I walked past my local bookies this morning and saw some old guys shuffling in and out. Then I came home and saw how Flutter Entertainment (LSE: FLTR) is doing. There’s only one side of that divide I’d want to be on. While the punters have been picking the nags on which to punt their odd pound or two, the FTSE 100 company’s share price has been soaring. Despite an early pandemic drop, Flutter Entertainment shares are up 38% so far in 2020.
The company, formed from the merger of Paddy Power and Betfair, released a first-half update Thursday. Revenue, aided by the acquisition of The Stars Group, rose by 49% from the first half of 2019, to £1,522m. Adjusted EBITDA gained 59%, to £342m.
Bottom line reported pre-tax profit fell 70%, to £24m, but that looks like an artefact of one-off accounting items. The firm spoke of charging separately disclosed items totalling £194m, up from £59m. It put this down to “an increase in the amortisation of acquired intangibles, as well as costs associated with the merger.“
Reported EPS fell 81%, but the adjusted figure came in 29% ahead. Along with many other FTSE 100 firms during the Covid-19 slump, Flutter Entertainment has suspended dividends for 2020. And the final 2019 dividend was paid in shares.
Acquisition debt
The growth in revenue and underlying earnings suggest to me there was no Covid-19 pressure on the dividend. But it does, perhaps, provide a plausible excuse for not paying out the cash in a year that has consumed a fair chunk of it in acquisition costs. Flutter’s net debt has ballooned. From a figure of £356m in 2019, at 30 June this year it stood at £2,899m. And to address part of it, the firm raised £813m in May through an equity placing.
We’re looking at a net-debt-to-adjusted-EBITDA multiple (using an annualised earnings figure of twice the first half) of 4.2 times. That looks scarily high to me, compared to the FTSE 100 stocks I usually favour. But at this stage, it might not actually be too much of a problem. It’s a highly cash generative business, and that should enable Flutter to get its leverage down in the coming years. And deleveraging is one of the firm’s key goals.
FTSE 100 dividends
Normally, I’d be concerned when a dividend-paying FTSE 100 company suspends its payments. And I really don’t think the Covid-19 crisis is anything like a good reason to do so. But Flutter Entertainment is very much in a growth phase at the moment, after a few years of consolidation in the gaming business.
Because of that, I’d be happy to buy now and forego dividend income for a year or two, wanting to see Flutter’s debt coming down. Online gambling is a cash-generative business, and it has relatively low costs. And I can see Flutter maturing to become a top FTSE 100 cash cow in the years ahead. Who wouldn’t want some of that?
