.55b it spent on buying out un-owned 5%).
• Net debt of $10.6b (ex. small $0.6b in leases), up from $5.2b to end LY on acquisitions; Italian Snai, Brazilian Betnacional and unowned 5% of US platform Fanduel.
  • levered 3.7x including LTM Snai earnings, well outside target 2-2.5x. Ended LY at 2.2x.
• Including 4Q (already done) did $1.1b in buybacks this year. Will continue next year in the 1Q with similar pace ($250m).
  • It did $941m in FCF LY. YTD FCF is running lower, somewhat seasonal into 4Q.

FY Guidance cut. Mid-points:

• revenue $16.7b, +19% y/y (prev. $17.3b)
• adj. EBITDA $2.92b, +24% y/y (prev. $3.3b)

On Prediction markets:

• "We believe the sports prediction market opportunity lies solely in those states currently without sports betting access, as we can clearly see prediction markets are having a negligible impact in the states where FanDuel sportsbook is already available to customers."
• Will launch FanDuel Predicts app, a JV with CME group, next month
  • will invest $40-50m in 4Q and $200-300m next year
     
• Re. India ban (was expected to be ~1.2% of revenue and ~1.5% of EBITDA); it will keeping running it on free-to-play basis for now
• Notes potential for UK gambling tax increases (our UK Eco sees as likely): "there has been much speculation around potential gaming tax increases in the upcoming UK budget"
  • UK is ~1/3 of group earnings